I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
During the past decades, Argentina has repeatedly gone through financial and economic crises, both resulting from the international context and the policies implemented by its own administrations, which until now have consistently avoided adopting the required deep structural changes necessary to secure sustainable growth.
The last liquidity crisis in Argentina was caused by the repeal of the Convertibility Law in 2001, which pegged the Argentine peso to the United States dollar at a parity of 1:1.
After the 2000s' crisis, the Kirchner administrations ruled Argentina for more than 12 years. By the end of 2015, Argentina was again facing a foreign exchange and foreign reserves crisis (which was contained through an increasing set of foreign exchange restrictions), increasing inflation, loss of competitiveness, recession and fiscal deficit. In December 2015, however, a new administration led by President Macri took office. In a very short time the new administration settled the claims from the holders of the sovereign debt, which was in default since 2001; lifted all foreign exchange restrictions; and commenced the adoption of some of the required structural measures, addressing some of the mayor problems in the economy.
By the end of 2018, however, Argentina faced a new foreign exchange crisis again, driven, mostly by foreign factors like the increase of the US Federal Reserve's interest rates, the increasing political and economic crisis in Brazil and other local factors. The latter included the change of the administration's inflation expectations for 2018, an increasing issuance of LEBACs (peso-denominated debt securities of the Argentine Central Bank), the passing of a law by the opposition in Congress restricting the ability of the administration to increase public tariffs (which has been vetoed by the President), a historical drought that affected crop production and the failure of the administration to continue implementing the required structural changes necessary to reduce the fiscal deficit and inflation. As a consequence, during 2018 the Argentine peso depreciated by 103.83 per cent against the US dollar and inflation soared to 47.6 per cent.
In response to the new foreign exchange crisis, the federal government and the Argentine Central Bank adopted a series of measures. On 7 June 2018, the federal government and the International Monetary Fund entered into a technical agreement to grant a stand-by loan of up to US$50 billion for a term of up to three years to strengthen the federal reserves and Argentina's financial and fiscal position, which was later increased by an additional US$7.1 billion. By April 2019, the International Monetary Fund had disbursed an aggregate of US$39.1 billion of the facility. In addition, the Argentine Central Bank defined foreign exchange intervention and non-intervention zones for the US dollar exchange rate and increased the amount of Leliqs (peso debt instruments of the Argentine Central Bank), which by the end of 2019 would represent around 4 per cent of the gross domestic product (GDP), with interest rates of more than 70 per cent. In an effort to reduce the volatility of the US dollar exchange rate, on 29 April 2019, the committee of monetary policy of the Argentine Central Bank announced that it could sell foreign currency even if the exchange rate is below the upper threshold and increased the daily sales from US$150 million to US$250 million if the exchange rate is beyond the upper threshold.
Those and other measures adopted by the federal government and the Argentine Central Bank to control the foreign exchange rate caused a deepening recession (the IMF projected a GDP decrease of 1.2 per cent for 2019), increasing unemployment and medium and small companies' failures. Despite the adoption of those measures, inflation and foreign exchange instability continued. In March, inflation increased by 4.7 per cebt, with an accumulated increase of 11.8 per cent during the first quarter and an inter-annual increase of 54.7 per cent; while between January and April 2019 the Argentine peso depreciated by 17.09 per cent. In addition, in October 2019 there will be presidential elections, and there is a great degree of uncertainty and speculation regarding whether Mauricio Macri will be elected or who may be his successor, which has also contributed to the economic instability. However, since May 2019, the dollar exchange rate has stabilised and inflation has begun to reduce slowly.
In the short term, those measures caused a contraction of Argentine economic activity and consumption. The increased cost of financing in pesos, the increase of the US dollar exchange rate and the sharp fall in consumption have caused an increase in the number of business failures over the last 12 months.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Insolvency proceedings
Insolvency proceedings are governed by the Argentine Insolvency Law No. 24,522,2 as amended, which provides for three different types of insolvency proceedings: (1) two reorganisation proceedings: acuerdo preventivo extrajudicial (out-of-court restructuring agreement, similar to pre-packaged restructurings in the United States); and concurso preventivo de acreedores (the reorganisation proceedings, similar to a Chapter 11 proceeding under the United States Bankruptcy Code); and (2) a quiebra (liquidation proceeding or bankruptcy, similar to a Chapter 7 under the United States Bankruptcy Code).
The out-of-court restructuring agreement
The out-of-court restructuring agreement is a private restructuring agreement entered into by the debtor and its unsecured creditors classified in one or more categories. The agreement is binding, unless provided otherwise. If the debtor obtains the consent to the out-of-court restructuring agreement by unsecured creditors within each category representing, more than 50 per cent in number and more than 66.66 per cent in principal amount (the Requisite Majority), then the debtor may file the out-of-court restructuring agreement before a competent court for endorsement.
For purposes of computing the Requisite Majority, the holders of debt securities issued in series must grant their consent at a noteholders' meeting or in such other manner as provided in the documents governing the securities, subject to the court's satisfaction. The headcount and principal majorities at a noteholders' meeting are computed as follows:
- all votes of the noteholders supporting the plan are computed as given by one person and all votes opposing the plan are computed as given by one person;
- the aggregate principal amount of debt securities held by the noteholders that consent to or oppose the plan are added to that of the other creditors also supporting or opposing the plan; and
- in addition, following broadly accepted case law, the principal amount of the debt securities held by the noteholders not attending the noteholders' meeting or abstaining from voting, are not computed in the calculation of the principal majority.
Upon endorsement by the court, the out-of-court restructuring agreement is binding on all unsecured creditors of the same categories.
Filing of a petition for confirmation of an out-of-court reorganisation agreement does not have any effect on secured creditors' enforcement rights on the collateral.
Reorganisation proceedings is a court-sanctioned reorganisation that is controlled by the court and supervised by a receiver. The filing for a petition for the commencement of a reorganisation proceeding is only voluntary, either through a direct filing for reorganisation by the debtor, or a debtor's motion for the conversion of a bankruptcy adjudication into a reorganisation.
Commencement of a reorganisation proceeding has, among others, the following effects:
- the court appoints a receiver, who supervises the process and the debtor's assets and business during the proceedings; and control committee, which is integrated by the three largest unsecured creditors and a representative of the employees;
- the debtor's financial obligations are accelerated;
- suspension of accrual on interest on unsecured pre-petition claims;
- the automatic stay of pre-petition unsecured monetary claims;
- pre-petition creditors (unsecured and secured) must file proof of claims; and
- the debtor keeps possession and administration of its assets in the ordinary course of business; provided that, the debtor may not incur in any gratuity, or any other act that may result in the alteration of the pre-petition creditors' situation, and, without the prior consent of the court, may not undertake any act on registrable assets (i.e., real state and vehicles), lease or sale of goodwill, issue secured debt or perform any other act beyond the debtor's ordinary course of business.
The debtor has an exclusivity period of 90 business days (that may be extended once for another 30 business days) within which it must formulate a reorganisation plan for each category of unsecured creditors and obtain the consent to it by the requisite majority.
Secured creditors' enforcement rights on collateral will be subject to the filing of proof of the claim and security. Secured creditors constitute one of the mandatory categories of creditors, but any proposal to them, other than the payment in their original terms, requires the consent of all secured creditors.
Commencement of a reorganisation proceeding does not itself affect the rights and remedies of secured creditors on the collateral; provided that in the event of manifest need or urgency the court may order a temporary stay of the realisation of the collateral and a temporary suspension of any injunction enjoining the use of the collateral by the debtor, in both cases for a term not exceeding 90 business days. Any interest accrued during the term of the stay or suspension not satisfied out of the proceeds of the realisation of the collateral will enjoy the preference of administrative expenses in liquidation.
The liquidation may be voluntary or involuntary. A voluntary liquidation may be commenced by a petition filed by the debtor. An involuntary liquidation may be commenced by a petition of a creditor or by failure of a reorganisation proceeding. Upon commencement of a liquidation, the court appoints a receiver, who takes possession of the estate and seeks to liquidate the estate's assets and distribute the proceeds among the estate's creditors in proportion to their respective claims, according to their respective preferences.
Among other things, upon bankruptcy adjudication:
- all the debtor's assets (except, among others, for non-monetary rights and non-attachable assets) pass to the estate and are managed by the receiver;
- all creditors (including unsecured and secured) must submit proof of claims before the receiver;
- all claims become due and payable;
- accrual of interest on unsecured claims is suspended;
- all monetary claims against the debtor, including secured claims (except for seizure proceedings, family law claims, ordinary proceedings, labour claims and claims in which the debtor is a joinder defendant) are consolidated at the bankruptcy court; and
- all claims denominated in foreign currency are mandatorily converted into local currency.
Bankruptcy adjudication does not suspend the accrual of interest on the secured claims; provided that interest may only be payable out of the proceeds of the collateral after deduction of the court costs, any preferred interest accrued before the bankruptcy adjudication date (as described above) and principal.
Upon bankruptcy adjudication, all foreclosure proceedings on credits secured with real property are consolidated before the bankruptcy court, and upon bankruptcy adjudication becoming final all individual foreclosure proceedings will be stayed.
Provided that proof of the claim and privilege has been duly filed, secured creditors may request the realisation of the collateral at any time at court. The court will decide whether to admit or deny the request; if admitted, this will proceed at an ancillary special liquidation proceeding.
Despite the foregoing, the receiver may request court authorisation to satisfy the secured credit in full with liquid funds available if maintenance of the collateral is beneficial for the creditors. To this effect, the court may authorise the receiver to grant other securities to the secured creditor or sell other assets.
Immediately upon bankruptcy adjudication, the receiver may decide to continue the business activities of the debtor; this decision must be confirmed by the court. If the continuation is decided, during the term of continuation enforcement of collateral needed for the business exploitation is stayed when (1) the secured credit is not due as of the bankruptcy adjudication date and the receiver performs the obligations due after such resolution in due time; (2) the secured credits are due as of the bankruptcy adjudication date but the security is not admitted by a final and non-appealable resolution; or (3) the secured creditor consented the stay of the enforcement.
In addition, in the case of continuation the court may also order the stay of collateral enforcement proceedings at the request of an employees' cooperative (formed for the purposes of bidding for the purchase of debtor's equity in the competitive bidding process or otherwise requesting the acquisition of debtor's equity prior to liquidation of the estate) for a maximum term of two years.
ii Director's duties
Under the Argentine General Companies Law No. 19,550,3 the directors of the debtor are subject to the duties of loyalty and diligence and may be subject to liability for their violation. The duty of loyalty embraces the obligation to act with the correctness of an 'honest person' and in defence of the interests of the debtor. The duty of diligence requires, among other things, that the director possesses certain minimum qualifications (i.e., technical knowledge and expertise).
When a debtor becomes insolvent, the directors' duties in relation to the creditors are strengthened. The members of the board of directors and representatives that wilfully provoked, facilitated, allowed or aggravated the debtor's economic and financial situation or its insolvency may also be subject to liability. Scholars have concluded that any express decision or omission of the directors that permits the continuation of the insolvent debtor's operations without adopting any measures directed to address this situation may result in corporate liability under the Argentine General Companies Law. Scholars and recent case law agree that liability requires wilful misconduct. Some case law has shown the imposition of a temporary restraining order on the directors of a bankrupt debtor based on the future and eventual liability actions that might be initiated against them.
Pursuant to the Argentine Insolvency Law, certain transactions performed by the debtor within the clawback period are void or voidable. The clawback period is the period from, and beginning on, the date on which the debtor becomes insolvent, that is, generally unable to meet its payment obligations – and ending on the date on which the debtor files the petition for reorganisation or the date on which the debtor is adjudicated bankrupt directly. The clawback period cannot extend back for more than two years from the date immediately preceding the date of the filing of the petition for reorganisation or the date of bankruptcy adjudication, in the event of direct bankruptcy.
The following transactions made by the debtor within the clawback period are void: (1) gratuities; (2) advance payments on account of debts that are due on or after the bankruptcy adjudication date; and (3) granting of security (mortgage, pledge or any other preference) in respect of debts not due and not secured under their original terms.
Any other transactions detrimental to the debtor's creditors made by third parties with knowledge of the debtor's insolvency during the clawback period are voidable. The third party has the burden of proving that the transaction did not cause any detriment to the debtor's creditors.
Any transactions in the ordinary course of business made by the debtor or any transactions not within the ordinary course of business and transfers made by the debtor with the authorisation of the court during a reorganisation process or during the implementation of the reorganisation plan are not subject to the avoidance action.
III RECENT LEGAL DEVELOPMENTS
The most relevant recent developments in insolvency law have developed after the financial crisis of the 2000s.
i The amendment of the out-of-court restructuring agreement
Until amendment to the Argentine Insolvency Law in 2002,4 the out-of-court restructuring agreement was binding exclusively among the consenting creditors. Upon the reform, if the debtor obtains the consent to the out-of-court restructuring agreement by the Requisite Majority of unsecured creditors, it may opt to file it before a competent court for endorsement; upon this endorsement it will be binding against all unsecured creditors.
Almost all restructurings following the Argentine Insolvency Law reform in 2002 were implemented by way of the out-of-court restructuring agreement.
ii The introduction of Section 45 bis to the Argentine Insolvency Law5
Until the reform introduced by Law No. 25,589, the consent of all unsecured creditors was computed on an individual basis. Since the reform, the consent to the reorganisation plan or an out-of-court restructuring agreement by the holders of securities issued in series must be given at a meeting of the holders of such securities. Pursuant to Section 45 bis, for the purposes of calculating the Requisite Majority, consent to the reorganisation plan or out-of-court restructuring agreement will be computed on the principal amount represented by all those holders who have accepted the plan; all holders consenting to the plan will be computed as a single person, and all holders rejecting the plan will be computed as a single person.
iii Construction of Section 45 bis
Since the introduction of Section 45 bis, for the purposes of computing the principal amount, in respect of the securities issued in series, the courts have consistently construed that the principal amount of the debt securities, in respect of which the holders thereof have not attended the meeting, or have attended but have abstained from voting, will be deducted from the aggregate principal amount outstanding and, therefore, from the base amount to calculate the principal majority.
iv Amendments introduced by the Law to encourage production financing
More recently, in May 2018, the Argentine Congress passed Law No. 27,440, which, among other things, amended the Negotiable Obligations Law No. 23,576, to eliminate the requirement for unanimous approval of any fundamental changes to notes issue conditions. In general, such amendments must be adopted at a meeting of the relevant noteholders. Resolutions, other than those requiring unanimity, are adopted at extraordinary meetings convened with the presence of noteholders representing more than 60 per cent of the aggregate outstanding principal amount of the notes in first call, or more than 30 per cent in the second call, unless, in both cases, the issue conditions require a larger quorum, and with the affirmative vote of the absolute majority of the notes present at the meeting convened with the required quorum. Before this amendment, a restructuring of all outstanding notes could only be pursued following approval of a reorganisation or out-of-court restructuring agreement, by more than 67 per cent of the principal amount, assuming the notes are the only claims subject to restructuring. Pursuant to this amendment, however, in the future, debtors seeking to restructure only notes would no longer be required to file for reorganisation or out-of-court restructuring, and may achieve the restructuring through a resolution at the noteholders' meeting without the requirement of unanimity, with the majority requirement provided in the notes conditions (which could not be below the statutory majority requirements described above); and excluded certain effects of the Argentine Insolvency Law on derivative transactions after bankruptcy adjudication, such as the restriction on the set-off, the limitations on the agreements with reciprocal obligations pending and agreements with a fixed term.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
Under the current economic conditions, those most affected are small- and medium-sized companies that in the absence of or due to the high costs of external financing, have limited access to group entities' and shareholders' financing.
The most active industries are those most affected by the recession, including mainly small- and medium-sized retailers, and particularly the textile, food and home appliances industries, and sectors related to retail such as logistics, transport and other services. Other industries such as the automobile production and sale industry are making personnel suspensions or reductions. One of the measures adopted to reduce the fiscal deficit was the reduction, suspension or delay of some of the government's programed public works, which also impacted the construction sector. The recession and lack of access to financing at a reasonable cost have mainly affected small- and medium-sized companies. However, towards the end of 2018 and in the first half of 2019, the crisis has begun to affect those large companies that reported losses and have been forced to suspend or reduce personnel.
As a consequence of the foregoing, an increase in restructurings and the filing of crisis preventive procedures before the Labour Ministry has been confirmed. However, a great majority of the companies facing financial trouble have financial debts with local banks and are generally seeking private restructurings out of the remedies of the Argentine Insolvency Law. In addition, there is also an increase in crisis prevention procedures, which are aimed at implementing a restructuring through the reduction of personnel in order to avoid insolvency or to overcome financial trouble.
Among the largest companies that have gone through the crisis preventive procedures recently we can mention Coca-Cola, Fate and Editotial Atlántida. In addition to the bankruptcy of Cresta Roja and Oil Combustibles, and the out-of-court restructuring of Sancor, more recently there have been other failures of large companies, such as the reorganisations of the low-cost airline Avianca, the transport company ERSA, the retailer of home appliances Ribeiro, the mill Molino Cañuelas and the private restructuring of the retailer of home appliances Garbarino.
Argentina has not yet adopted the Model Law on Cross-Border Insolvency of the United Nations Committee on International Trade Law (UNCITRAL), and the main source of law in cross-border insolvency is the Argentine Insolvency Law; except for the treaties of Montevideo of 1889 (between Argentina, Bolivia, Colombia, Peru, Paraguay and Uruguay) and 1940 (between Argentina, Paraguay and Uruguay).
Argentine law voids effects to foreign insolvency proceedings against creditors holding claims payable in Argentina in connection with the dispute of any rights of such creditors on the debtors' assets located in Argentina, or the annulment of any agreements executed by such creditors with the foreign debtor.
As consequence of this general principle, before any creditor holding claims payable outside of Argentina would attempt to take any action or measure against the foreign debtor's assets within Argentina, it shall be necessary to verify the existence of creditors holding claims payable in Argentina.
Scholars in general agree that such verification must be made in a court proceeding, but also agree that the Argentine Insolvency Law does not provide for a specific proceeding for this purpose.
Section 4 of the Argentine Insolvency Law provides that the declaration of liquidation in a foreign jurisdiction constitutes grounds for the filing of a petition for a liquidation case of the foreign debtor under the Argentine Insolvency Law, upon which a full plenary liquidation case will be commenced in Argentina.
In addition to the general principle of voided effects of foreign insolvency proceedings against creditors holding claims payable in Argentina described above, the Argentine Insolvency Law comprises three additional principles in cross-border insolvencies:
- preference for creditors participating in the Argentine liquidation process (pursuant to which upon commencement of a liquidation case in Argentina, the creditors participating in the foreign proceeding shall only have the right to get the turnover of the debtor's remaining assets balance after all the claims of the creditors participating in the Argentine liquidation process have been fully satisfied);
- reciprocity (pursuant to which participation in an Argentine liquidation case of creditors holding claims payable outside of Argentina, and not participating in a foreign liquidation process, is conditioned upon filing of evidence that, reciprocally, creditors holding claims payable in Argentina are permitted to participate in a liquidation process commenced at the jurisdiction where such claims are payable in equal conditions with the domestic creditors of such jurisdiction; however, an exception is made with respect to creditors holding claims secured by liens on property (mortgages) on real estate property or liens on movable assets. Condition for any creditor be subject to the reciprocity requirement is based on the place of payment of the claim (outside of Argentina) and not on the nationality or domicile of the creditor); and
- dividend parity (pursuant to which, payment received by unsecured creditors in a foreign jurisdiction after commencement of a liquidation case under the Argentine Insolvency Law will be computed on account of the general distribution available to such creditors on account of payments of unsecured claims under the Argentine liquidation process).
In addition, in the recent case In re Supercanal SA, debtor in a foreign proceeding, in which participated, the United States Bankruptcy Court for the Southern District of New York took a new, more affirmative and innovative approach to granting recognition and relief under Chapter 15 of the US Bankruptcy Code, in reorganisations involving securities issued in series and deposited with depositary systems, where the consideration under the reorganisation plan is tendered and made available to the beneficial owners of the debt securities, and receipt is conditioned upon the performance of certain affirmative actions by such beneficial owners that are never taken. In the relevant portions, the court ordered the discharge of all claims and release of any further obligations by the debtor, securities' trustees and other securities intermediaries where the exchange of such debt securities could not otherwise have been achieved without action by the beneficial owners. This decision has introduced new features to Chapter 15 recognitions and scope of relief that will facilitate consummating restructurings involving debt securities. The granting by the court of Supercanal's petitions and relief sought constitutes a milestone in the scope of relief granted under Chapter 15 recognitions.
VI FUTURE DEVELOPMENTS
During the past decades, Argentina has been introducing changes to the Argentine Insolvency Law. The most relevant recent amendments are described above.
The Ministry of Justice has recently convened a number of judges, practitioners, trustees and certified public accountants) to analyse and propose an integral review and amendment to the Argentine Insolvency Law.
The work of such commission has not yet been made public, but the proposed amendments would include, among others:
- adoption of the UNCITRAL Model Law;
- development of a procedure for preventing the corporate crisis;
- creation of a consumer reorganisation proceeding;
- review of the effects of the insolvency proceedings on the contracts with continuing performances; and
- DIP financing.
However, as a result of the current economic crisis, these changes have been delayed.
1 Fernando Daniel Hernández is a partner at Marval, O'Farrell & Mairal.
2 Argentine Law No. 24,522, as amended, http://servicios.infoleg.gob.ar/infolegInternet/anexos/25000-29999/25379/texact.htm
4 Pursuant to Law No. 25,589, http://servicios.infoleg.gob.ar/infolegInternet/anexos/70000-74999/74331/norma.htm