I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY

During the past decades, Argentina has repeatedly gone through financial and economic crises, resulting from both 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.

In 2018 Argentina faced a foreign exchange crisis again, driven mostly by both foreign and local factors. 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. After the results of the primary elections for president in August 2019, foreign exchange volatility increased, along with an acceleration of the reduction of the Argentine Central Bank's federal foreign liquid reserves. To stabilise the exchange rate volatility and reduce the outflow of reserves from the Argentine Central Bank, since 1 September 2019 the Argentine government has reimposed rigid exchange controls and transfer restrictions, substantially limiting the purchase of foreign currency and the making of certain payments or distributions out of Argentina. Upon the adoption of these measures an unofficial US dollar trading market developed, in which the Argentine peso/US dollar exchange rate has been significantly higher than the rate in the official foreign exchange market. These and other measures adopted by the government caused a deepening recession (GDP decreased by 6.2 per cent in 2018 and 1.7 per cent in 2019), increasing unemployment, and medium and small companies' failures, while high inflation and foreign exchange instability continued. During 2019 the Argentine peso depreciated against the US dollar by 59.0 per cent and inflation increased by 53.8 per cent.

In addition, as of 31 December 2019, Argentina's foreign debt amounted to US$323.065 billion, which represented 89.4 per cent of Argentina's GDP. During 2020 the Argentine government had principal and interest payments of about US$69.7 billion on sovereign debt in foreign currency and Argentine pesos, which it must restructure. On 9 March 2020, the government authorised negotiations for the restructuring of US$68.85 billion in foreign currency and law-governed sovereign bonds, and on 21 April 2020 it launched an exchange offer with respect to all eligible foreign currency and law-governed sovereign bonds. The exchange offer was originally set to expire on 8 May 2020. On 22 April 2020, however, approximately US$500 million in coupon payments under the eligible foreign bonds BIRAD/USD 6.875 per cent due 2021, BIRAD/USD 7.5 per cent due 2026 and BIRAD/USD 7,625 per cent due 2046 became due, subject to a cure period through 22 May 2020. When the exchange offer expired on 8 May 2020, it had received a very low level of acceptance, and the government extended the expiration date until 22 May 2020. Upon the expiration of the extension the offer continued to have a low level of acceptance. The government defaulted on the payment of the BIRAD coupons due and extended the offer until 2 June 2020. Since 2 June 2020, the Argentine government has improved the offer on a few occasions, the latest on 5 July 2020, and extended the expiration date several times, the latest until 4 August 2020.

Between 1 January 2020 and 30 June 2020, the Argentine peso depreciated against the US dollar by 17.7 per cent in the official exchange market, but the gap with exchange rate in the unofficial exchange market continued to increase and, despite the deep recession that the economy was undergoing, inflation increased by 11.1 per cent between 1 January 2020 and 31 May 2020.

In addition to this delicate situation, the Argentine economy has been, and continues to be, significantly and adversely affected by the covid-19 outbreak in February 2020. Since 20 March 2020, the Argentine government has ordered a strong lockdown, which was extended until 17 July 2020. After the covid-19 outbreak occurred, a new and different scenario developed in which there are now many companies and businesses facing not only financial distress but cash-flow problems. Due to the lack of federal reserves and lack of access to financing, the Argentine government is financing all governmental aid to individuals and businesses to address the recession caused by the covid-19 pandemic by issuing currency. If all or a substantial portion of such issuance is not absorbed in the future by the Argentine Central Bank and the federal reserves continue to reduce, inflation may rise to higher levels, including hyperinflation.

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 (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).

Out-of-court restructuring agreement

An 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 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.

To compute 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:

  1. 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;
  2. 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
  3. 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

A reorganisation proceeding 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:

  1. the court appoints a receiver, who supervises the process and the debtor's assets and business during the proceedings; and a control committee, which includes the three largest unsecured creditors and a representative of the employees;
  2. the debtor's financial obligations are accelerated;
  3. suspension of accrual on interest on unsecured pre-petition claims;
  4. the automatic stay of pre-petition unsecured monetary claims;
  5. pre-petition creditors (unsecured and secured) must file proof of claims; and
  6. 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 (which 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 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. 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.

Liquidation

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:

  1. 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;
  2. all creditors (including unsecured and secured) must submit proof of claims before the receiver;
  3. all claims become due and payable;
  4. accrual of interest on unsecured claims is suspended;
  5. 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
  6. 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. 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 have been duly filed, secured creditors may request 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.

iii Clawback

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 developed after the financial crisis of the 2000s.

i Amendment of out-of-court restructuring agreements

Until the amendment to the Argentine Insolvency Law in 2002,4 an out-of-court restructuring agreement was binding exclusively among the consenting creditors. Upon the reform, if the debtor obtains 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 an 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, consent to a 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 a reorganisation plan or an 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 that 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). 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 are excluded.

v Measures adopted in response to the covid-19 pandemic

The Argentine government has taken several measures to support businesses in Argentina due to the covid-19 crisis, including, among others, those described below.

The Argentine government created a Specific Purpose Guarantee Fund to be applied to the granting of guarantees to facilitate the extension of financing for working capital to Micro Small and Medium Enterprises (MSMEs). The Argentine Central Bank also created a series of incentives for the extension of credit facilities to MSMEs. Attachments and other precautionary orders by the Federal Tax Authority have been suspended, and a moratorium on the payment of taxes and social security contributions (with certain limited exceptions) to the Federal Tax Authority due as of 30 November 2019 by MSMEs has been extended until 31 July 2020.

The government has also created an Emergency Work and Production Assistance Programme providing certain benefits to all employers that comply with any of the following requirements (excluding those rendering services deemed essential):

  1. perform activities critically affected by the geographical areas where they are carried out;
  2. have a significant number of employees infected with covid-19 or subject to mandatory isolation or with work exemption (e.g., falling within a risk group); or
  3. have suffered a significant reduction in sales since 12 March 2020

The benefits of the programme include:

  1. an extension of the expiry of the terms for the payment of employers' contributions to the Argentine Social Security System in March and April 2020, or a reduction of up to 95 per cent on employers' contributions to the Argentine Social Security System accrued during April 2020; and
  2. a complementary salary to be paid by the government to all workers of the beneficiaries in the private sector for an amount equal to 50 per cent of the worker's net salary in February 2020, with a minimum of one minimum vital salary and a maximum of two minimum vital salaries or the worker's net salary for such month.

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. Also, due to the recession provoked by the covid-19 outbreak, industries and businesses of all sizes are being affected by the lockdown restrictions.

Prior to the covid-19 pandemic, the main sectors affected by the general economic conditions in Argentina were the retail sector in general and the textile, food and home appliances sectors, automobile production, and sale and construction in particular. However, since the covid-19 outbreak, a new and different scenario has developed in which there are now many companies and businesses facing not only financial distress, but cash-flow problems. In addition to the deepening of the economic difficulties for the sectors already affected, additional sectors are being strongly affected by the lockdown restrictions, such as tourism, hotels, airlines, passenger transports, restaurants and theatres.

One of the current largest insolvency cases in Argentina is the reorganisation process of the agro exporter Vicentín S.A.I.C., which has a debt of about US$1.3 billion. After filing a reorganisation petition and commencing reorganisation proceedings, Vicentín was trying to obtain the unsecured creditors' consent to an out-of-court restructuring agreement. However, due to the stage Vicentín's reorganisation process had reached, for admittance of the out-of-court restructuring agreement for endorsement Vicentín will first have to desist from the reorganisation proceedings, for which purpose it will require the consent of its unsecured creditors holding 75 per cent of all unsecured claims.

Under all these circumstances creditors are being more cooperative to reach private arrangements and debtors are more reluctant to seek restructurings under the Argentine Insolvency Law. For example, recently Aeropuertos Argentina 2000 S.A. (the manager of all Argentine airports), income of which has been seriously affected by the flight restrictions, successfully restructured US$386 million in international debt securities through a private exchange offer and privately restructured debt with financial institutions. Longvie S.A. (a local producer of home appliances) also privately restructured all its interest payments due in 2020 on its debt securities, which, following a favourable vote of 99.93 per cent of the holders, have been capitalised and deferred until final maturity. It is also privately restructuring its payments under financial indebtedness due in 2020.

V INTERNATIONAL

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 attempts to take any action or measure against the foreign debtor's assets within Argentina, it is 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:

  1. 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);
  2. 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. Conditions for any creditor be subject to the reciprocity requirement are based on the place of payment of the claim (outside of Argentina) and not on the nationality or domicile of the creditor); and
  3. 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, a debtor in a foreign proceeding, in which the United States Bankruptcy Court for the Southern District of New York participated, 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 the 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.

In the recent past, the Ministry of Justice 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, including 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 debtor-in-possession (DIP) financing.

However, as a result of the current economic crisis, those changes have been delayed. Due to the covid-19 outbreak, there are currently several draft bills proposing amendments to the Argentine Insolvency Law. However, some of those amendments are aimed at addressing only temporary relief to overcome the critical economic situation, such as the suspension of bankruptcy petitions, suspension of enforcement actions, extension of the exclusivity period and extension of the term for the performance of the reorganisation plan. Some of them also address more permanent changes, such as the creation of a preventive procedure; in our opinion, in this regard this would be enough with a few adjustments to the proven and successful out-of-court restructuring agreement. As discussed earlier in this chapter, the problem caused by covid-19 is not only financial, but mainly operative, due to the lack of cash flow to keep businesses running. In this regard, it is urgent to rule on DIP financing and amend certain regulations of the Argentine Central Bank (mainly relating to technical requirements of minimum capital, categorisation of creditors and allowances, among others) to facilitate the extension of financing to debtors facing out-of-court restructurings and reorganisations.


Footnotes

I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY

During the past decades, Argentina has repeatedly gone through financial and economic crises, resulting from both 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.

In 2018 Argentina faced a foreign exchange crisis again, driven mostly by both foreign and local factors. 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. After the results of the primary elections for president in August 2019, foreign exchange volatility increased, along with an acceleration of the reduction of the Argentine Central Bank's federal foreign liquid reserves. To stabilise the exchange rate volatility and reduce the outflow of reserves from the Argentine Central Bank, since 1 September 2019 the Argentine government has reimposed rigid exchange controls and transfer restrictions, substantially limiting the purchase of foreign currency and the making of certain payments or distributions out of Argentina. Upon the adoption of these measures an unofficial US dollar trading market developed, in which the Argentine peso/US dollar exchange rate has been significantly higher than the rate in the official foreign exchange market. These and other measures adopted by the government caused a deepening recession (GDP decreased by 6.2 per cent in 2018 and 1.7 per cent in 2019), increasing unemployment, and medium and small companies' failures, while high inflation and foreign exchange instability continued. During 2019 the Argentine peso depreciated against the US dollar by 59.0 per cent and inflation increased by 53.8 per cent.

In addition, as of 31 December 2019, Argentina's foreign debt amounted to US$323.065 billion, which represented 89.4 per cent of Argentina's GDP. During 2020 the Argentine government had principal and interest payments of about US$69.7 billion on sovereign debt in foreign currency and Argentine pesos, which it must restructure. On 9 March 2020, the government authorised negotiations for the restructuring of US$68.85 billion in foreign currency and law-governed sovereign bonds, and on 21 April 2020 it launched an exchange offer with respect to all eligible foreign currency and law-governed sovereign bonds. The exchange offer was originally set to expire on 8 May 2020. On 22 April 2020, however, approximately US$500 million in coupon payments under the eligible foreign bonds BIRAD/USD 6.875 per cent due 2021, BIRAD/USD 7.5 per cent due 2026 and BIRAD/USD 7,625 per cent due 2046 became due, subject to a cure period through 22 May 2020. When the exchange offer expired on 8 May 2020, it had received a very low level of acceptance, and the government extended the expiration date until 22 May 2020. Upon the expiration of the extension the offer continued to have a low level of acceptance. The government defaulted on the payment of the BIRAD coupons due and extended the offer until 2 June 2020. Since 2 June 2020, the Argentine government has improved the offer on a few occasions, the latest on 5 July 2020, and extended the expiration date several times, the latest until 4 August 2020.

Between 1 January 2020 and 30 June 2020, the Argentine peso depreciated against the US dollar by 17.7 per cent in the official exchange market, but the gap with exchange rate in the unofficial exchange market continued to increase and, despite the deep recession that the economy was undergoing, inflation increased by 11.1 per cent between 1 January 2020 and 31 May 2020.

In addition to this delicate situation, the Argentine economy has been, and continues to be, significantly and adversely affected by the covid-19 outbreak in February 2020. Since 20 March 2020, the Argentine government has ordered a strong lockdown, which was extended until 17 July 2020. After the covid-19 outbreak occurred, a new and different scenario developed in which there are now many companies and businesses facing not only financial distress but cash-flow problems. Due to the lack of federal reserves and lack of access to financing, the Argentine government is financing all governmental aid to individuals and businesses to address the recession caused by the covid-19 pandemic by issuing currency. If all or a substantial portion of such issuance is not absorbed in the future by the Argentine Central Bank and the federal reserves continue to reduce, inflation may rise to higher levels, including hyperinflation.

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 (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).

Out-of-court restructuring agreement

An 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 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.

To compute 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:

  1. 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;
  2. 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
  3. 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

A reorganisation proceeding 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:

  1. the court appoints a receiver, who supervises the process and the debtor's assets and business during the proceedings; and a control committee, which includes the three largest unsecured creditors and a representative of the employees;
  2. the debtor's financial obligations are accelerated;
  3. suspension of accrual on interest on unsecured pre-petition claims;
  4. the automatic stay of pre-petition unsecured monetary claims;
  5. pre-petition creditors (unsecured and secured) must file proof of claims; and
  6. 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 (which 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 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. 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.

Liquidation

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:

  1. 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;
  2. all creditors (including unsecured and secured) must submit proof of claims before the receiver;
  3. all claims become due and payable;
  4. accrual of interest on unsecured claims is suspended;
  5. 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
  6. 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. 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 have been duly filed, secured creditors may request 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.

iii Clawback

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 developed after the financial crisis of the 2000s.

i Amendment of out-of-court restructuring agreements

Until the amendment to the Argentine Insolvency Law in 2002,4 an out-of-court restructuring agreement was binding exclusively among the consenting creditors. Upon the reform, if the debtor obtains 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 an 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, consent to a 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 a reorganisation plan or an 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 that 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). 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 are excluded.

v Measures adopted in response to the covid-19 pandemic

The Argentine government has taken several measures to support businesses in Argentina due to the covid-19 crisis, including, among others, those described below.

The Argentine government created a Specific Purpose Guarantee Fund to be applied to the granting of guarantees to facilitate the extension of financing for working capital to Micro Small and Medium Enterprises (MSMEs). The Argentine Central Bank also created a series of incentives for the extension of credit facilities to MSMEs. Attachments and other precautionary orders by the Federal Tax Authority have been suspended, and a moratorium on the payment of taxes and social security contributions (with certain limited exceptions) to the Federal Tax Authority due as of 30 November 2019 by MSMEs has been extended until 31 July 2020.

The government has also created an Emergency Work and Production Assistance Programme providing certain benefits to all employers that comply with any of the following requirements (excluding those rendering services deemed essential):

  1. perform activities critically affected by the geographical areas where they are carried out;
  2. have a significant number of employees infected with covid-19 or subject to mandatory isolation or with work exemption (e.g., falling within a risk group); or
  3. have suffered a significant reduction in sales since 12 March 2020

The benefits of the programme include:

  1. an extension of the expiry of the terms for the payment of employers' contributions to the Argentine Social Security System in March and April 2020, or a reduction of up to 95 per cent on employers' contributions to the Argentine Social Security System accrued during April 2020; and
  2. a complementary salary to be paid by the government to all workers of the beneficiaries in the private sector for an amount equal to 50 per cent of the worker's net salary in February 2020, with a minimum of one minimum vital salary and a maximum of two minimum vital salaries or the worker's net salary for such month.

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. Also, due to the recession provoked by the covid-19 outbreak, industries and businesses of all sizes are being affected by the lockdown restrictions.

Prior to the covid-19 pandemic, the main sectors affected by the general economic conditions in Argentina were the retail sector in general and the textile, food and home appliances sectors, automobile production, and sale and construction in particular. However, since the covid-19 outbreak, a new and different scenario has developed in which there are now many companies and businesses facing not only financial distress, but cash-flow problems. In addition to the deepening of the economic difficulties for the sectors already affected, additional sectors are being strongly affected by the lockdown restrictions, such as tourism, hotels, airlines, passenger transports, restaurants and theatres.

One of the current largest insolvency cases in Argentina is the reorganisation process of the agro exporter Vicentín S.A.I.C., which has a debt of about US$1.3 billion. After filing a reorganisation petition and commencing reorganisation proceedings, Vicentín was trying to obtain the unsecured creditors' consent to an out-of-court restructuring agreement. However, due to the stage Vicentín's reorganisation process had reached, for admittance of the out-of-court restructuring agreement for endorsement Vicentín will first have to desist from the reorganisation proceedings, for which purpose it will require the consent of its unsecured creditors holding 75 per cent of all unsecured claims.

Under all these circumstances creditors are being more cooperative to reach private arrangements and debtors are more reluctant to seek restructurings under the Argentine Insolvency Law. For example, recently Aeropuertos Argentina 2000 S.A. (the manager of all Argentine airports), income of which has been seriously affected by the flight restrictions, successfully restructured US$386 million in international debt securities through a private exchange offer and privately restructured debt with financial institutions. Longvie S.A. (a local producer of home appliances) also privately restructured all its interest payments due in 2020 on its debt securities, which, following a favourable vote of 99.93 per cent of the holders, have been capitalised and deferred until final maturity. It is also privately restructuring its payments under financial indebtedness due in 2020.

V INTERNATIONAL

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 attempts to take any action or measure against the foreign debtor's assets within Argentina, it is 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:

  1. 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);
  2. 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. Conditions for any creditor be subject to the reciprocity requirement are based on the place of payment of the claim (outside of Argentina) and not on the nationality or domicile of the creditor); and
  3. 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, a debtor in a foreign proceeding, in which the United States Bankruptcy Court for the Southern District of New York participated, 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 the 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.

In the recent past, the Ministry of Justice 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, including 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 debtor-in-possession (DIP) financing.

However, as a result of the current economic crisis, those changes have been delayed. Due to the covid-19 outbreak, there are currently several draft bills proposing amendments to the Argentine Insolvency Law. However, some of those amendments are aimed at addressing only temporary relief to overcome the critical economic situation, such as the suspension of bankruptcy petitions, suspension of enforcement actions, extension of the exclusivity period and extension of the term for the performance of the reorganisation plan. Some of them also address more permanent changes, such as the creation of a preventive procedure; in our opinion, in this regard this would be enough with a few adjustments to the proven and successful out-of-court restructuring agreement. As discussed earlier in this chapter, the problem caused by covid-19 is not only financial, but mainly operative, due to the lack of cash flow to keep businesses running. In this regard, it is urgent to rule on DIP financing and amend certain regulations of the Argentine Central Bank (mainly relating to technical requirements of minimum capital, categorisation of creditors and allowances, among others) to facilitate the extension of financing to debtors facing out-of-court restructurings and reorganisations.


Footnotes