Argentina: Restructuring & Insolvency

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in Argentina.

This Q&A is part of the global guide to Restructuring & Insolvency.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    In Argentina we have different types of securities over immovable and movable property.

    Mortgage
    The most popular security is the mortgage (hypothec) which can be used for immovable property and also for ships and planes (movable property).

    A hypothec is merely an encumbrance giving a creditor a non-possessory security interest in a debtor’s property and preferential right to have claims paid out of that property as last recourse when the debtor is in default.

    The most commonly used is the mortgage over immovable property, which must be issued by a mortgage deed before a Public Notary. Not complying with that requirement means that there is no mortgage. Additionally, the mortgage must be registered before the Real Estate Registry. Failing to do so makes the mortgage unenforceable against third parties, although it will be valid between the parties to the contract.

    As mentioned, there are also mortgages that can be used over ships and planes. In both cases, special laws (Aviation Code and Navigation Act) regulate their formalities which are quite similar to the mortgage over real property. Again, an essential element is the non-possessory preference right.

    Pledge
    The pledge is a guarantee over a movable asset in security of a credit. There are basically 2 types of pledges: possessory and non-possessory. Whereas in the first case the asset is placed in the creditor’s possession, in the latter the asset remains in the debtor’s possession and consequently it has to be registered properly (Registry of Non-Possessory Right).

    In order to have effects as regards third parties, the pledge must be issued by a deed before a Public Notary or through a written contract with a fixed date. Not complying makes the pledge unenforceable against third parties, although it will be valid between the parties to the contract.

    Trust
    Finally, it is worth mentioning trusts. A security trust is another way to secure creditor’s interests. In trusts, certain property or rights of the debtor are transferred to the trustee to ensure the compliance with the obligations assumed. Trusts must be issued through a written contract (and through a deed if the assets to be transferred are subject to that formality for their transference) and registered before the Public Registry of Commerce.

    The advantage of the trust is that property of the asset is transferred to the trustee who ensures the fulfillment of the debtor’s obligations.

    There are some other forms of securities. However, the most commonly used are the above mentioned.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    Enforcing securities may take time, depending on the jurisdiction and the type of security. So, the first issue that creditors may have to face is time.

    Except for some possessory pledges over certain assets, the enforcement of securities must be filed before a Court.

    While in certain jurisdictions of our country it might take time and would be costly to enforce a security, it would be easier to do it in the City of Buenos Aires. Hence, it is advisable to choose that jurisdiction for security contracts.

    Finally, it is important to understand that some assets may be sensitive assets and, consequently, difficult to enforce since they may trigger social conflicts (for example industrial plants, family houses and others).

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    The test for insolvency or the prerequisite for filing for insolvency proceedings is what the law calls the “cessation of payments”, which is understood as when the debtor is not able to regularly meet their obligations when due.

    The law provides the following facts that evidence the “cessation of payments”:

    1. Debtor’s acknowledgement of their insolvency.
    2. Debtor’s default in complying with any obligation due.
    3. The absence or self-hiding of the debtor or its board members.
    4. Closing of the headquarters or the place where the company works.
    5. Selling goods at a vile price or paying with goods.
    6. The judicial revocation of certain fraud acts committed by the debtor against the creditors.
    7. Any kind of fraud committed by the debtor in order to obtain resources.

    The directors of a company facing financial difficulties do not have any special duty and continue having the general law fiduciary duties. However, they are required to adopt any available measure to overcome financial crisis or reduce losses. Otherwise, although they are not obliged by the law to file for bankruptcy or reorganization procedures, they might be found liable for delaying such filing and deepening the crisis.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    Leaving aside the reorganization procedure (in and out-of-court) that will be addressed in question #7, insolvency has only one procedure and can be initiated by the debtor or any of the creditors.

    Once insolvency is declared, the debtor ceases in the administration of their business and a liquidator (síndico) is appointed in order to start the liquidation proceedings under the supervision of the court.

    The law establishes that the court has a three-month period (that could be extended up to 4 months) to sell all the assets of the debtor and distribute the proceeds to the creditors (in accordance with the rank that will be explained in the next question). In practice, liquidation process may take months, years and even decades, depending on the size of the company.

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    The law provides the following categories: credits with special preferences, credits with general preferences and common credits with no preference.

    Beyond those categories, the law establishes that expenses related to preservation of the assets as well as expenses and fees of the court’s officers should be paid when due and at any moment and with preference even over the ones with special preference.

    Having said that, the rank of preferences is as follows:

    Credits with special preferences

    • Credits for expenses related to the construction, improvement and maintenance of certain assets of the debtor.
    • Labour credits for salaries due to the employee for six months and for severance and other labour credits over existing stock, raw materials and machinery located in the place where the employee works.
    • Credits for taxes on property and assets over those assets.
    • Credits secured with mortgage, pledge or warrants over the assets that guarantee those credits and credits with bonds secured with special or floating guarantee.
    • Credits for sums owed to a withholding party retaining property of the debtor.
    • Credits secured with naval or aeronautical mortgages.

    The preference can be extended to the interests for 2 years of the principal in credits secured with mortgages and pledges and for certain labour credits.

    Credits with general preferences

    • Labour credits (credits for six months salaries, severance payments and indemnification for health claims due to the employee) including interests accrued during two years.
    • Credits for amounts due to the social security system.
    • If the debtor is an individual: credits for funeral expenses, illness related expenses of their last six months of life and other amounts due.
    • Credits for taxes.
    • Credits for amounts due on credit bills accepted up to AR$ 20,000 (USD 1,250 approx.) in each case.

    After paying special and general credits, common credits with no preferences as well as subordinated credits shall be paid.

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    In case of insolvency, certain transactions made by the debtor before the insolvency was declared might be challenged.

    In a general report issued by the liquidator (síndico) after admitting or denying credits and creditors to the liquidation process, a date on which cessation of payments started will be established. Certain transactions done during the period comprised between the date on which cessation of payments started and insolvency was declared (suspicious period) can be challenged in a process that can be started by the liquidator.

    Gratuitous acts, advance payments of debts and granting mortgages or pledges or giving preferences to credits which have not matured and originally did not have a security are considered void acts and there is no necessity of filing any action. They are just declared void by the judge and the resolution can be challenged at the court of appeal.

    Any other act detrimental to creditors during the mentioned period can also be declared invalid if the party to the act knew of the debtor’s cessation of payments. In this case, the action should be started by the liquidator with the authorization and thus consent of a majority of unsecured creditors. Also, if the liquidator does not file the action, any creditor can do it by their own means.

  7. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    The law provides two options as regards restructuring proceedings: the reorganization procedure (concurso preventivo) and the out-of-court restructuring agreement (acuerdo preventivo extrajudicial - APE).

    Reorganization procedure
    The reorganization procedure can only be filed by the debtor at any time prior to bankruptcy and even as a petition of conversion of bankruptcy (if declared) into a reorganization procedure.

    The process is controlled by the court, which also appoints a receiver (síndico) and a creditor’s committee. However, the management still administers the company.

    Provided that the company faces a situation of cessation of payments, the requirements when filing the reorganization procedure are as follows.

    The debtor must submit:

    • Evidence of registration of the company before the Public Registry of Commerce, articles of incorporation and by-laws and amendments thereto.
    • Explanation of the financial crisis.
    • Statement with a complete detail of assets and liabilities.
    • Copies of the debtor’s financial statements of the last three fiscal years.
    • List of existing creditors with some information about them.
    • List of commercial and corporate books.
    • Declaration of the existence of any previous reorganization procedure.
    • List of debtor’s employees with relevant information about them.

    After opening the proceedings and the recognition of the credits, the debtor has an exclusivity period during which the debtor can negotiate a restructuring plan with the creditors. Such restructuring plan shall be approved if the debtor obtains the consent of the absolute majority of the creditors in each category, representing at least two-thirds of the total outstanding amount of the unsecured credits in each category.

    A plan for creditors with special preferences will need the approval of every creditor in the category.

    Once the plan is approved by the creditors it also has to be confirmed by the court which has the power to reject it in case it is abusive, discriminatory or fraudulent.

    Out-of-court restructuring agreement
    An out-of-court restructuring agreement consists of a private self-regulated restructuring agreement with the unsecured debtor’s creditors. The purpose is to negotiate a restructuring plan outside the formal framework of a judicial reorganization procedure.

    To the extent that the agreement is executed by the required majorities (absolute majority of the creditors representing at least two-thirds of the total unsecured creditors), the debtor may file it before a court and obtain its endorsement, upon which it will be binding to all pre-petition unsecured creditors.

    The requirements that the petition should meet are quite similar to the ones of the reorganization procedure:

    • Statement of assets and liabilities.
    • List of existing creditors with some information about them.
    • List of judicial claims against the company.
    • List of commercial and corporate books.

    The out-of-court restructuring agreement is simpler than the judicial reorganization procedure and certainly less expensive (there is no receiver, it does not require “cessation of payments, etc.).

    Insurance companies and financial entities cannot file a judicial restructuring nor enter into an out-of-court restructuring agreement.

  8. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    There are no provisions in the law as regards financing companies in restructuring proceedings. However, as there is no prohibition, we have seen some cases of new financing in restructuring proceedings which worked and were secured with new guarantees.

  9. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?

    Once the reorganization procedure is open, the debtor may continue performing their obligations under the existing contracts in which there are still pending mutual obligations. In those cases, the debtor must ask for the court’s authorization and the counterparty may ask for the fulfillment of any due obligation at the time in which the procedure was filed. Should the debtor not notify their will to continue performing the contracts within thirty days of the filing date, then the counterparty is entitled to terminate the contract.

    In case of an out-of-court restructuring process, there are no limitations as regards the existing contracts or new ones: the debtor must comply with their obligations and is free to enter into new business.

    Finally, if bankruptcy is declared, the principle is that the debtor loses the administration of their business and assets and the sale process starts. Additionally, every existing contract is finished and the debtor cannot enter into new ones. However and exceptionally, the liquidator might recommend the court to continue the debtor’s business if it is considered beneficial for the debtor (and the creditors) or if two-thirds of the debtor’s employees request so.

  10. What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted?

    During the reorganization procedure assets and even the entire business or units can be sold subject to the authorization of the court and the consent of the receiver and the creditor’s committee.

    In that case, assets are acquired as in a normal deal and there is no “free and clear” provision or guarantee.

    Thus, it is necessary for the acquiring party to perform a due diligence on the assets or units or the entire business that it is buying.

    However, if a company is purchased under reorganization procedure, and after the two-year period that creditors have in order to ask for the recognition of their credits, then the acquiring party will be buying with the advantage of knowing who the creditors are and that there is no chance of receiving a claim from other creditors if they have not shown in the process.

    Securities cannot be released without creditor’s consent and credit bidding is permitted.

  11. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty?

    Directors or any kind of representative of a company who have fraudulently produced, facilitated, allowed or aggravated the debtor’s financial situation shall be liable for the damages caused.

    Likewise, any third party who in some way helped to reduce the debtor’s assets or increase its liabilities at any time before or after the bankruptcy declaration shall be liable and must reinstate any asset that it may have and also compensate for the damages caused.

    These acts must have been performed up to one year before the cessation of payments date declared by the court. Related actions should be started by the liquidator with the authorization and thus consent of a majority of unsecured creditors. Also, if the liquidator does not file the action, any creditor can do it on their own.

    Having said that, directors and representatives of the companies in distressed situation keep their duties and responsibilities under the Commercial Companies Act and the Bankruptcy Law does not ban filing claims against them. The only difference is that those claims must be filed by the liquidator and, although it is not required, asking for the approval of a majority of creditors seems to be the correct way of doing it.

  12. Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?

    No other third parties incur in liability for the debts of an insolvent debtor with the exception of what was mentioned in the previous question and also in special situations where bankruptcy might be extended in certain cases.

    The Bankruptcy Law establishes that bankruptcy shall be extended to: (i) any person that acting as if it were the debtor, performed acts on their own benefit, damaging the creditors´ rights, (ii) a controlling person who performed acts on their own benefit through the controlled company and (iii) any person when there is a commingling of assets and debts between the debtor and that person and that prevents understanding who owns each asset.

  13. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions.

    As mentioned in question 11, directors and other stakeholders shall be liable for the damages caused and the action against them must be brought by the liquidator or the creditors if the liquidators fails to do so.

  14. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition?

    Insolvency proceedings started abroad allow local creditors and the debtor to file for local insolvency proceedings too.

    Notwithstanding what any treaty may state, foreign insolvency proceedings cannot be used as a waiver for not paying local debts.

    If bankruptcy is declared in more than one jurisdiction, creditors in the foreign insolvency proceedings will be able to collect in the local proceedings only after local creditors have been paid.

    Finally, to obtain the recognition of a foreign claim, the foreign creditor must prove reciprocity of their country.

  15. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    As mentioned in the previous question, insolvency proceedings started abroad allow local creditors and the debtor to file for local insolvency proceedings too.

    However, it seems that having local proceedings in these cases makes sense if the debtor has assets or activity in our jurisdiction.

    If that is the case, the company must be registered and duly incorporated locally as a subsidiary or a branch of the foreign company.

  16. How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?

    A group of companies may file for their reorganization procedure as a group, provided that they prove the existence of the group. The filing for reorganization procedure as a group must include all the members without exception.

    General rules for reorganization procedure apply to the group filing but, however, there are certain special rules:

    • The cessation of payments of the group is proved by the cessation of payments of any of the companies of the group.
    • The jurisdiction will be determined by the company with the most assets.
    • The receiver (síndico) will be the same for all the group (but the judge may appoint more than one).
    • There will be one individual process for each member of the group, with only one general report which will contain a consolidated report as regards assets and liabilities.
    • The members may offer a unified proposal. The majorities are the same as in the normal reorganization procedures but proposals will be also considered approved if they receive the approval of 75% of the creditors of the group and at least 50% in each category.
    • If approvals are not obtained, then the judge will declare the bankruptcy of every company of the group.
  17. Is it a debtor or creditor friendly jurisdiction?

    Although the law provides adequate protection for both creditor and debtor, when applying it, judges may interpret it in favor of one or the other.

    In that sense, I would say that we are currently a debtor friendly jurisdiction that -at the same time- offers creditors the right tools to fight for their rights.

  18. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    Sociopolitical factors indeed give additional influence to certain stakeholders, such as unions or just groups of employees.

    The pressure of the employees might be strong and sometimes it is hard to find a balanced solution for creditors, debtor and employees.

    During the last years, we have seen the state playing a role in trying to help distressed companies that were important for regional economies or that provide jobs to many people. In those cases the state plays the role of a mediator and in some cases provides credit (or at least bridge loans) to the debtor.

  19. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    I think that we have efficient and effective restructuring and insolvencies. However, there are many things to improve.

    Finding the right balance between the interests of the debtor, their employees and the creditors is one of them. I personally do not believe in extreme positions (e.g. the law in favor of the debtor or in favor of the creditor). On the contrary, I believe in adequate protection for every stakeholder, which is something doable. Bankruptcy does not have to be win-lose. I think that win-win solutions are feasible and the law gives the tools to find them.

    Another big issue in our legislation is that there are no consequences for shareholders in case of bankruptcy unless fraud is discovered. Looking into this subject will probable also help to improve our legal framework.