Back to Corporate and M&A Law Committee publications

Federico Guillermo Absi
López Tilli Abogados, Buenos Aires
fabsi@lopeztilli.com

Diego García Romero
López Tilli Abogados, Buenos Aires
dromero@lopeztilli.com

 

The Covid-19 pandemic has caused governments around the globe to take desperate measures in order to save lives. The strictness of these measures has varied from country to country.

The Argentinian government at all times expressed that the defence of the lives of its people was priority number one. Alongside other measures, it adopted a long and strict isolation rule. This has caused enormous economic damage to companies of all sizes, particularly as isolation has been lifted in several parts of the country, but not in the most important economical district.

Various measures have been enacted in order to mitigate the adverse economic effects (postponements in the payment of taxes, employer's contributions, public services and the payment of part of employees’ salaries by the government) but unfortunately this may not prevent many of the affected companies from default or being forced to resort to any of the debt restructuring mechanisms provided for in the Argentinian Bankruptcy Act (ABA).

In other words, once the quarantine has been lifted and the extraordinary judicial break ordered by the Supreme Court of Justice has ended, a true flood of requests for different bankruptcy proceedings will occur.

Taking into account this worrying panorama, several Parliament members – belonging to diverse party blocs – have presented different bills (the Bills) in order to facilitate successful debt restructuring, allowing the preservation of companies as a source of employment and avoiding bankruptcies.

The Bills contain proposals of different measures to attack the upcoming crisis, such as longer terms for complying with approved agreements, special financing for defaulted companies, suspension of public auctions and more.

This paper analyses the changes proposed for one of the restructuring tools that we believe will acquire enormous importance in the coming months – extrajudicial preventive agreements (APEs).

The APE: general notions

The APE is a debt restructuring tool that allows the debtor to negotiate out-of-court agreements or payment plans with its creditors. The debtor has to comply with certain formal requirements for this purpose and, once the majorities provided by the corresponding Act have been met (the absolute majority of creditors that represent, at least, two-thirds of the total of the liabilities), it must be filed with the court in order to obtain its approval.

Once approved, said agreement is mandatory not only for all unsecured creditors who have expressly given their consent, but also for those who have not accepted the proposal or have unsuccessfully opposed it.

As it is a short and low-cost judicial process (due to not having a credit verification process, nor requiring the appointment of a receiver), we consider it to be an interesting tool for the months to come. It is likely that the commercial courts will be in danger of collapsing due to the large number of new lawsuits to be filed – not only debt restructuring procedures but also executive collections and ordinary lawsuits that will be filed as a consequence of the breakdown in the chain of payments between companies.

Temporary amendment proposals

The Bills seek to facilitate the process of obtaining consents and judicial approval, make their compliance more flexible, allow the extension of deadlines and the adjustment of the agreed conditions, and promote post-bankruptcy financing that would allow business continuity.

These proposed amendments would be temporary and be invoked by debtors only while the health emergency established by Act 27.541 and extended by Decrees 260/20, 297/20, their amendments and extensions (which at the time of writing extend to 31 December 2020) are in force.

They would apply to the new APEs, as well as to those already in process at the date of the eventual entry into force of the Bills (in the latter case, debtors would be entitled to request the adaptation of the process on or before 31 December 2020). The following proposed amendments are worth highlighting.

Elimination of the ABA’s double majority requirement

The most significant proposed amendment is with respect to the majority regime necessary to obtain approval.

The ABA requires a double majority of two-thirds of the total liabilities and an absolute majority of creditors; the Bills only require that the creditors who represent ‘more than half of the total unsecured liability’ agree.

The requirement of a two-thirds majority would be reduced (since it would be sufficient that the percentage of the liability exceeds 50 per cent) and the requirement of the absolute majority of creditors is eliminated.

In other words, the double majority of the ABA is eliminated, establishing that the majority would be reached in case of obtaining the agreement of creditors representing more than 50 per cent of the liability, regardless of the number of creditors. It could be the case that the legally required majority is met with the agreement of a single creditor that holds more than 50 per cent of the liability.

While this amendment would facilitate obtaining the necessary majorities to obtain approval, it could also lead to abuse in cases wherein the majority of the liability is in the hands of one or very few creditors.

This amendment proposal would benefit countless debtors who will be able to relatively easily refinance their debts, but the new Act would require stricter judicial control in order to avoid abuse and illegal collusion between the debtor and the majority creditors to the detriment of minority creditors.

Renegotiation and extension to approved agreements

Another significant amendment that will be submitted to Parliamentary discussion plans to empower the debtor to renegotiate previously approved agreements.

It is proposed that, in the event of default of an approved APE, the debtor may request an additional period to modify the terms thereof, and may include the creditors of cause or title subsequent to the presentation of the APE who, for this reason, had been left out of it.

On the other hand, the debtor may alternatively and in a reasonable manner request the extension of the terms of an already approved APE. The bills do not provide much detail about the requirements to access these benefits.

In our opinion, the debtor should be required to obtain the majorities necessary for approval for this new renegotiated or extended agreement, since allowing a debtor to unilaterally modify an agreement that had obtained a legal majority has a serious impact which would end up denaturing the APE institution.

If debtors are allowed to easily modify the terms agreed through an approved APE, the creditors will have no reason to agree to it in the first place.

Suspension of judicial proceedings of patrimonial content

The ABA establishes that the suspension of judicial proceedings of patrimonial content against the debtor will operate as from the judicial resolution that orders the publication of edicts for an indefinite period.

However, several of the Bills propose that the suspension only operates for an expressly determined period (between 60 and 90 days) being only necessary to provide, in each of the judicial files, the information required by the ABA for the judicial presentation of the APE and/or the approval request expressing its will to achieve an extrajudicial agreement with the creditors. If the abovementioned term had elapsed, and the debtor does not prove that it has reached an agreement with the creditors, the suspension will expire, and each judicial file will continue in accordance with the existing status at the moment when the suspension was requested.

The advantage of this planned amendment with respect to the ABA is that it would allow the debtor to request the suspension without having yet obtained the majorities necessary for the approval of the APE, in which case they must be obtained within a certain period. It would be lawful to suspend the lawsuits without being necessary to have previously filed the APE.

Regarding the suspension term, the proposed limit is fully justified in order to avoid that those debtors with lawsuits filed against them request this suspension abusively with no intention of restructuring their debt by means of an APE.

Appointment of a private accountant as a requirement for filing the APE

A novel aspect of the Bills is the introduction of a new requirement for the judicial presentation of the APE – which does not exist in the ABA – consisting of the appointment of a public accountant by the debtor, who would be in permanent contact with the judge in order to provide the information and clarifications necessary for the analysis and understanding of the provided information.

The intention of the legislator is to try to speed up the resolution timing regarding the approval, bearing in mind that the judicial processes for the approval of APE do not have the intervention of a receiver who may advise the judge on the accounting aspects of the restructuring request.

Post-bankruptcy financing

The Bills also propose to urge the official and private financial entities to provide credit financing to those companies whose APEs have been approved. This would be regulated by the Argentinian Central Bank, which in no way can be construed as the imposition of an obligation for financial entities to grant loans indiscriminately.

Entering into insolvency proceedings or APE makes it difficult for debtors to access to credit. In this sense, the purpose of the Bills is laudable, but we believe that it would be difficult to apply since the granting of these loans would ultimately depend on the goodwill of each financial entity.

Conclusion

The extraordinary times the world currently faces demand quick and exceptional measures from governments: firstly to avoid the disappearance of a large number of medium and small companies, but also – and especially in the case of Argentina – to rebuild the country’s economic status quo.

The Bills propose measures of this nature in order to facilitate the situation of debtors with the intention of restructuring their liabilities, although clarifying that they would be temporary measures that, once the emergency situation is over, would cease to apply.

It is worth highlighting the elimination of the double majority for the approval of the APE, and the reduction of the majority required regarding the liability would be the most significant amendment in terms of impact.

This measure may be abused by debtors, but the desperate economic situation that many small and medium-sized companies are experiencing today, added to the transitory nature of the proposed amendments, perhaps should convince the Members of Parliament about their convenience.

Such abuses could be controlled by the application of strict penalties such as fines. Strong judicial control would also help avoid abuses on the part of unscrupulous debtors or illegitimate collusions between the debtor and the majority creditor or creditors – ultimately hindering the debt restructuring and going directly against the purpose of the planned amendment.

This type of measure, together with access to private and government financing, may act as life vests for sinking companies, allowing them to re-engage in their activities once Covid-19 is at least partly under control.