Bankruptcy and Insolvency

SYNOPSIS

A. INTRODUCTION 10.101

B. PRINCIPLES 10.102

C. PERSONS SUBJECT TO THE LAW 10.106

D. SUSPENSION OF PAYMENTS 10.109

E. EXTRAJUDICIAL SETTLEMENT PLAN 10.112

F. PREVENTIVE BANKRUPTCY PROCEEDING 10.114

G. BANKRUPTCY 10.130

H. MINOR PREVENTIVE BANKRUPTCY PROCEEDING 10.138



A. INTRODUCTION

10.101 Within the frame of substantial economic amendments in August 1997, the bankruptcy law was replaced by a new law (No. 24522). The new law has respected the general provisions of the previous system introducing new legal figures.

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B. PRINCIPLES

10.102 We can summarize the general principles of the Bankruptcy Law can as follows:

The main focus is to preserve viable Business Organizations suffering economic difficulties.

It also focuses in recovering businesses to avoid market reductions thus helping maintain open and competitive markets.

10.103 To this end it has established the following solutions:

- extrajudicial plan of settlement.

- preventive bankruptcy proceedings

- cramdown ("salvataje")

If all these previous legal attempts to preserve the business are not successful, bankruptcy regulation authorize the court to declare bankruptcy with the object of a speedy liquidation of assets to permit that they be reused in the general economic system so as to satisfy creditors’ claims.

10.104 In the new law judges’ authority has been limited but not suppressed, and creditors powers of decision have been broadened, e.g., if during the reorganization agreement period, the debtor reaches an agreement, the judge will only have to confirm it according to the rule of law. A creditors’ committee will control the fulfillment of that agreement.

10.105 The amendment of the law also resulted in a cost reduction of Bankruptcy proceedings and suppressed the judgment at the Commercial Court of the bankrupt party’s responsibility, reserving this to a Criminal Court ruling.

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C. PERSONS SUBJECT TO THE LAW

10.106 Preventive Bankruptcy Proceedings can be applied to natural or legal persons including those owned, all or in part, by the Federal, Provincial or Municipal Government (the Federal Government, Provinces, Municipalities and Government Agencies). Public entities are excluded from this regime.

10.107 Insurance companies, Mutual Associations and Administrators of Pensions and Retirement Funds are also excluded as in case of Insolvency they are ruled by the laws of creation (20.091, 20.321 and 24.241).

10.108 Finally, this Law cannot be applied to Financial Entities which have their own regime of Bankruptcy under law N0.24522.

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D. SUSPENSION OF PAYMENTS

10.109 The clue to comprehend Law N0. 24522 is to understand what is considered suspension of payments, because once this has been understood, it will be easier to identify an insolvent company.

10.110 In the Argentine Bankruptcy System, the suspension of payments constitutes an economic fact that might so be evidenced by other events or circumstances and not only by not fulfilling monetary obligations. This state is a disadjustment between the amounts needed to fulfill all obligations and the value of assets owned, needed to cancel them.

10.111 Therefore, when a merchant finds himself in this situation he will be able to use any of these solutions to prevent bankruptcy.

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E. EXTRAJUDICIAL SETTLEMENT PLAN

10.112 Law No. 24522 (articles 76 to 96) offers this possibility to those who find themselves in economic or financial problems, even if this happens before suspension of payments and before the initiation of preventive proceedings is declared by a Court.

10.113 Through the extrajudicial plan of settlement, debtor and creditors find a private solution that obliges the signing parties. The agreement recorded before a Commercial Court becomes of obligatory compliance by all creditors even those that did not sign the agreement.

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F. PREVENTIVE BANKRUPTCY PROCEEDING

10.114 This regime has been established to benefit the debtor allowing him to manage his business with certain limitations, while he reaches a settlement with his creditors that allows him to overcome the critical situation of the business.

10.115 This judicial request by a debtor must comply with specific requirements such as stating the reasons for his financial condition, list a detailed description of his assets and liabilities, his creditors and in case of a legal person it must attach to the request its bylaws, charter and inscription before the Inspection of Corporations.

10.116 The judge of the competent commercial court must rule on the petition either rejecting it for failure to meet procedural requirements or declaring the initiation of preventive proceedings.

10.117 The initiation of preventive proceeding has the following legal effects:

• debtor continues to manage his business under the supervision of a receiver

• debtor cannot sell assets without judicial approval

• prohibition for the disposal of assets through donation or to change conditions or guarantees of debts contracted before presentation.

• suspension of interest on all prior debts except those guaranteed by mortgage or chattel mortgage

• convertion of all non-monetary debts in monetary debts

• Debtor may not leave the country without prior communication to the court or with court authorization if it is for a long absence.

10.118 Once notice calling all creditors is published, creditors must request receiver to verify the validity of their claims. After this period, creditors may object verification of other credits and then the receiver informs and advises the judge about the different claims and objections he has received. Here the procedure returns to the court where the judge must rule admitting or rejecting in all or part each credit verification request.

10.119 Then, receiver files his general report that must consider, among other things, reasons for debtor’s financial difficulties and the date that the debtor ceased in its payment. This general report may also be objected by creditors and debtor.

10.120 The debtor must also file a categorization plan for each group of creditors’ verified claims and the court will resolve about the definite categories.

10.121 Next step, will be the opening of a period of "exclusivity" in which the debtor must negotiate the payment agreement with each group of creditors.

10.122 Although the law is broad concerning settlement plans, these can differ from one category of creditors to another but must have equal conditions for creditors in the same category. The debtor may also offer alternative plans of settlement to one category for creditors to choose.

10.123 Some of the many alternative offers may consist in the adjudication of assets to creditors of one category or the formation of a new company together with unsecured creditors where they become partners or shareholders, debtor’s corporate reorganization, management of specific assets in creditors’ interest, negotiable obligations and debentures issuance or bonds convertible into shares or capitalization of debts.

10.124 There is also a possibility of offering a settlement plan to preferred creditors, but if this is not accepted it does not make the preventive bankruptcy proceeding fall. If the proposed settlement plan is rejected by creditors, the court must declare Bankruptcy.

10.125 If the settlement plan is approved, creditors representing a legal majority will register it with the following effects:

• novation of all the obligations contracted before the petition was presented.

• application of the settlement plan to all creditors, even to those who have not been involved in the proceeding.

10.126 Once the settlement plan has been registered, the court provides for its execution and compliance, it declares the preventive bankruptcy proceedings and the receiver’s functions terminated.

10.127 The law also allows the creation of creditors’ committees to control the compliance of settlement plan, these have broad access to information, advising, objecting and controlling compliance of the plan.

10.128 Inspired in cramdown of the North American Bankruptcy System, art 48 has established a procedure called ¨salvataje¨.

10.129 When the debtor is a Corporation, a limited liability company, a cooperative or a company partially owned by the Federal, Provincial or Municipal Government and the debtor has not reached a settlement plan, bankruptcy is not declared to permit any creditor or even a third party interested in the purchase of the company to file in a special register opened by the court a plan of settlement based on their taking over the company. If this last solution fails, bankruptcy is finally declared.

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G. BANKRUPTCY

10.130 Bankruptcy is a process where the debtor is deprived of all his assets and these are sold under supervision of a receiver for an orderly distribution of the proceedings to creditors. Liquidation of assets is done to satisfy creditors` claims according to their rights, categories and priorities.

10.131 The bankruptcy petition may either be requested by the debtor or by any creditor who can prove that debtor suspended its payments.

10.132 According to the principle of "preserving a business", Law No. 24522 provides debtor with a chance of ¨conversion¨ of the proceedings.
This mechanism consists in a brief period, once bankruptcy has been declared, in which liquidation proceedings may be converted into a preventive bankruptcy proceeding at debtor’s request. It is clear that to be able to obtain this benefit, the debtor must comply with conditions requested for reorganization agreements. Therefore, the law establishes that this conversion cannot be requested by those who have bankrupted as a result of reorganization agreement failure.

10.133 Declaration of bankruptcy has the following legal effects:

• personal effects regarding the debtor are his obligation to cooperate with the receiver in establishing his net worth, the restriction to leave the country without the court’s permission and the bankrupt’s disqualification to act in commerce. Then same effects affect directors and/or managers of corporations.

• the debtor losses his ownership right to his assets

• the period between the cessation of payments and the formal declaration of bankruptcy is designated ¨period of suspicion¨ and it is within such period that certain transfers of property by debtor could be rendered void or without effect if they affected the equal state of common creditors.

• the declaration of bankruptcy also results in the maturity of all debts and all interest on same are suspended and no creditor can claim except through the bankruptcy proceeding.

10.134 The court orders restrictions on all assets, and holds the debtor’s commercial books and papers and puts the debtor’s business under control of the receiver who must take the necessary measures to preserve and administer same.

10.135 The receiver must try to satisfy the bankrupt’s credits and proceed to an immediate liquidation of debtor’s business, in accordance to the following priorities:

• sale of the entire business, as a going concern

• bulk sale of the business assets

• sale of all or part the assets on an individual basis

10.136 An exception to this principle is the special sale of mortgaged or chattel mortgaged assets.

10.137 The receiver must present his final report with a liquidation plan, and once this has been approved it will be the basis for the payment of the common creditors dividend. Finally when the court considers that a proper and complete liquidation has taken place, bankruptcy proceeding is declared closed.

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H. MINOR PREVENTIVE BANKRUPTCY PROCEEDING

10.138 It has been created to simplify proceedings that need to be fulfilled when the debtor does not fulfill one of the following conditions:

• debt does not reach $ 100.000

• when not more than 20 unsecured creditors act within the proceedings.

• when the debtor has less than 20 employees

10.139 In this situation the petition for settlement plan is easier, there is no need for a creditors’ committee and a "cramdown" proceeding cannot be applied.

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