Extra-judicial Reorganization Proceedings

Before Law No. 22,917 came into force in 1983, agreements between debtors in crisis were governed exclusively by general law, not being contemplated by Law No. 19,551 on Reorganization and Bankruptcy Proceedings which had been in force until then.

Law No. 22,917 introduced a new remedy under bankruptcy law to enable overcoming individual economic crises by means of “Acuerdos Preconcursales” or agreements prior to declaration of insolvency.

This procedure was partially modified in 1995 by means of Law No. 24,522.

In spite of the large number of liability restructuring proceedings that have taken place, especially those of a financial nature (Clubs of Banks), Extra-judicial Reorganization Proceedings (Acuerdos Preventivos Extrajudiciales - APE) did not become a common legal procedure.

It was only as a result of the latest changes made to the Law on Reorganization and Bankruptcy Proceedings introduced by Law No. 25,589 that certain aspects were incorporated to the APE to make them particularly attractive because of their effect, speed and cost.

For these reasons large corporations currently in a crisis situation have been analyzing the possibility of entering into such agreements with their creditors with the clear intention of avoiding reorganization proceedings through the courts.

The main features of the APE and the most significant of the changes introduced by Law No. 25,589 are as follows:

1.    Requirements for the court filing of an APE

a.    Formal aspects of the agreement

According to the terms of section 70 of Law No. 24,522 on Reorganization and Bankruptcy Proceedings (this text is included within Law No. 25,589), the formalities that must be fulfilled when entering into an agreement with creditors are as follows:

(i) They may be granted by means of a private deed, signatures and capacity of all the parties being certified by a notary public.

(ii) The powers-of-attorney indicating the capacity of those signing should be attached to the agreement.

(iii) It is not necessary for the agreement to be signed by all those entering into it on the same day.

(iv) Individual agreements can be entered into with each creditor.

b.    Formal requirements for the filing in court of the agreement reached

According to section 72 of Law No. 24,522 on Reorganization and Bankruptcy Proceedings (as modified by Law No. 25,589), the requirements that must be fulfilled to obtain approval for the agreement with creditors are as follows:

(i) A statement of assets and liabilities updated to the moment at which the agreement is signed.

(ii) A listing of creditors with an indication of the amounts of their claims.

(iii) Accounting certification confirming that there are no further registered creditors.

(iv) A list of the lawsuits or administrative procedures in progress or with non discharged sentences, specifying location.

(v) Full listing of all the Company’s business records.

(vi) Compliance with the majorities required for the approval of the agreement.

2.    Content of the APE

Under the terms of the new section 71 of the Law on Reorganization and Bankruptcy Proceedings, as under the previous system, the parties to the APE can ensure it contains the items appropriate to their interests. In this instance the principle of equality among creditors that is typical of the reorganization process does not apply.

3.    Majorities required for court approval of the APE

Under the terms of the new section 73 of the Law on Reorganization and Bankruptcy Proceedings (ordered text as per Law No. 25,589), once the above formalities have been complied with the Court must approve the APE once an absolute majority of the creditors representing at least two thirds of total non-preferential liabilities have indicated their agreement (as required by section 45 of Law No. 24,522).

Although the new section 73 of the Law on Reorganization and Bankruptcy Proceedings only established that credits and capital majorities should be calculated as indicated above (as per section 45 of Law No. 24,522) some experts have considered that the procedure for calculating majorities foreseen by section 45 bis (in relation to holders of negotiable obligations or other securities issued in series) should also apply to an APE, as well as the reduced majorities foreseen by section 52 of Law No. 24,522 in accordance with the text introduced by Law No. 25,589.

In view of the fact that the APE has only been contemplated for the restructuring of liabilities without debtor guarantee, it can only include preferred creditors who waive their guarantees (pledges, mortgages, warrants, etc.).

For an APE to be deemed valid in the case of labor creditors, it will first be necessary to obtain approval of the agreement from the corresponding administrative authority.

4.    Principal innovations introduced by Law No. 25,589

An APE provides debtors with the possibility of restructuring their liabilities in a quicker and more effective manner than if they had resorted to formal reorganization proceedings, at a considerably lower cost. The main advantages of the new legal regime are:

(i) The mere filing in court of the APE for approval prevents litigation being brought against the debtor’s property.

(ii) Court approval of the APE makes it mandatory for creditors that have not participated in the agreement.

As is the case when important regulations undergo such transcendental changes, in spite of certain imperfections and omissions in the new regime, their usefulness will only become evident over time after they have experienced treatment in the courts.