Financing and Restructuring of Insurance Companies

The Federal Supreme Court of Justice has recently declared Decree No 558/2002 of the Executive Branch unconstitutional (judgment dated May 19, 2010, in re “Consumidores Argentinos vs Argentine Government”, court file C.928.XLIII).

Decree No. 558/2002 was issued by former president Eduardo Duhalde on March 27, 2002 in the context of one of the most intense economic crises suffered by Argentina, and was later regulated by Communications 60 and 61 of the Argentine Superintendent of Insurance (see Insurers may now borrow from banks and create subordinated debt - Marval News # 9, of August 30, 2002-).

On grounds of necessity and urgency, the decree introduced certain amendments to the Insurance Companies Act, such as the Superintendent of Insurance’s powers to authorize insurance companies to: (i) resort to bank loans in cases of financial illiquidity (which was originally prohibited by the Insurance Companies Act passed by the Federal Congress, except for credits for the construction of buildings to be sold or rented, with the corresponding prior approval of the Superintendent of Insurance); and (ii) create debt subordinated to the general and special privileges derived from insurance contracts.

Decree No. 558/2002 also amended the regularization and financial adequacy regime for insurance companies whose minimum capital requirements were affected.  In this respect, the regularization and financial adequacy plan to be filed by an insurance company with the Superintendent could provide for a portfolio transfer or an exclusion of certain assets or liabilities and their transfer to another insurer or the setting up of a trust, without complying with the requirements of the Transfer of a Going Concern Act nor with the publication requirements of the same Insurance Companies Act in respect of insureds.  The amendments also restricted the possibility of taking any enforcement actions over the excluded assets of an insurance company (except for the enforcement of mortgage or pledge rights) and enforcing any precautionary measures against an insurance company.

According to the recitals of the decree, the measures taken to mitigate the economic crisis significantly affected the operations of insurance companies, so it was deemed “imperative and urgent” to establish regulations allowing for the Superintendent of Insurance to manage various regularization and financial adequacy alternatives for the insurance market to protect the interests of the insureds.

Therefore, the Executive Branch considered that “…the critical economic and financial emergency situation that the country is facing, in which the insurance market operates, constitutes an extraordinary circumstance that makes it impossible to follow the ordinary procedure provided by the Federal Constitution to pass laws, resulting in the urgent and necessary issuance of this decree…”.

The consumers’ association Consumidores Argentinos filed legal actions (acción de amparo) against the Executive Branch seeking that Decree No. 558/2002 be declared unconstitutional. The plaintiff argued, among other things, that the amendments introduced to the Insurance Companies Act: (i) deprive insureds of their right to reasonably object a portfolio transfer; (ii) allow for the exclusion of assets of the insurance company without giving notice to the insureds; (iii) restrict the right to take enforcement actions over the assets of a debtor due to unpaid obligations; and (iv) limit the enforceability of precautionary measures over the assets of the debtor.  In the plaintiff’s view, these measures violate consumer protection rights as well as property, equality and due process rights protected under the Federal Constitution.

Likewise, the consumers’ association alleged that the necessary requirements allowing for the Executive Branch to issue this sort of decrees had not been met.  According to the plaintiffs, instead of urgency, there was “…plainly an Executive Branch’s intention to ‘bailout’ the most affected corporate sector of the insurance market…”.

The case was heard by the federal administrative law courts.  Both in first and second instance the complaint was admitted.  The Argentine Government filed an extraordinary appeal against the appellate decision.  The Supreme Court deemed that the extraordinary appeal had been granted correctly and unanimously affirmed the appellate ruling although justices Highton de Nolasco, Petracchi, Maqueda and Argibay issued their own votes.

In principle, the Executive Branch is prohibited from issuing regulations which are legislative in nature.  Only when due to exceptional circumstances it is impossible to follow the ordinary procedures set forth in the Federal Constitution for the enactment of laws, and when rules are not referred to in criminal, taxation or electoral matters, or the system of political parties, does the Constitution authorize the Executive Branch to issue decrees on grounds of necessity and urgency, to the extent that certain other formal requirements are met (article 99.3 of the Federal Constitution).

After pointing out the extensive use of this type of decree and stressing that judges have the authority to evaluate the factual circumstances that would justify the issuance of decrees on grounds of necessity and urgency, the Supreme Court found that in this case none of the indispensable requisites set forth in the “Verrocchi” precedent had been met to legitimate the exercise by the President of legislative functions which, in principle, are foreign to the President’s attributes, that is: “…1) that it was impossible to enact legislation through the ordinary procedure set forth in the Constitution, meaning that the houses of Congress cannot meet due to force majeure circumstances that prevent it, as would occur in case of warlike actions or natural disasters preventing a meeting to be held or Congressmen to travel to the Federal Capital; or 2) that the situation requiring a legislative solution be of such an urgency that it must be solved immediately, within a period of time inconsistent with the term demanded by the ordinary procedure for the enactment of laws…”.

In connection with the decree itself (issued before the enactment of Law No. 26,122, by which the Federal Congress regulated the procedure and scope of its intervention in respect of decrees issued by the Executive Branch on grounds of necessity and urgency), the Supreme Court also pointed out that, notwithstanding the economic and financial emergency invoked in the decree, the amendments introduced to the Insurance Companies Act, “…do not reflect a circumstantial-type of decision aimed at mitigating a purported extraordinary situation in the [insurance] sector, but, on the contrary, constitute permanent rules amending the laws of the Federal Congress…”.

In short, the Supreme Court held that the amendments to the Insurance Companies Law introduced by Decree No. 558/2002 are invalid.