New Amendments to the Judicial Reorganization and Bankruptcy Legal Regime

The most significant amendments introduced to Judicial Reorganization Law by the recently passed Law No. 25,589 are the following:

Exclusivity Period: Section 1 of Law No. 25,589 limited to a maximum of 120 days the term that had been extended – under Section 2 of Law No. 25,563 – to a maximum of 360 days, for companies under reorganization to make payment proposals to their creditors and to obtain and provide evidence of their approval (the so called “exclusivity period”). The original wording of Law No. 24,522 established that the exclusivity period could not extend beyond 60 days.

Minimum Payment Offer: Another important amendment introduced by Laws No. 25,563 and 25,589 is the derogation of the provision contained in Section 43 of Law No. 24,522, preventing the debtor from making payment offers including reductions of more than 60% of the claims filed or declared admissible.

Performance of the Approved Agreement (“Acuerdo Homologado”): Section 10 of Law No. 25,563 extended for the term of one year the date to perform the agreement approved (“homologado”) in connection with the debtor’s reorganization. Section 9 of Law No. 25,589 repealed such extension and provided that, for reorganizations affected by the rule in question, the term to perform the agreement will be resumed on June 30, 2002.

Suspension of Foreclosures during Reorganization Proceedings: Section 8 of Law No. 25,589 repeals Section 9 of Law No. 25,563, which had set forth a 180-day suspension for collateral foreclosure proceedings filed or to be filed against the debtor.

Suspension of Bankruptcy Petitions: Section 10 of Law No. 25,589 repeals Section 11 of Law No. 25,563, which set forth the suspension of bankruptcy petitions pending and the prohibition to file new petitions.

Guarantees of Financial Obligations: Section 7 of Law No. 25,589 repeals the second paragraph of Section 8 of Law No. 25,563 which suspended, until December 10, 2003, the foreclosure of financial obligations’ guarantees allowing to transfer the control of companies under reorganization and their subsidiaries.

Restructuring of Financial Obligations: Section 11 of Law No. 25,589 repeals Section 15 of Law No. 25,563, forcing financial institutions to restructure their credits within the term of 90 days on reasonable and equitable conditions in view of the new economic circumstances.

Suspension of Judicial Foreclosures and Precautionary Measures: Section 16 of Law No. 25,563 suspended for the term of 180 business days the filing and continuation of foreclosure proceedings on the debtor’s assets (with certain limitations), as well as the filing and continuation of precautionary measures against the debtor on its assets used in the ordinary course of business. Section 12 of Law No. 25,589 restricted such term to 180 calendar days, as well as the scopes of such provision. As from the introduction of this amendment, the suspension is only applicable to the auction of the debtor’s assets (with certain limitations) and the ordering of precautionary measures involving the loss of possession of those assets used by the debtor in the ordinary course of business.

Cramdown: Section 21 of Law No. 25,563 suspended until December 10, 2003 the business reorganization procedure contemplated in Section 48 of Law No. 24,522, known as “Cramdown”. Section 13 of Law No. 25,589 reinstates the Cramdown procedure, but with certain amendments in respect of the original regime. In the first place, it extended to the debtor the power to make payment proposals to creditors. In addition, for purposes of determining the value of the company under reorganization, its book value is no longer considered and a procedure was established allowing the judge to estimate their real value, with the intervention and opinion of appraisers. Appraisers may be investment banks, other financial entities authorized by the Central Bank and leading auditing firms.

Securities Issued in Series: By means of Section 14 of Law No. 25,589, Section 32 bis was incorporated to Law No. 24,522, allowing trustees and other authorized persons to file the proof of claims (“verificación de créditos”) on behalf of holders of securities issued in series. In addition, Section 16 of Law No. 25,589 also incorporated Section 45 bis to Law No. 24,522, which set forth a regime to obtain the conformity of noteholders or holders of other securities issued in series, by means of the holding of a meeting. For the approval of the debtor’s payment proposal as a result of such meeting, the majorities set forth in Section 45 of Law No. 24,522 must be obtained (absolute majority of creditors representing at least 2/3 of the computable capital), with the following exception. By means of a new and defective computation system, the vote of all creditors voting for the agreement will be considered as one favorable “vote”, and the vote of all other creditors will be considered as an unfavorable “vote”. In this way, unless there is unanimity, the majority of creditors necessary to approve the agreement will never been obtained. Judges will certainly cure this defect in order to perfect agreements with creditors.

Approval of Agreements with Creditors: Section 17 of Law No. 25,589 set forth a regime of reduced majorities for the approval of payment proposals to creditors whose claims have been filed or declared admissible. In case of payment proposals differentiated by categories of creditors, the court may approve (“homologar”) payment agreements that have not been voted by a simple majority of creditors representing at least 2/3 of the computable capital (Section 45 of Law No. 24,522). In these cases, the judge may approve (“homologar”) the payment agreement if the following requirements are complied with: (i) approval of at least one of the categories of general (not guaranteed) creditors (“acreedores quirografarios”); (ii) conformity of at least ¾ of general (not guaranteed) capital (“capital quirografario”); (iii) the proposed agreement not discriminating creditors that have not given their conformity; and (iv) the payment to be received by creditors being not lower than the sums they would have received had the debtor been declared bankrupt.

Pre-reorganization Agreements (Pre-package): Section 18 of Law No. 25,589 amended the regime of pre-reorganization agreements set forth by Law No. 24,522. As from such amendment, the judicial presentation of the agreement (pre-package) has the effects specified in Section 21, sub-sections 2 and 3 of Law No. 24,522, consisting in the suspension of processes of an economic nature and the suspension of precautionary measures ordered against the debtor. Furthermore, it set forth that the agreement approved at court (“homologado”) entails the novation, not only of the credits of the parties to such agreement, but also of the credits of those creditors that are not a part thereof. In this way, its effects are similar to those of an agreement obtained within the framework of a judicial reorganization proceeding.