Court of Appeals rejects APE due to lack of information

On April 6, 2010, in re “Bugallo, Mario Hugo s/ acuerdo preventivo extrajudicial”, Room D of the National Court of Appeals on Commercial Matters of the City of Buenos Aires, affirmed a lower court decision rejecting an endorsement of a debt restructuring agreement that had been submitted under an APE proceeding, on the grounds that the debtor did not provide sufficient information.

 

The ruling of first instance rejected the APE’s endorsement based on two main issues: (i) the insufficiency of information filed by the debtor regarding his personal assets and liabilities, and (ii) the payment proposal was considered abusive (20% in 2 annual equal and consecutive installments, without interest, the first installment to be paid as of 6 months of the date of Court endorsement).  Mr. Bugallo appealed the lower court ruling, which was affirmed by the Court of Appeals.  

The Court of Appeals rejected the endorsement of the APE on the grounds of the lack and inaccuracy of the information provided by the debtor with regard to his financial situation at the time of proposing the terms for the restructuring agreement.

In the grounds of its decision, Room D outlined the differences between the APEs and the voluntary reorganization proceedings known as concurso preventivo (similar to the US Chapter 11), mainly regarding the information and control systems, stating that in the APEs “there is neither a review nor an investigation of the accounting records by a receiver, nor a verification of credits with the control of the other creditors, but only a limited system of oppositions between them”. 

Likewise, and given that upon endorsement the APE becomes effective over the other creditors who have not consented to its terms, which is an exception to the general principle that agreements should only be binding upon consenting parties, the Court of Appeals underlined that the debtor should be required to provide truthful and consistent information to avoid the commitment of fraud.

The Court of Appeals referred to the importance of the debtor’s obligation to provide complete, certain and verifiable information in order to allow a thorough acknowledgement of its main activities and of its financial situation, by means of a regular accounting system kept in accordance with the applicable legal rules. In this respect, the ruling outlined the need for the APE to state the debtor’s main activity and the origin and amount of its income, as well as a description of its plan to face its obligations. 

This judgment confirms that the endorsement of a debt restructuring agreement under and APE proceeding will only be available to those companies which maintain a regular accounting system and comply with minimum standards of information and transparency.