Court rejects APE of financial entities

The “Acuerdo Preventivo Extrajudicial” or “APE” is a procedure by which a debt restructuring agreement between a debtor and its creditors becomes binding on all unsecured creditors upon consent by the majority of creditors provided by law and approval of an Argentine court.

The ability of a financial entity to implement an APE to restructure its unsecured indebtedness has been heavily debated.

In a recent court ruling in re: “Banco Hipotecario S.A. s/ Acuerdo Preventivo Extrajudicial”, Judge Dr Angel O Sala of the National Commercial Court No 14 of the City of Buenos Aires ruled against this alternative.

The Court based its decision on two fundamental premises:

* The APE constitutes a subspecies of the concurso preventivo procedure. Financial entities must solve their financial difficulties pursuant to the provisions of the Financial Entities Law No 21,526, which prohibits financial entities to enter into concurso preventivo or bankruptcy proceedings. Given that financial entities cannot file a concurso preventivo neither can they file an APE.

* Banking activity is of public interest, and requires constant supervision and control of the Argentine Central Bank, who should evaluate the possible alternatives to solve financial entities crisis situations.

The authors of this report disagree with the conclusion of the court, as we consider that in some cases the APE may constitute a useful instrument to restructure unsecured indebtedness of financial entities. In the case of Banco Hipotecario, for example, in which the restructuring agreement was consented by more than 90% of the unsecured creditors, by requesting the endorsement of the APE agreement the sole purpose of the debtor was to make the agreement effective against the remaining not more than 10% of unsecured creditors. The court approval of the APE would have resulted in a complete remediation of the financial situation of the entity that would no longer be subject to the claims of the opposing unsecured creditors.The 90% or more of consenting creditors would also have ensured that the deal the opposing creditors would be offered would not be better than the deal offered to them.