The Argentine Supreme Court revoked the approval of Sociedad Comercial del Plata S.A. reorganization procedure

Sociedad Comercial del Plata S.A. ("SCP") is a holding company which at the time of the filing of the reorganization proceeding held the controlling stake of Compañía General de Combustibles S.A. and Tren de la Costa S.A. The shareholdings in these companies were the two most important assets of SCP. The three companies and other related entities filed for their reorganization procedures individually in the year 2000 in order to restructure their debts.

SCP filed for a “concurso” proceeding (similar to Chapter 11 of the US Bankruptcy Code), which was approved by the Lower National Commercial Judge, Norma B. Di Noto, on March 1, 2004.

Under the approved debt restructuring proposal, all creditors were grouped in a single category. The proposal consisted of: (i) the pesification of the credits in foreign currency at the rate of AR$1 for each US$1, without applying any adjustment for inflation on the resulting amount[1]; (ii) a haircut on principal and interest of 40%; and (iii) a forbearance period of 10 years as from the date of approval. Under the plan, SCP was required to issue and deliver to the creditors promissory notes maturing in five annual installments after 10 years, with an interest of 1% to be accrued as of the tenth year.

The agreement was challenged by some creditors on the following grounds: 

Under Article 45 bis of the Argentine Bankruptcy Law 24,522, as amended (the “ABL”), in the event the debtor has bonds outstanding, a bondholders meeting is required to be called to vote the debt restructuring proposal.  SCP had a significant amount of debt represented by a type of bonds denominated negotiable obligations (obligaciones negociables). 

A bondholders meeting was called to approve the SCP debt restructuring proposal.  The creditors claimed that there were several irregularities in this meeting, as follows:  

First, several bondholders were not able to attend the meeting given defects alleged by the debtor in the certificates they presented to credit their holdings. These bondholders were unable to obtain the blocking certificate (certificado de bloqueo) of the bonds they held issued by the depositary entities.  Therefore these bondholders were not admitted to the meeting and were not able to vote the proposal.    

Second, the Lower Court judge ruled that the bondholders that were absent (including those who had not been authorized to attend due to defects in their certificates) and those who abstained from voting at the bondholders’ meeting should not be included in the basis for the calculation of the majorities required by the ABL[2]. Of the total of US$ 258,638,960.72 of bonds outstanding, US$30,897,937.80 were present and voted in favor of the proposal.  Even when the bondholders that voted in favor of the proposal represented less than 11% of the total debt, applying the basis of calculation explained above the Lower Court considered the majorities required by the ABL had been reached and the debt restructuring proposal had been approved.

The proposal offered abusive and discriminatory terms to the creditors of debt denominated in foreign currency.  These creditors suffered a double haircut.  First, a disguised or implicit haircut which resulted from the terms of the “pesification” of their credits, which were converted at a rate of 1U$S = 1 AR$, but the resulting amount was not adjusted by the CER index, as would have been required to be done under the applicable emergency laws.  This lack of adjustment for inflation resulted in an implicit haircut.  Second, the foreign denominated debt was grouped in a single category with the peso denominated category, and as a result the express general 40% haircut was also applied to the foreign denominated debt.   This resulted in a very significant haircut for the foreign debt creditors, which was claimed to be abusive and discriminatory.

The Lower Court judge disregarded these claims of objecting creditors and ruled in favor of SCP, approving the debt restructuring proposal filed under the concurso proceeding in the terms described above.

On June 22, 2006 Room D of the Commercial Court of Appeals confirmed the ruling of the Lower Court.

The General Public Prosecutor before the Court of Appeals and Banco de la Provincia de Buenos Aires filed extraordinary appeals against the ruling of Room D to submit the matter for consideration of the Supreme Court.

In a divided ruling issued on October 20, 2009, the Supreme Court[3] revoked the judgement of Room D and ordered that the file be sent to the Court of Appeals to pass a new judgment on this matter.

The vote of the majority of the Supreme Court was premised on the application of two constitutional rights: the right to due process and the right to property (Article 18 and 17 of the Argentine Constitution, respectively).

The Supreme Court considered that, within the framework of the reorganization procedure, the protection of due process means that judges must guarantee the procedures aimed at obtaining the expression of the positive or negative vote of the majority of the creditors, with transparent information.

In order to determine if the guarantee to due process was affected in this case, the Supreme Court analyzed the argument of the General Public Prosecutor related to the validity in the conformation of the bondholders' meeting, since it was a condition required for the consent of the proposal and affected the further development of the reorganization proceedings. The public prosecutor’s challenge was focused on the requirement providing that the blocking certificate should be issued by the depositary entity of the negotiable obligations. The notice published calling the meeting did not specify who the issuer of the blocking certificate to attend the meeting should be.  However, the certificate issuer specifications were later required by the Lower Court Judge in a resolution which was not published by which the judge requested that the certificate should be issued by the depositary entity, which became a requirement that certain creditors were unable to comply with.  The Lower Court also acted arbitrarily when considering the certificates for admittance to the bondholders meeting, as it considered duly credited certain bondholders who did not have the required certificate, but had a certificate issued by an intermediary entity which issued another certificate in favor of the bondholder with a detail of its ownership, and, at the same time, it denied the admission of other bondholders who could only manage to obtain the blocking certificate by the intermediary entity.

 

The Supreme Court considered that by requesting the blocking certificate in a resolution which was not published and was issued after the publication of the notices, created new additional requirements which were not duly informed to the bondholders. This situation restricted the right of some creditors to participate in the decision to accept or not the proposal. The Supreme Court emphasized that the reorganization procedure requires absolute transparency in all acts comprising such procedure, in particular to the issue related to the vote of the creditors. The Supreme Court held that the process should not be turned into an "obstacle race" for the creditors.

Additionally, the Supreme Court considered that the mere reference made by Room D in the sense that "the requirement had been fulfilled by a great number of bondholders" was not sufficient to support its decision. It also resolved that Room D had incurred in an error since it supposed that there were verified credits of bondholders for an aggregate amount of US$ 30,897,937.80 but the actual amount of bonds outstanding was of US$ 258,638,960.72. Consequently, Room D supposed that almost 90% of the bondholders accepted the proposal, but actually only less than 11% had done so.

The Supreme Court resolved that there was reasonable doubt regarding the transparency of information and the obstacles that the creditors found to express their vote in the meeting. Thus, the right to due process was affected.

The second matter analyzed by the Supreme Court was if in this case there had been a substantial reduction of the credit as a consequence of the abusive exercise of the debtor's right since, according to the Supreme Court's criteria, this would go against the economic-social purpose of the reorganization procedure.

In this respect, the Supreme Court considered that due to the fact that the capacity of election of the creditors was limited because of the obstacles they faced to issue their votes, plus the lack of information and transparency, there was a situation which enabled to consolidate a proposal which would not have been approved if such restrictions would not have existed.

To support its decision in the SCP case, the Supreme Court applied its own criteria expressed in the precedent "Arcangel Maggio S.A. s/ Concurso Preventivo"[4], where the Supreme Court rejected the approval of a proposal for a reorganization procedure on the grounds that it considered it abusive as provided by Article 1071 of the Argentine Civil Code[5].  In this precedent, the debt restructuring proposal offered by the debtor only covered 12.39% of the verified debt, and was therefore not approved on the grounds that it was considered to be an abusive and unreasonable debt restructuring proposal. 

In re SCP, the Supreme Court considered that the determination of the existence of an abuse of rights in the debt restructuring proposal must be centered in the evaluation of the economic-social purpose of the reorganization procedure, which results from the balancing of (a) the conservation or continuity of the company as a source of production and employment; and (b) the satisfaction of the creditors' rights, which is denied when the loss imposed on them is clearly excessive.

The Supreme Court then ordered that a new decision has to be taken by the competent court according to the guidelines indicated in its resolution.   

SCP has requested the Court of Appeals to call a new bondholders meeting to approve a new debt proposal that it is reformulating under terms which it has informed shall be more favorable to creditors..

In SCP’s case, the Supreme Court provides guidelines for the bondholders meetings that are called to consider debt restructuring proposals, which must not constitute an obstacle race for creditors, and reaffirms its criteria that to comply with the economic-social purpose of the reorganization procedure the debt restructuring proposal must balance the conservation of the company vis à vis the satisfaction of creditors' rights.