Supreme Court Confirms the Rejection of APEs of Financial Entities

On February 22, 2011 the Argentine Supreme Court issued its ruling in re: "Banco Hipotecario S.A. s/ acuerdo preventivo extrajudicial” whereby, the Supreme Court unanimously upheld the decision of Room D of the Commercial Court of Appeals that had determined that the debt restructuring agreement entered into by Banco Hipotecario with a majority of its creditors may not obtain Court approval under an Acuerdo Preventivo Extrajudicial (“APE”) procedure. The aim of Banco Hipotecario in requesting such APE Court approval was to make the debt restucturing agreement enforceable against all the unsecured creditors of Banco Hipotecario. (please refer to “Court rejects APE of financial entities” published in Marval News # 34 and “Court ruling confirms the rejection of APEs of financial entities” published in Marval News 50, related to the First Instance Court and Court of Appeals rulings in this case).

Room D said in its decision, that the Out-of-Court Agreement (the “APE”) should be characterized as a subspecies of the restructuring proceedings (“concurso preventivo”). In that sense, in the interpretation of Articles 2, 5 and 69 of the Argentine Bankruptcy Law 24,552, as amended (the “Bankruptcy Law”) the judges mentioned that some persons are excluded by the Bankruptcy Law and other special laws to engage in a restructuring proceedings (“concurso preventivo”), and that with reference to financial institutions there is an express prohibition in Article 50 of Financial Entities Law 21.526 to request the filling of a reorganization proceeding (“concurso preventivo”). Room D considered that this rule should be extended to the approval of an APE. Finally, Room D considered -based on the opinion of the Attorney General of the Commercial Court- that a specific regime exists under Article 35 Bis of the Financial Entities Law to the consolidation of banks with a strong control of the Central Bank of Argentina. These rules prevail over the solutions of the Bankruptcy Law, a fact which also prevented the filing and court approval of the agreement reached by Banco Hipotecario to its creditors, through the institute of the APE. It should be remembered that the Financial Entities Law prohibits entities ruled by the same to apply for its bankruptcy proceeding (“concurso preventivo”). The ratio legis of this rule is the impact on the confidence of depositors in the same (and other entities as a consequence of their systemic impact) of the presentation in bankruptcy proceeding (“concurso preventivo”) that cannot be recovered.

Banco Hipotecario invoked arbitrary grounds in Room’s D sentence, which were rejected by the Supreme Court on the grounds that it was well founded, but also Banco Hipotecario argued federal related issues, questioning laws of federal nature, specifically the Financial Entities Law and its amendments, and that the decision of Room D was contrary to the law in which the Banco Hipotecario grounded its appeal, argument by which the Supreme Court held that the appeal should be formally admitted.

The Supreme Court accepted that there is no obstacle to consider the APE to be included within the prohibition of Article 50 of the Financial Entities Law, notwithstanding that the rule does not expressly mention the APE because it is in accordance with its raison d’etre or the spirit of same, taking into account the "particular characteristics of an activity that involves public confidence in the financial system ... [that] requires different solutions from those offered by the common law ..." and supporting such reasoning cited various precedents of the Supreme Court related to the functions and powers of the Central Bank of Argentina.

The Supreme Court considered that all measures to be taken by a financial institution for its reorganization, cannot be decided by itself, but must be submitted for approval by the Central Bank who in the exercise of its authority decides on its legal basis, and if the attempts to rectify the situation fails it has the power to order the closing down and cessation of the activity of the financial institution and decide its liquidation through the specific procedures foreseen in the Financial Entities Law.

In this regard, the Court reasoned that if the legislator had intended to allow financial institutions to undergo a debt restructuring under an APE Procedure it should have included this alternative in the amendment introduced by Law 25.780. Instead, the APE was not included as an alternative and was not even discussed.

So the Supreme Court concludes, if the APE is judicially accepted as a way of restructuring an insolvent financial institutions, such judicial decision would lead to a unwanted purpose by the legislature: "... the entity could circumvent the ban to apply for insolvency proceedings ..." taking into account the effects that judicial approval was granted by Article 76 of Law 24.589, as it was "... dramatically intensified ...[the] similarity to the bankruptcy proceeding "

It should be remembered the contrary interpretation that have had other courts, for example in the cases of Banco Suquía and Banco Bisel, entities to which the Central Bank ordered the closing down and cease of their activities and that in provincial jurisdictions -Córdoba and Rosario, respectively- received favorable response to its request to submit an reorganization proceeding (“concurso preventivo”). However, in such cases, it was asserted that these institutions were no longer financial institutions and therefore were entitled to request this solution. It is unclear the impact this court decision will have on those cases that share similarities but also differences with the case of Banco Hipotecario.

However, it should be analyzed by the Legislature and the Central Bank itself, which denied the possibility of Banco Hipotecario to approve the agreement reached with its creditors through the APE, if this institute cannot be an appropriate instrument to rescue a financial institution facing liquidity problems or to proceed to its self liquidation, with the active participation of the Central Bank.

In the first case, it should be noted that the Bankruptcy Law only extends to unsecured creditors the obligation of the terms of the APE with judicial approval, which excludes for example, depositors and employees of financial institutions (as well as the Central Banks own claims) that would not fall under the scope of the debt restructuring agreement endorsed under an APE Procedure, and instead would be favored by the agreement of the financial institution with its unsecured creditors.

In the case of the self liquidation, the APE would be complementary to the exclusion of assets and liabilities determined by the Central Bank in accordance with the Financial Entities Law, and through an agreement with unsecured creditors (approved by the Central Bank) on the process of selling the remaining assets and the payments of the debts with the proceeds obtained, could avoid the endless legal liquidations of financial institutions, that in the case of those that went out of business in 2002, have taken more than eight years of proceedings before the courts, with the sole suggestive exception of Banco Suquía and Banco Bisel that several years ago reached an agreement with its creditors that has already been fulfilled.