Amendments to the Judicial Reorganization and Bankruptcy Law

On February 15, 2002 Law No. 25,563 has been published in the Official Gazette. This law (the “New Law”), although partially vetoed by the President, incorporates significant reforms to the legal system applicable to judicial reorganization and bankruptcy in Argentina, currently governed by Law No. 24,522.

Section 1 of the New Law sets forth that the proposed reforms will be in force on a temporary basis until December 10, 2003 (date of termination of the term of office of the current Argentine President, Eduardo Duhalde). After expiration of such term, the provisions amended by the New Law should return to their original wording, which can entail, in due time, serious problems of interpretation and application to specific situations.

Section 2 grants debtors under judicial reorganization a longer term to reach an agreement with creditors, during which the effects of the reorganization will continue (for example, the non accrual of interest, apart from suspending the amortization of principal and interest, the impossibility of general creditors to demand payment of their credits, etc.), bringing the so called “exclusivity period” to a whole aggregate of up to 360 days. The high probability of courts interpreting those 360 days as business days could make reorganizations to last for more than two years. Additionally, it sets forth the elimination of the debtor’s prohibition of offering an agreement contemplating payments to general creditors for less than 40% of the amount of the debt.

Sections 3, 4, 5 and 6 of the New Law contain amendments which are a consequence of the elimination of the cramdown provisions contemplated in Section 21. Under cramdown provisions, creditors and other third parties are empowered to acquire the ownership of the company under judicial reorganization, in certain circumstances. In fact, the cramdown proceeding regulated by Law No. 24,522 provided a legal framework to a practice that existed long before that time, whereby a third party negotiated with the debtor the purchase of its company, and with creditors a payment plan and performance guarantees.

Section 7 introduces an important amendment, since it extends to the guarantor or joint and several co-debtors the terms and conditions of the new obligation resulting from the agreement with creditors. As an example, credits guaranteed by third parties’ mortgages would be significantly affected, as the guarantor would not respond for the total amount for which it was bound, but only for that resulting from the agreement with creditors, which the secured creditor may even not have approved.

In line with the amendments contemplated in Section 2, Section 8 of the New Law postpones all currently pending judicial reorganizations for one hundred and eighty days, unless the debtor under reorganization can reach, before such term, an agreement with the majority of creditors required by law.

Section 8 also incorporates another significant amendment, since by suspending the guarantees of financial obligations in any way allowing the transfer of control of companies under reorganization or their subsidiaries, it makes the granting of financing secured by pledges on shares or other similar security interests not viable, which situation is aggravated by the uncertainty generated by the lack of precision regarding what must be understood as “control”. In connection with already existing guarantees, the potential violation, by this rule, of the secured creditors’ constitutional rights should be analyzed.

Section 9 of the New Law suspends for the term of one hundred and eighty days (business days?) all kind of court and out-of-court foreclosures against debtors under reorganization.

Section 10 grants to such debtors an additional term of one year for the performance of the agreements they may have reached with their creditors, after due negotiation thereof; no difference is made between those debtors who are current in their payments and delinquent debtors, nor between those who are in a compromising economic-financial situation and those who are not. It is not clear if the extension must be considered a suspension or be calculated in a different way. Nor it is clear if, in those cases in which the creditor is a financial institution, the captioned extension might be cumulative with the terms of section 6 of Decree 214/2002 which provide for, among other things, a 6 months mandatory delay for payments related to certain transactions.

According to Section 11 of the New Law, creditors cannot petition the debtor’s bankruptcy, nor continue with already filed petitions for a term of one hundred and eighty days.

Section 12 sets forth that the Central Bank will regulate the elimination of any restrictions hindering the access to credit by debtors under judicial reorganization; this is not clear if we bear in mind, for example, the rules of the Central Bank regarding the classification of debtors from the point of view of their solvency. This section also sets forth that the Central Bank will implement a “discount window” for financial institutions assisting companies under judicial reorganization, with the purpose of ensuring them access to credit and sufficient guarantees to offer an acceptable arrangement to their creditors.

Sections 13 and 14 reduce judicial reorganization costs, by reducing the court tax and legal fees under certain circumstances.

Section 15 of the New Law has been one of the most controversial. It sets forth that financial institutions will have a term of 90 days to restructure, within the framework of Public Emergency Law No. 25,561, the credits existing as of November 30, 2001. However, this Section is not consistent with the provisions of Law 25,561, which provides different course of actions for debts as classified by amount and type. Furthermore, Decree 214, issued on February 4, 2002 (the “Pesification Decree”), also contains regulations modifying existing terms and conditions of debts. Consequently, the construction of the new legislation brings up many questions and creates uncertain rights and duties of the relevant parties. Within the scope of this Section it should be also borne in mind that the President has vetoed the third paragraph, which provided that financial entities had to write-off 100% of the credits in respect of which a restructuring agreement has not been reached with debtors; thus, it is currently not clear which the consequence should be in case of lack of agreement.

Section 16 of the New Law suspends all kind of court and out-of-court foreclosures against any kind of debtors (even those who are not under judicial reorganization) in a general way, for a term of 180 days, with limited exceptions: alimony credits, credits derived from the commission of crimes, tort and against insurance companies, labor credits, credits not secured by the debtor’s house or by other property not related to its business (which will undoubtedly derive in multiple interpretations), credits derived from obligations subsequent to the effective date of the New Law, and the liquidations of property derived from judgments which are already being enforced. In any case, it should be pointed out that debtors qualifying within the above exceptions may obtain a result similar to the suspension by filing a judicial reorganization petition, under the provisions of Section 9. Additionally, Section 16 suspends the precautionary measures (injunctive relief) issued and prohibits the issue of new precautionary measures on those assets which are considered indispensable for the continuation of the activities related to the debtor’s ordinary course of business for a term of 180 days in both cases, declaring that all extraordinary acts of disposition by the debtor during the suspension period will be null and void, except with the creditors’ express consent. This suspension may increase litigation as a result of situations which have not been foreseen (discussions on whether or not certain assets are indispensable for the continuation of the debtor’s activities, or whether or not a certain sale is of extraordinary nature and may therefore be carried out, etc.).

Finally, it is also worth mentioning that as a consequence of President’s partial veto, foreclosures and precautionary measures related to collection of taxes have been excluded from the suspension provided for by Section 16.

The sections of the New Law which have not been expressly mentioned, refer to several subjects not related to those considered herein.

TEXT OF LAW NO. 25,563 PUBLISHED IN THE OFFICIAL GAZETTE DATED FEBRUARY 15, 2002

TITLE I
ON EMERGENCY

Section l: As a result of the crisis existing in the country, a productive and credit Emergency is hereby declared which is to last until December 10, 2003. The amendments hereby made to the Laws herein mentioned shall prevail throughout the emergency period except a lower term is established; provided, however, that the effects corresponding to the acts performed during its effectiveness shall be fulfilled and maintained in the future.

TITLE II
ON DEBTORS UNDER REORGANIZATION PROCEEDINGS

Section 2: Section 43 of Law 24,522 is hereby amended and shall read as follows:

"Section 43: Exclusivity Period. Agreement Proposal.

Within one hundred and eighty days, after the resolution contemplated in the above section is notified by operation of law, or within a greater term determined by the Judge based on the number or creditors or categories, which term may not exceed the established ordinary term of one hundred and eighty (180) days, the debtor shall enjoy an exclusivity period to make proposals for reorganization agreements per categories to its creditors and obtain from them their consent pursuant to the system provided for in section 45. Proposals may consist in a debt reduction or extension of the payment term or both; delivery of property to creditors; organization of a company with general creditors, where the latter have the capacity of members; reorganization of the debtor company; management of all or part of the property for the creditors’ interest; issue of negotiable obligations or debentures; issue of bonds convertible into shares; creation of security over third-party property; assignment of shares of other companies; capitalization of claims, including those of labor creditors, in shares or in an employee stock ownership plan, or in any other agreement sufficiently consented within each category, and regarding all creditors to which the proposal is made.

Proposals must contain the same clauses for creditors within each category, but they may differ among them. The debtor may make more than one proposal regarding each category, among which the creditors comprised therewith may choose. The creditor must choose at the time of adhering to the proposal.

Proposals may not consist in any action depending on the debtor’s will. When it does not consist in debt reduction or extension of payment term, it must state the time and manner in which existing foreign currency debts shall be finally calculated, in relation to the provisions agreed upon.

Preferred creditors expressly waiving their privilege shall be included in any of the general creditor categories. The waiver may not be lower than thirty percent of their claim. To these effects, the privilege arising from the employment relationship may be waived, in which case it must be ratified at a hearing before the Judge hearing in the reorganization proceedings, with summons of the legitimated union association. If the worker is not comprised by the collective bargaining agreement system, summons of the union shall not be necessary. Waiver of the employment privilege may not be lower than 20 percent of the claim and labor creditors who waived their privilege shall be included in the general labor creditor category for the claim amount, the privilege of which they waived. The privilege waived by the worker voting in favor of the agreement arises again in case of subsequent bankruptcy proceeding resulting from failure to reach a reorganization agreement or in the case of failure by the Judge to approve the agreement.

The debtor shall make its proposal public by submitting the same in the record at least twenty days prior to expiration of the exclusivity term. Should it fail to do so, it shall be adjudged bankrupt.

The debtor may submit amendments to its original proposal until holding of an information meeting as contemplated in section 45, penultimate paragraph.”

Section 3: Section 49 of Law 24,522 is hereby amended and shall read as follows:

“Section 49.- Existence of Agreement. Within three (3) days from filing of the relevant consents by the debtor, within the exclusivity period, the Judge shall pass a resolution, informing on the existence of a reorganization agreement.”

Section 4: Subsection 5 of section 50 of Law 24,522 is hereby amended and shall read as follows:

“Non-fulfillment of essential formalities for agreement execution. This event may only be invoked by creditors who have not submitted their consent to the debtor’s proposals”.

Section 5: Section 51 of Law 24,522 is hereby amended and shall read as follows:

"SECTION 51. RESOLUTION. After challenge proceedings, should the judge deem it applicable, he must declare the institution of bankruptcy proceedings in the resolution passed by him. If he deems it inapplicable, he must approve the reorganization agreement. Both decisions are subject to appeal, for the sole effect of the appeal process in sending court file to appellate court (with no stay of decision), in the first case by the debtor and in the second case by the challenging creditor”.

Section 6: Section 53 of Law 24,522 is hereby amended and shall read as follows: "SECTION 53. Measures for execution. The resolution approving the agreement must contemplate the necessary judicial measures for compliance therewith. If it consists in reorganization of the debtor company, or the creation of a company with creditors or with any of them, the judge must provide for the actions leading to formalization thereof and establish a term for its execution, except for the agreement provisions."

Section 7: Section 55 of Law 24,522 is hereby amended and shall read as follows:

"Section 55: Novation: In all cases, the approved agreement involves novation of all obligations with an origin or cause prior to the reorganization proceedings. This novation does not cause termination of the surety’s obligations or of those of the joint and several co-debtors, which shall be only bound to the extent of the new obligation arising from the approved agreement.”.

Section 8: As from entry into effect of this law, expiration of the so-called exclusivity period shall be extended, in all reorganization proceedings filed before and governed by law 24,522, for a term not lower than one hundred and eighty (180) days counted as from the contemplated expiration date or from the last extension granted by the Judge hearing in the reorganization proceedings.

Any type of guarantees of financial obligations under any means permitting the transfer of control of the companies under reorganization or their subsidiaries shall be suspended as from the entry into effect of this law and for the term established under section 1 hereunder.

Section 9: All court and out-of-court foreclosures in reorganization proceedings, including mortgage and pledge foreclosures of any origin whatsoever, those provided for in law 24,411, in section 39 of decree law 15,348, in law 9,643 modified by law 24,486 and those contemplated in section 23 of law 24,522 are suspended for a term of one hundred and eighty (180) days counted as from the entry into effect of this law.

Section 10: In the case of court or out-of-court reorganization agreements approved under the terms of Law 24,522, the term for fulfillment of the obligations assumed by the debtor, and notwithstanding the provisions of Title III, shall be extended for one (1) year to be counted as from the time the obligations approved in the agreement are enforceable.

Section 11: Bankruptcy petition proceedings are suspended for the term of one hundred and eighty (180) days, notwithstanding however that, the measures of section 85 of law 24,522 may be applied.

Section 12: Access to credits. The Central Bank of the Argentine Republic shall regulate the elimination of any restriction in any way preventing, hindering or increasing costs of access to credits by physical and/or legal persons under reorganization proceedings. The Central Bank of the Argentine Republic shall implement a rediscount line designed for financial institutions assisting companies under reorganization proceedings which are at the stage contemplated in section 43 of Law 24,522 the effect of which is to ensure those under reorganization proceedings access to sufficient credits and securities to make an agreement proposal to its creditors that is considered to be reasonable and viable by the banking institution that is to provide the loan assistance. Companies under reorganization proceedings or bankrupt companies that continue doing business may freely enter into contracts with the National Government provided they meet the conditions required by the latter.

Section 13: The following paragraphs are included as the last paragraph of section 3 of Law 23,898:

……"Special Rate. In reorganization proceedings, the applicable rate shall be 0.75% (zero point seventy-five percent) of the amount of all general claims proved and accepted comprised in the reorganization agreement. However, when such amount exceeds the sum of $100,000,000, the applicable rate shall be 0.25% (zero point twenty-five percent) over the excess.

The Administración Federal de Ingresos Públicos shall grant to reorganization proceedings general payment plans of the court tax determined in this law for a term of 10 years. The provinces are hereby invited to establish a diminution in their respective tax regimes with respect to court taxes following what has been hereunder provided”.

Section 14: The following paragraph is included as the last paragraph of section 266 of law 24,522:

"In case the amount of assets prudently estimated exceeds one hundred million pesos ($100.000.000), fees provided under this section may not exceed one percent of the estimated assets".

TITLE III
ON THE PRIVATE SECTOR AND MORTGAGE DEBT

Section 15: Financial institutions governed by Law 21,526 and supplementary laws shall have a term of ninety (90) days to reschedule the claims existing as of November 30, 2001 with system debtors through an agreement with each of them, entered into under the provisions of Law 25,561.

Restructuring shall contemplate the terms of debt reduction, payment term extension, rate and other conditions that are reasonable under the new exchange conditions and cash flow conditions of physical or legal persons.

If, at the time of expiration of such term, the indicated rescheduling has not been agreed upon, the financial institution shall provision one hundred per cent (100%) of the debtor’s claim.

Guarantees granted by Reciprocal Guaranty Companies (Law 24,467) and/or guaranty funds cannot be foreclosed during the term of the emergency.

In case an agreement is reached, the Reciprocal Guaranty Companies and/or guaranty funds shall reassume their obligations subsidiarily and under the same terms of the agreement reached by the debtor.

Section 16: All court or out-of-court foreclosures, including mortgage and pledge foreclosures of any origin whatsoever, including those contemplated by law 24,441 and in section 39 of Decree-law 15,348 and those established in law 9,643 modified by law 24,486, shall be suspended for the term of one hundred and eighty (180) days counted as from the entry into effect hereof. The following are excepted from this provision: alimony claims and claims derived from the liability for crime commission, labor claims, claims that do not affect the debtor’s home or other assets affected by the debtor to production, commerce or provision of services, those derived from personal liability and against insurance companies, obligations that arose after the entry into effect of this law and the cases in which a bankruptcy judgement has started to be fulfilled with the corresponding liquidation of assets.

Levied precautionary measures are suspended for the term of (180) one hundred and eight days and new precautionary measures over those assets that are essential for continuity of the activities related to the debtor’s usual business are forbidden for the same term.

In addition, foreclosures and precautionary measures referred to in section 92 of Law 11,683 included by section 18 of Law 25,239 are hereby suspended for the same term.

All debtor’s disposition acts over its property during the suspension term provided for in this section shall be null except they are expressly agreed to by creditors.

Section 17:

1. The first and second paragraph of section 6 of Law 25,561 shall be replaced and read as follows:

“Section 6: The National Executive Branch shall provide the measures leading to reduce the impact caused by the change in the exchange ratio provided for by section 2 hereof, in the debts denominated in US dollars or other foreign currency, held by natural or legal persons with the financial system or among them, comprised within subsections a), b) and f) hereof. To such effect, it shall provide necessary rules for adjustment.
The National Executive Branch shall restructure the debts with the financial sector and among natural or legal persons comprised within subsections a), b) and f) of this section establishing the exchange ratio of ONE PESO ($1) = ONE US DOLLARS (US$1) in debts to the financial system and among natural or legal persons comprised within subsections a), b) and f) of this section the amount of origin of which does not exceed ONE HUNDRED THOUSAND US DOLLARS (US$100,000) regarding: A) Loans assigned to purchase of homes; B) building, repair and/or expansion of homes; C) personal loans; D) loans secured by pledges for the purchase of automobiles; E) loans of natural or legal persons meeting the requirements of micro, small and medium sized companies (MIPYME); and F) the debts contracted by natural persons as members of cooperative companies or mutual companies, the purpose and aim of which were the purchase, building, repair and/or expansion of the single family dwelling.”

2. This paragraph is added as the last one of section 6 of law 25,561:

“Cooperatives and mutual associations affected by this rule may receive from the national Executive Power the treatment that is given to financial institutions referred to in this section”.

Section 18: This paragraph is added as the last one of section 11 of law 25,561:

“The events comprised in section 6 are excepted from the provisions of this section”.

SUPPLEMENTARY PROVISIONS

Section 19: Subsection “c” of section 28 of Decree 1023/01 is hereby derogated.

Section 20: Subsection e) of section 3 of law 23,898 is hereby derogated.

Section 21: Section 48 of law 24,522 is hereby derogated.

Section 22: This law is of public order and shall be effective after it is promulgated.

Section 23: Be it communicated to the Executive Branch.

PASSED IN THE ARGENTINE CONGRESS IN BUENOS AIRES ON JANUARY THIRTY YEAR TWO THOUSAND AND TWO.

Provisions in bold have been vetoed by means of Decree 316/2002 and therefore they are not in force.