New regulations on Reciprocal Guaranty Companies

On October 9, 2006, the Undersecretariat of Small and Medium Enterprises and Regional Development (the “Undersecretariat”) issued Disposition No 142/2006 (the “Disposition”), which provides that during a term of 90 days (though not expressly provided by the Disposition, it can be construed that the reference is to administrative working days) as from the date the Disposition came into force through its publication in the Official Gazette (i.e. October 11, 2006), the Undersecretariat will not authorize the creation of new Reciprocal Guaranty Companies (“RGCs”) nor any increase of the already authorized amount of risk funds of existing RGCs. The Disposition provides that within such 90 day term, the Argentine Directorate for the Financial Assistance of  Small and Medium Enterprises depending on the Undersecretariat, must conclude any already commenced audit process of all existing RGCs and deliver a report to the Undersecretariat about the outcome of such audit.

RGSs are special types of companies created by Law No 24,467 (the “Small and Medium Enterprises Law”, as amended by Law No 25,300 and regulated, the “RGCs Legal Framework) which have as their primary corporate purpose the entry into reciprocal guaranty agreements with participating partners (“socios partícipes”) which are small and medium companies, in order to secure financings granted to such participating partners. Besides their corporate capital, RGCs have a “Risk Fund” mainly formed by the contributions of the protecting partners (“socios protectores”) of the RGCs, which must cover the guarantees granted by the RGC for the benefit of creditors of the RGCs’ participating partners. Section 79 of Law No 24,467 provides that contributions to the Risk Fund are fully deductible from the tax results of the contributing protecting partner for purposes of determination of the income tax of its respective activities in the fiscal period during which the contributions are made, provided that

(i)           such contributions are maintained with the RGC for a minimum term of two years (extendible for an additional year), and

(ii)           the RGC grants guarantees during the maintenance of the contributions to the Risk Fund in an aggregate average amount at least equal to 80% of the risk fund.

Breach of the minimum term referred to in (i) above obliges the contributing protecting partner to reimburse to its tax balance sheet the deducted contributions plus interest and applicable sanctions. In the event the above mentioned minimum utilization percentage is not complied with, the tax deduction must be reduced in a percentage proportional to the percentage of effective utilization of the Risk Fund amount in the granting of guarantees. If the Risk Fund is created as a fiduciary fund, the tax deduction of the contribution amount to the Risk Fund will be equivalent to 2/3 of the contributed amount.

The above mentioned tax benefits constitute an important incentive for protecting partners to make contributions to risk funds of RGCs, whether to risk funds of new RGCs incorporated by the contributing protecting partners or to specially created fiduciary Risk Funds to be managed by existing RGCs, in both cases, created to cover guarantees granted in the interest of participating partners with whom the contributing protecting partners have a common business relationship, such as customers or suppliers.

The Disposition is mainly motivated by the “RGCs Program Status Report” prepared by the Argentine General Auditor (“Sindicatura General de la Nación”) annexed to the Disposition (the “SIGEN Report”), which found “notorious deficiencies” in the course of audits of some existing RGCs. These included deficiencies related to the effective utilization of the Risk Funds of the RGCs to guarantee authentic financings granted to the RGCs’ participating partners which, if confirmed, could render inapplicable the above mentioned tax benefits granted to the RGCs’ protecting partners by the existing RGCs Legal Framework. It seems that the Undersecretariat has issued the Disposition in order to evaluate during the above mentioned term of suspension the advisability of issuing new regulations. These could include regulations granting the application authority more surveillance powers over compliance by RGCs and their partners with the requirements of the RGCs Legal Framework for the protecting partners to enjoy the above mentioned tax benefits, and the ability to dictate more stringent sanctions on RGCs and their partners in the event of breach of the RGCs Legal Framework.

The Undersecretariat also issued Disposition No 144/2006 (published in the Official Gazette on October 13, 2006) which provides that:

(i)            the maximum amount of Risk Funds of existing RGCs already authorized by the Undersecretariat will be the lesser of the amount corresponding to the expiration date for setting up the involved risk fund and the maximum authorized amount; and

(ii)           unless there is express authorization for the increase or reduction of the Risk Fund, the maximum amount referred in (i) above will prevail until the last day of the calendar quarter corresponding to the expiration date authorized by the application authority, and thereafter, the maximum authorized amount will be the maximum amount registered on the last day of the preceding calendar quarter, not exceeding in any event such last registered amount.

In practice, the application of Disposition No 144/2006 could entail a progressive diminution of already authorized maximum amounts of risk funds. This has provoked strong reactions by the RGCs operating in the market.