Important Supreme Court decision concerning derivatives and other financial transactions with Argentine financial institutions

The legality of setting off debits and credits with a suspended financial institution has long been a matter of doubt and differing opinions. Many international players carefully analyze this issue at the time of evaluating derivative or other financial transactions with Argentine financial institutions.

In July this year, in re: Banco Patricios S.A., the Argentine Supreme Court of Justice ruled that set off cannot take place during the suspension of an Argentine financial institution. 

1.    Financial entities’ insolvency proceedings

In Argentina, insolvency proceedings of financial entities differ from insolvency proceedings of other entities. Basically, neither financial entities nor their creditors may request the bankruptcy of the financial institution until its license has been revoked by the Argentine Central Bank. Nor may the financial institution request its reorganization until its license has been revoked.

Additionally, the Central Bank Charter (Law No 24,144, as amended) and the Financial Institutions Law No 21,526, as amended, provide special proceedings to which financial entities may be subject: (i) all or part of the operations of a financial entity may be temporarily suspended (article 49 of the Central Bank Charter); (ii) a financial entity may be requested to submit a regularization plan (article 34 of the Financial Entities Law); (iii) a financial institution may be restructured to protect depositors (article 35 bis of the Financial Entities Law) and a financial entity’s license may be revoked (article 44 of the Financial Entities Law).

2.    Suspension of the operations of a financial entity

Suspension of all or part of a financial institution’s operations may be decided by the Superintendent of Financial Institutions (an officer of the Central Bank) with the prior consent of the President of the Central Bank, for up to 30 days. The Board of Directors of the Central Bank may approve a further extension of 90 days. 

During the term of the suspension the enforceability of credits and the accrual of interest against the financial entity (except for debts with the Central Bank) are suspended and agreements increasing the debt of the financial entity are considered null and void. Also, during the suspension, no enforcement or injunction order may be sought against the suspended financial entity.

3.    Set off during suspension

In the case under analysis, during the suspension of operations of Banco Patricios S.A., Banco de Formosa S.A. (then a subsidiary of Banco Patricios S.A.) set off its debt towards the suspended entity as distribution of dividends against a loan granted by Banco de Formosa S.A. to the suspended bank which had been renewed a few days before the suspension was decided.

The lower court considered that the set off was contrary to the provisions regulating suspension of financial entities. The Court of Appeals revoked the lower court’s resolution stating that the referred regulations do not bar such set off given that the regulations do not refer to court proceedings or agreements increasing the debt of the financial entity.

The Supreme Court overruled the Court of Appeal’s resolution and basically indicated that the Civil Code allows set off of credits that are enforceable and that, given that credits against a suspended financial institution are not enforceable, set off during suspension may not take place.

4.    Conclusion

The criteria set by the Argentine Supreme Court in the referred case of Banco Patricios S.A. would imply that, during the suspension of an Argentine financial entity, a creditor may not set off its credit against any other debt it may have with the suspended financial institution.