By Damiana Ponferrada and Jacques Wilson-Rae

Argentina made further changes in its bankruptcy laws in mid-May. The changes repeal some of the more extreme protective measures — and amend others — that Argentina put in place last February for the protection of distressed debtors. The action follows an outcry from the international lending community to the February reforms. The new statute is Law 25,589.

Cram-down Proceedings

The new law reinstated and amended the “cram-down proceeding,” a special process under which a debtor who cannot get approval for its plan of reorganization from creditors is essentially put up for sale under special bidding procedures. Thus, lack of approval of a reorganization proposal will not be automatically followed by the debtor’s bankruptcy.

The new law not only entitles the debtor’s creditors and third parties to acquire the company by purchasing its common stock through a special bidding process, but also allows the debtor to reformulate reorganization proposals.

Another important amendment to the cram-down proceeding is the procedure for the appraisal of the company’s value. The original bankruptcy law — before it was rewritten last February — provided that a court would determine the value of the company based on, but not necessarily equal to, its book value. The new law provides for the appointment of an appraiser who must submit a valuation to the court. The court then uses this valuation to determine the “market value” of the company.

If the appraisal is that the company has a negative value, then acquisition of the company by a creditor or third party does not require any payment to the shareholders.

If the appraisal is that the company has a positive value, then acquisition of the company by a creditor or third party requires payment of at least the “minimum price.” That is the market value of the company, as determined by the court, but reduced by the same “haircut” that the creditors had to take on their debts. Thus, for example, if the present value of the debt release by creditors was 60%, then the “minimum price” for the company is 40% of its market value. Any bid below the minimum price requires the consent of two thirds of the equity capital of the company.

Exclusivity Period

The new law gives insolvent debtors an “exclusivity period” of 120 days to submit a reorganization plan. This is a reduction in the 180 days allowed last February. Argentine law used to allow only 60 days.

The new law also puts an end to the extension of the exclusivity period for existing Chapter 11-type reorganization proceedings.

Suspension of Foreclosures

All foreclosure proceedings against Argentine debtors had been suspended for 180 days from last February 14.

Under the new law, only auctions pursuant to foreclosure proceedings are suspended; foreclosure proceedings themselves can get underway. Therefore, foreclosure proceedings will continue until the auction is ordered by a court resolution. The new law also limits the suspension to those foreclosures that involve the home of the debtor or that involve goods and facilities that are put to commercial or productive use.

The new law also limits the scope of injunctions and attachments that had been suspended for 180 days from last February 14. Under the new law, enforcement of such injunctions and attachments is suspended only for actions to seize goods and facilities that are used by the debtor in commercial or productive activities.

The new law clarifies that the 180 days must be counted on the basis of calendar days and not business days.

Bankruptcy Proceedings

The new law puts an end to the suspension of bankruptcy proceedings and creditors are now again entitled to petition for the bankruptcy of debtors without restrictions.

Court Discretion

The bankruptcy law originally provided that if, at the end of the exclusivity period, the debtor has obtained the required majorities and no objections are made or any objections are disregarded by the court, then the court must approve the reorganization plan.

The new law gives the court discretion to impose a reorganization plan even if all classes of creditors have not agreed to it. However, in order to do this, three things would have to be true. First, the plan must have been approved by at least one class of unsecured creditors and by at least the holders of three quarters of the aggregate unsecured claims. Second, the plan must be fair and must not unreasonably discriminate against any nonconsenting class of creditors. Third, the payments to be made under the restructuring plan to creditors who did not accept it must be no lower than the ones that would be made to them if the company proceeded into bankruptcy.

Use of a Trustee

Under the new law, a trustee can now submit a proof of claim on behalf of a large group of note holders or bondholders and be admitted by the court as a creditor with the right to speak for the entire group.

Under this procedure, each creditor in the group would vote for or against the reorganization plan and the group would be recorded as consisting of two blocks of votes — one percentage of votes for the plan and the other against — for computing the majorities in respect of admitted claims. However, for computing the majorities in respect of number of creditors, all noteholders and bondholders in the group who vote in favor of the plan will be treated as one creditor, and all who vote against will be treated as one creditor.

The new law also waives the need for the noteholders and bondholders actually to meet to cast their votes if the trustee and the creditors whom it speaks can agree on an alternative.

Prepackaged Bankruptcies

The new law introduces a concept similar to “prepackaged bankruptcies” under the US bankruptcy code. This is a procedure where the debtor and creditors can execute a restructuring agreement out of court and submit it to a court for its authorization. If the agreement is approved by a majority of unsecured creditors who also represent two thirds in principal amount of all unsecured claims, then the agreement can be officially approved and would be binding on all unsecured creditors.

Enforceability

Although the new law is enforceable as from its publication in the official gazette; any extensions already granted by courts under the February bankruptcy statute in pending reorganization proceedings would not be subject to revision.