Of Corporate Bondage: How Bondholders May Be Adversely Affected By The Bankruptcy Code

This edition of Argentine Business Law Watch¹ highlights concerns about the imposition of "prepackaged" reorganization plans on bondholders (the unabashed parody of W. Somerset Maugham’s classic notwithstanding). We also take a look at the latest anti-evasion proposal by the Administración Federal de Ingresos Públicos (the tax revenue authority). Finally, this issue closes with a brief summary of a ruling by the Inspección General de Justicia (the superintendency of corporations) that could prove troublesome to Argentine companies with foreign shareholders.

By the end of the last decade, Argentine corporate bonds totaled approximately US$ 25 billion² . Economic recession coupled with the 2001 devaluation left many companies unable to service U.S. dollar-denominated debt and led to widespread default. To restructure their debt, several companies have worked with their creditors to reach agreement both with and without judicial involvement.

Sections 69 to 76 of the Bankruptcy Code offer the parties one means to restructure without opening a bankruptcy case³ . These sections, enacted in May 2002, allow a debtor to agree with the majority of its creditors on a "prepackaged" reorganization plan (acuerdo preventivo extrajudicial or "APE") which, upon judicial confirmation, becomes binding on all creditors—even those opposing the plan. Despite their appeal to debtors and major creditors looking to efficiently restructure without a bankruptcy proceeding, an APE leaves bondholders in a much more tenuous position.

The Negotiable Obligations Law, a body of statutes governing debt securities, requires unanimous approval to modify "essential" terms like maturity, principal or interest⁴ . Thus, the Negotiable Obligations Law protects bondholders from nonconsensual changes to essential terms. The APE, allowing majority (51% of all creditors representing at least 2/3 of unsecured claims) approval, undermines this statutory guarantee.

Both the Bankruptcy Code and the Negotiable Obligations Law are silent as to statutory conflict and both are federal laws of equal hierarchy. The Argentine courts, as of yet, have not offered any guidance on this issue. Nonetheless, we believe that in an insolvency context the Bankruptcy Code previsions will prevail, and that a court is likely to uphold a challenge to the APE as long as the confirmed plan is fair and equitable.

It would not be the only instance in which bankruptcy courts have proved willing to alter bondholder rights. In calculating the numerical majority for creditor approvals of reorganization plans, the Bankruptcy Code treats bondholders as an indivisible unit in which no more than two votes (one in favor and one against) are allotted to bondholders voting at a meeting. Other creditors, although perhaps representing a smaller claim, are given individual votes on the reorganization plan.

The Administración Federal de Ingresos Públicos (AFIP) has recently proposed "Phase Two" of an anti-evasion package. Under the proposal, new companies would be obligated to register based on their Clave Única de Identificación Tributaria (CUIT), a federal tax identification number. Existing companies created within the last five years will be required to re-register.

The proposal aims to deter the widespread practice of registering "phantom companies" (companies having false domiciles, directors and activities used to invoice income). This practice allows "real" companies to underreport income and may provide collaborating payors a fraudulent VAT credit. The proposed reform would allow the AFIP to increase scrutiny of Argentine companies as a means to discourage this scheme.

The Inspección General de Justicia (IGJ) recently rejected a corporation’s effort to modify its by-laws for failure to properly register a foreign corporate shareholder as mandated by Ley de Sociedades 19.550, art. 123. The IGJ held that a foreign company’s participation as a shareholder constitutes a presence in Argentina and not an "isolated act."5 From the registrant’s perspective, the ruling proved particularly troublesome, as the foreign company was merely a minority shareholder.

We view the IGJ’s decision as inappropriate. Arguably, the same logic would exclude unregistered foreign shareholders, even minority shareholders, from shareholder meetings. Based on this ruling, the IGJ will likely reject any registration of an amendment to corporate by-laws if it becomes aware of an unregistered foreign shareholder. To avoid unnecessary delay, we are advising our clients to make sure that all their foreign shareholders are properly registered.