The inevitable cannot be avoided, but ways can be found to mitigate its consequences. The coronavirus pandemic is having devastating economic effects around the world and Argentina will be no exception. The economy has entered an induced coma ordered by governments to prevent a greater harm.
From a legal perspective, the vast majority of legal systems will consider it a force majeure event that excuses the due performance of obligations and contracts. These effects will occur in the case of reciprocal legal relationships.
Economic science professionals report problems with the web application for the recategorization of the simplified tax regime (monotributo).
But the solution will be different when the debtor’s general economic and financial situation is affected and the consequences go beyond the scope of individual commitments. In these cases, the rules on insolvency and bankruptcy may apply, and what would justify an excuse from performance in individual situations may lead to a state of cessation of payments.
Companies can take advantage of Insolvency and Bankruptcy Law 24,522, as amended, to turn their cessation of payments into a legal instrument that allows them to restructure and reorganize their business in order to adapt to the new post-Covid-19 economy.
In other words, the coronavirus pandemic may justify a debtor’s insolvency and cessation of payments, regardless of whether such situation is due to force majeure or is attributable to the debtor’s responsibility.
The importance of anticipating “the inevitable” is fundamental. The consequence for a patient in an “induced coma” (inability to continue the commercial activities of its business) may, in these cases, be a bankruptcy petition filed by an impatient creditor, based not on the individual non-payment of its claim but on the state of insolvency or cessation of payments that such non-payment would cause. Thus, what at first sight appears to be an individual claim by one creditor may result in the liquidation of the debtor company to pay all creditors (not only the one who filed for bankruptcy) and in the end of the business it carried on.
Reorganization proceedings (concurso preventivo) thus emerge as a constructive way to avoid the unwanted consequences of Covid-19. An Argentine debtor who files for reorganization retains the management of its assets under the supervision of the trustee (Law 24,522, art. 15) and is only “dispossessed” in the event of bankruptcy (ibid., art. 106 et seq.). In other words, the debtor under reorganization remains at the head of its business while it negotiates the agreement with its creditors and, for this purpose, enjoys broad protection under the Law: suspension of the accrual of interest (Law 24,522, art. 19); continuation of contracts with pending reciprocal performances (ibid., art. 20); lifting of previously imposed interim measures (ibid., art. 21); possibility of temporary suspension of auctions (ibid., art. 24); the obligation of creditors to go through the claim verification process in order to be admitted to the negotiation of the agreement with the debtor (ibid., arts. 32 et seq.); and the two-year limitation period from the start of the proceedings for creditors who did not take part in the verification process to come forward (ibid., art. 56).
To this must be added the very broad margin available to the debtor to make proposals (ibid., art. 43) and thus offer solutions to overcome the crisis and avoid bankruptcy, which is always a more burdensome scenario for the debtor itself but also for its creditors.
Here it is important to point out the difference between our Law 24,522, which follows the model of Continental European Law, and the systems of Anglo-Saxon common law. The latter has a concept of ‘insolvency’ that differs from our concept of ‘cessation of payments’, as we will see below.
In the United States, insolvency proceedings are governed by 11 U.S. Code, whose § 101 ‘Definitions’ (32)(A) and (32)(B) establishes that insolvency is a financial condition in which the sum of the debtor’s (a legal entity’s) liabilities exceeds all of its assets. The United Kingdom has a similar provision in section 123(2) of the UK Insolvency Act 1986.
U.S. legislation includes the well-known Chapter 11 (“Reorganization”) of 11 U.S. Code, which, in its 94 sections, provides for the administration of the estate by a “trustee” (sometimes an “examiner”) or sometimes by the “debtor in possession” itself, with the purpose of organizing management and submitting a restructuring plan, all under the supervision of a creditors’ committee. The UK Insolvency Act 1986 provides for “company voluntary arrangements” (first group of provisions, Part I) and “individual voluntary arrangements” (second group of provisions, Part VIII), which give a greater role to the debtor, especially to individuals, but which likewise aim at the approval by creditors of a reorganization and payment proposal.
In Argentina, the previous insolvency law (Law 19,551) enshrined in its statement of reasons the “principle of preservation of the business” as one of its essential objectives, a pillar upheld by the current Law 24,522, as amended. Here, during the first half of the last century (following Italian and French precedents), the cessation of payments was characterized as a state of financial incapacity that prevents the debtor from meeting its obligations. This concept, adopted by Law 24,522, is broader than common law ‘insolvency’: under our law there are other situations, in addition to an imbalance between assets and liabilities, that can evidence the cessation of payments.
In short, Argentine law, like its Continental European precedents, focuses on the debtor’s financial condition. It does not limit itself to considering whether pending obligations are being duly performed (although default, as we have seen, is part of the list of “revealing facts”); instead, it looks at whether such obligations can be performed: that is, whether the debtor’s assets are in a position to meet the payments generated by its activity, even regardless of the debtor’s intention to perform.
Both the state of insolvency and the cessation of payments under our law open the door to a consensual solution with creditors that, in these circumstances arising from Covid-19, should not be missed.
The dire consequences for human life and health brought about by the coronavirus crisis override all other considerations. But when the pandemic finally subsides, we will face the challenge of rebuilding the economy to mitigate, as far as possible, the devastation that has befallen our society. We will surely see an increase in the use of insolvency proceedings around the world, which will test their ability to assist in the recovery of economic activity. It will also be a test for Law 24,522 and its ideals of protecting the business and the relationships between capital and labor that make it up.
(*) Alfaro-Abogados
