Under Argentine Bankruptcy Law, a “cessation of payments” (cesación de pagos) duly proven in court can trigger a declaration of bankruptcy against a person or entity, resulting in the debtor being constrained from making payments out of its ordinary resources on a regular basis (Section 1 of the Bankruptcy Law No. 24,522). The debtor or any of its creditors can file a petition requesting the declaration of a bankruptcy, which must be issued by a court. To that end, the judge will determine whether the debtor´s current financial status could be considered as a situation of cessation of payments, which is not a mere default on payments or breach of a singular obligation but rather a general status of the debtor of a permanent nature. Argentine Bankruptcy Law provides a more detailed menu of “cessation of payments” indicators for the judge to declare bankruptcy. For example, the debtor´s acknowledgment of it not being able to honor its debts; the debtor´s managers are missing or hiding and no representative is available; the administrative headquarters are shut down, or the assets are being sold at a vile price or they either hidden or transferred as payment of previous obligations.
Argentine Bankruptcy Law also allows a declaration of bankruptcy with respect to a foreign entity, but only regarding its assets located in Argentina. Some court decisions, however, have permitted a declaration of bankruptcy with respect to foreign entities irrespective of the existence of current assets in Argentina.
The main consequences of the declaration of bankruptcy are that (i) the debtor loses possession and management over its assets; (ii) a trustee assumes the administration of the debtor’s assets and businesses, subject in many cases to prior judicial authorization; and (iii) the court orders the liquidation and auction of the debtor’s assets to pay the creditors (needless to say, this liquidation process can be avoided if the debtor files for its own reorganization and enters into a composition with its creditors).
Can a declaration of bankruptcy affect third parties?
The general principle is that the declaration of bankruptcy only affects the debtor and its assets. However, Argentine Bankruptcy Law also set forth certain circumstances in which third parties may be affected by the declaration. These generally relate to acts and behaviors carried out by third parties that may be considered to have been fraudulent as to the debtor’s creditors or that may have had a direct impact on the debtors’ insolvency status. The bankruptcy law provides two different legal actions that could be initiated in those scenarios: the extension of bankruptcy and the liability action.
Extension of Bankruptcy
Section 161 of the Argentine Bankruptcy Law allows the trustee or any creditor to request the extension of bankruptcy to third parties in certain specific cases:
- Personal benefit: the third party performed an act on behalf of the debtor and obtained a “personal benefit” in fraud of creditors.
- Corporate controlling: the parent or controlling company of the debtor used its power over the debtor to deviated from normal corporate principles for its own benefit.
- Indivisible confusion of assets and liabilities: the common administration between the debtor and a third party makes it impossible or very difficult to separate their respective assets and liabilities.
These circumstances call to mind theories of liability that arise in the United States and elsewhere – fraudulent transfers, veil piercing, and substantive consolidation.
The trustee or any creditor may request an extension of bankruptcy as against a third party. This action must be filed any time from the declaration of bankruptcy for the debtor until six months after the filing of the General Report by the trustee. In the General Report, the trustee describes, among other issues, the assets and liabilities of the debtor and the reasons that originated the cessation of payments. The extension of bankruptcy implies that the third party will be automatically in a liquidation stage, irrespective of its financial status (i.e., it does not require to undergo a cessation of payments situation) and therefore be liable for the payment of the former bankruptcy´s creditors.
As in other countries, Argentine law does not make companies of an economic group liable per se for the obligations of their subsidiaries and affiliates. Argentine law does recognize, however, the exceptional remedy of piercing the corporate veil and extending liability to the parent or controlling company when the acts performed by the other company (usually, branches or local corporations) have a non corporate or business purpose (“fines extrasocietarios”), violate the law, public order or good faith or affect third parties´ rights (section 54 of the Corporation Law No. 19,550). In practice, the piercing of corporate veil has a similar effect to the extension of bankruptcy, and in both cases they are decided on a case-by-case basis in a very restrictive manner.
Section 173 of the Argentine Bankruptcy Law regulates an action for damages against (i) the representatives (including directors, administrators, agents or business managers) of the debtor or (ii) third parties (such as shareholders). The liability action is limited only to those acts performed up to a one-year period before the initial date of cessation of payments.
The liability action may be brought by the trustee and must be initiated by the trustee if creditors representing a majority in amount of unsecured claim request the trustee to bring the action. The Argentine Bankruptcy Law only allows creditors to bring an action when the trustee fails to initiate the liability action.
If the liability action is filed against representatives of the debtor, the plaintiff must prove that the defendant had intentionally produced, facilitated, allowed or compounded the financial situation of the debtor or its insolvency. Some court decisions also make representatives liable if they should have known the consequences of their acts or omissions, even though they had no effective knowledge or willful intent.
If the liability action is filed against third parties, the plaintiff must prove that the defendant had participated in acts intentionally aimed at the reduction of the debtor’s assets or the exaggeration of its debts, either before or after the declaration of bankruptcy, and must turn over any assets still in its possession and compensate for any damages caused by its behavior. In addition, a defendant that is found liable cannot assert any rights in the debtor’s bankruptcy proceeding.
The general principle under Argentine law is the separability of legal entities. In insolvency matters, such rule of law implies that a bankruptcy declaration only affects the insolvent party. As is the case in other jurisdictions, though, under exceptional situations the effects of a debtor’s bankruptcy may be extended to third parties and may result in personal liability for those third parties.