Insolvency-related fraud in Argentina
February 2015 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
In Argentina, insolvency is governed by Law No. 24,522, as amended (the Argentine Bankruptcy Law or ABL). Insolvency-related fraud in Argentina is generally related to: (i) schemes for excluding debtor’s assets from the estate or affecting secured creditor’s security interest; and (ii) schemes for exaggerating debtor’s liabilities.
The first kind of scheme includes debtors’ asset stripping or impairment of creditor’s rights on a security interest or guarantee, where the debtor, among other things, may: (i) convey some or all of its assets through fraudulent transfers with the sole purpose of excluding those assets from the estate in the liquidation; and (ii) create liens on existing claims or create fraudulent secured claims to the same effect. In the impairment of creditor’s rights on collateral or guarantee, the debtor generally affects the collateral value or availability to the creditors through any means or the guarantor performs any of the actions described above to exclude its own assets from the debtor’s creditors’ claims under the guarantee and the estate in its own liquidation.
The second kind of scheme is intended for increasing debtor’s unsecured liabilities to control the reorganisation plan. Through the fraudulent creation of simulated unsecured claims or the fraudulent increase of the amount of existing unsecured claims, in both cases held by third parties under the control of the debtor, the debtor has the power to approve any reorganisation plan proposed.
The main grounds of actions for insolvency-related fraud in Argentina are: (i) the Argentine Civil Code (the Argentine Congress has recently passed into law No. 26,994 a broad amendment and restatement to the Argentine Civil Code and the Argentine Commercial Code and other related laws, all of which have been amended and restated into a single new ‘Argentine Civil and Commercial Code’ which has been promulgated on 7 October 2014 but which will come into effect on 1 August 2015 (the C&C Code); (ii) the ABL; and (iii) the Argentine Criminal Code.
In Argentina, fraudulent transfers and other fraudulent actions may be challenged on the following grounds to the extent all requirements described below are satisfied.
Fraudulent transfers voidance action under §§961 and subsequent of the Argentine Civil Code
Any unsecured creditor may file an action for the avoidance of any debtors’ fraudulent transfer, to the extent that: (i) the debtor is insolvent. Debtor’s insolvency is shown through a debtor’s inability to regularly meet its current liabilities. Such failure must not result from a mere default, but from a permanent and general impossibility. Signs of insolvency include a debtor’s judicial or non-judicial payments suspension declaration, failure to meet an obligation, closing of the debtor’s administrative office or place of business, and any adverse or fraudulent means for obtaining funding; (ii) the unsecured creditors suffered a detriment to their rights as a consequence of the debtor’s transfer or the debtor was already insolvent at the time of the transfer; and (iii) the existence of the claim pre-dates the transfer.
To the extent the transfer was for any consideration, then: (i) the debtor’s fraud must be wilful; and (ii) the third party contracting with the debtor must have acted in complicity, provided, however, that if the debtor was insolvent at the time of the transfer, then the debtor’s fraud wilfulness will be presumed, and if the third party had knowledge of the debtor’s insolvency at the time of the transaction, then his complicity will also be presumed.
The action for fraud is subject to a statute of limitations of one year from the date of the transaction or the date when the creditors had knowledge of the transaction.
Under the C&C, the fraudulent transfers voidance action is subject to a number of requirements. Firstly, the existence of the credit must be prior to the fraudulent transfer, except the debtor had the intention to affect future creditors. Secondly, the fraudulent transfer must have caused or aggravated the insolvency situation of the debtor. Finally, the third party contracting with the debtor for consideration had known or should have known that the transaction has the effects described above.
Ordinary voidance action under §§955, subsequent and related of the Argentine Civil Code
In the event the requirements for filing the fraudulent transfers action under §961 of the Argentine Civil Code are not met, then the unsecured creditors may file an ordinary voidance action on the grounds of simulation or fraud, which is available to any individual affected by any action or transaction of a third party.
Admissibility of the voidance action for simulation or fraud requires, among other things, the execution of a legal transaction hidden under the form of a different legal transaction, the existence of a conveyance of rights to a person different from those to whom the benefits are really transferred; or the execution of a nonexistent transaction.
The statute of limitations of the ordinary voidance action is two years from the date when the detrimental action or transaction was known to the creditor.
Void and voidable transactions in liquidation proceedings (insolvency voidance action)
Upon bankruptcy adjudication the court will determine the date when the debtor became insolvent – the insolvency date – and the ‘suspect period’ or ‘claw back period’ (período de sospecha). This date will consist of the period between the insolvency date and the date of the bankruptcy adjudication, provided that the suspect period for the purpose of this section could not be extended back for more than two years from the date immediately preceding this last date.
The following transactions made by the debtor within the suspect period are void, without need of filing of an action or petition: (i) transactions without consideration; (ii) advance payments on account of debts that are due on or after the bankruptcy adjudication date; and (iii) granting of security (mortgage, pledge or any other preference) in respect of debts not due and not secured under their original terms.
The following transactions made by the debtor within the suspect period are voidable: any other transactions detrimental to the debtor’s creditors made by third parties with knowledge of the debtor’s insolvency. The third party has the burden of proving that the transaction did not cause any detriment to the debtor’s creditors.
The voidance action will be filed by the receiver in the reorganisation proceedings upon request of unsecured creditors holding a majority in principal amount of the unsecured claims admitted, provided that if the receiver does not file the action within the 30 days following notice of the request by the required majority of creditors then the action may be filed directly by any unsecured creditor. The statute of limitations of the voidance action is three years from the bankruptcy adjudication.
Managers’ and directors’ liability
The managers and members of the board of directors of the debtor may be held liable under the grounds of the following provisions of the ABL or the Argentine Business Companies Law, No. 19,550 (the BCL).
Pursuant to the ABL, as from bankruptcy adjudication, the receiver may bring actions against the managers, directors and others to recover damages for wrongful conduct. The period of liability for such claims is longer than the ‘suspect period’, as it extends back to one year prior to the actual cessation of payments. Under §173 of the ABL, the members of the board of directors who have wilfully produced, facilitated, allowed or aggravated the debtor’s economic and financial situation or its insolvency shall be liable.
Pursuant to the BCL, the members of the board of directors of the debtor may be held liable for breach of their duties of loyalty and diligence and for violation of the law. Pursuant to the Argentine Civil Code, the liability of a director is aggravated when, due to the director’s qualifications, the director is required to act with more care than an ordinary person. The directors may also be held liable for violations of the law, regulations or the company’s by-laws, and the damages resulting from fraud, abuse of powers and gross negligence.
Any individual wilfully preventing the exercise of a creditor’s right on an asset or guarantee, and any debtor adjudicated bankrupt who has performed any simulation or sales in detriment to its creditors, may be prosecuted for fraud under the Argentine Criminal Code. The statute of limitations of the criminal actions for fraud is six years from the date of the fraudulent act.
Pursuant to the ABL, if after expiration of the proof of claims period all debtors’ assets are insufficient to satisfy the insolvency proceedings’ costs and expenses – including court tax and professional fees, then the liquidation procedure is closed for lack of assets. Equally, §233 of the ABL creates a presumption of fraud and provides that the bankruptcy court must give notice to the criminal courts for prosecution. In a precedent of the Room C of the Chamber of Appeals in Commercial Matters of the City of Buenos Aires (Pellene, Blanca Perla s/quiebra  CNCom Sala C) the court stated that application of §233 of the ABL is not automatic, but rather requires that such notice be given after the bankruptcy court has found grounds for the presumption of fraud based on a preliminary integral analysis of all facts surrounding the insolvency case. However, this precedent was reverted in a more recent case of the same court (Barbieri, Antonio Ambrosio s/quiebra  CNCom Sala C), where the court confirmed that upon confirmation of the lack of assets the court must automatically, and without any further analysis, give notice to the criminal courts.
Martín Campbell and Fernando Daniel Hernández are partners at Marval, O’Farrell & Mairal. Mr Campbell can be contacted on +54 11 4310 0100 ext. 2514 or by email: firstname.lastname@example.org. Mr Hernández can be contacted on +54 11 4310 0100 ext. 1670 or by email: email@example.com.
© Financier Worldwide
Martín Campbell and Fernando Daniel Hernández
Marval, O’Farrell & Mairal