Is There an “Oxygen Mask” for Indebted SMEs in the Post-COVID Era?

What will be the new ‘timing’ adopted by ‘voracious’ creditors, desperate debtors, and pragmatic judges when deciding whether to issue a bankruptcy order or dismiss the petition?”

While the pandemic and the widespread paralysis humanity is experiencing will have devastating economic effects worldwide, its impact will be particularly severe in Argentina, where the crisis and debt levels that predated COVID-19 had already created a highly complex economic landscape.

Faced with this unusual and unprecedented scenario, there is enormous uncertainty regarding the degree of tolerance creditors will show, as they seek to resolve their own resulting insolvency and consider filing for the debtor’s bankruptcy. Will ethical or moral considerations come into play, or will the strict provisions of the Insolvency and Bankruptcy Law prevail, allowing a bankruptcy order to be issued without further proceedings when certain specific conditions are met?

If we briefly consider the different ways in which COVID-19 affects patients, we could distinguish between: a) asymptomatic patients who continue their lives as normal; b) patients with mild symptoms who require some care and eventually return to normal life; and c) critically ill patients who need an oxygen mask to survive.

Similarly, we could refer to: a) companies that continue operating normally despite the global crisis—and, in some cases, such as food companies, have even improved their performance; b) companies that have begun accumulating debt and will require scheduled private refinancing arrangements agreed upon with their creditors; and c) companies that will need their own oxygen mask to avoid disappearing.

That “oxygen mask” is the legal mechanism that has historically served as a lifeline during times of crisis: court-supervised reorganization proceedings (“concurso preventivo”).

This legal mechanism allows companies to transform their suspension of payments into an opportunity to restructure their business and adapt to the new economy expected to emerge in the medium term.

Once again, court-supervised reorganization appears to be a possible alternative for anticipating conflicts that are already emerging as merely the tip of a much larger iceberg. The alternative may result in a complete lack of oxygen, inevitably leading either to the death of a critically ill patient or to the bankruptcy of a company that was unable to overcome its crisis.

Through court-supervised reorganization proceedings, an Argentine debtor can continue breathing while retaining control over its assets, suspending the accrual of interest and opening a collective proceeding for all its creditors, who will be required to file and verify their claims—within timelines that are manageable for the debtor—under the supervision of a judge and a court-appointed trustee.

In this way, the debtor receives the most valuable oxygen mask it could need and, with it, has a strong chance of “recovering”—to continue the patient analogy—or, in other words, restoring the financial health of its business. The law provides considerable flexibility to submit a repayment proposal with manageable terms and deadlines, substantial debt reductions and attractive creditor classifications, enabling the company to overcome its crisis and avoid bankruptcy.

There is still a long road ahead!