INTERNATIONAL INSOLVENCY INSTITUTE Eighth Annual International Insolvency Conference Latin American Committee Humboldt University Berlin, Germany

JUNE 9-10, 2008

Panel: “Financing Companies Undergoing a Court Debt Restructuring in Latin America” - DIP Financing. Shielding court administrators against liabilities. Comparison of legislation and experiences.

Panelists: Thomas Felsberg (Felsberg e Associados Advogados - Sao Paulo, Brasil) Agustin Berdeja-Prieto (Berdeja y Asociados, S.C. – D.F., México) Fernando Jamarne (Alessandri & Compañía – Santiago, Chile) David Gurfinkel (Allende & Brea – Buenos Aires, Argentina)

Modertor: Ricardo W. Beller (Marval, O'Farrell & Mairal – Buenos Aires, Argentina)

1. Does insolvency law in your country contain features designed to provide access to financing during the debtor's restructuring? If so, how does it work?

Thomas Felsberg (Brasil): Yes, there are some features designed to provide access to debtor-in- possession (DIP) financing, although they are insufficient. Any debts incurred by the debtor after the petition for restructuring is filed (including those derived from DIP financing) are given priority over most pre-restructuring claims and are paid first in the event of a subsequent liquidation proceeding. This “special status” is automatic and is given regardless of court approval.

If the debtor is subsequently liquidated, claims derived from DIP financing are grouped together with other post-restructuring claims and are not put separately in a class of claims of their own. Therefore, DIP financing claims are not given a preferential treatment (in comparison to other post- restructuring petition claims) and this restricts the availability of credit for restructuring purposes.

Agustín Berdeja Prieto (México): Yes, the Commercial Insolvency Law (Ley de Concursos Mercantiles) (“LCM”), which became effective on May 13, 2000, incorporated provisions allowing access to financing during the debtor's restructuring. The Law on Bankruptcy and Suspension of Payments (Ley de Quiebras y Suspensión de Pagos), which was in effect during 1943-2000, did not contemplate this.

A mediator (conciliador) must decide whether or not to terminate executory contracts and shall approve, with the prior opinion of the intervenor (interventor), the execution of new credit agreements.

The mediator is appointed by the Federal Institute of Insolvency Specialists (Instituto Federal de Especialistas de Concursos Mercantiles) (“IFECOM”) upon commencement of the reorganization (conciliación) proceedings. The mediator must be appointed by IFECOM randomly from its list of registered estate fiduciaries, known as “insolvency specialists” in Mexico. However, the debtor or “Merchant” under the LCM, and a group of creditors representing at least 50% of the value of the

credits may agree on the appointment of a specific mediator from the list of IFECOM-registered specialists; or an independent mediator if the group of creditors represents at least 75% of the value of the credits. Such mediator is mainly responsible for procuring an agreement between the creditors and the debtor.

The intervenor represents the creditors’ interests and may be appointed by any class of creditors representing at least 10% of the value of the credits.

Fernando Jamarne (Chile): Insolvency law (Bankruptcy Law) does not have specific features aimed to provide access to finance debtor's restructuring whether before the declaration of bankrupcty or after it.

Prior to the declaration of Bankruptcy, financing can be obtained only if 100% of the creditors agree with debtor in a restructuring agreement to avoid the declaration of bankruptcy and also agree the subordination of their own claims. Only then the trustee may request financing for the continuity of the debtor's business.

After the declaration of the debtor's bankruptcy, the trustee may decide to continue the business of the debtor, and submit said decision to the approval of the creditors whose claims have been recognized in the roster prepared by the trustee and submitted to the competent court. The proposal requires the consent of a simple majority of the creditors to be approved. Once the approval is in place and if the trustee obtains the financing from the same creditors or third parties, said financing will have preference for payment vis a vis pre petition credits included in the restructuring plan. This financing could also be obtained by the trustee through a judicial agreement as requested by the debtor and accepted by the majority of the creditors (more than 50% of the capital of the debts).

David Gurfinkel (Argentina): Argentine Bankruptcy Law (“ABL”) does not specifically contain features designed to provide access to financing during the debtor’s restructuring process.

Under the ABL, the debtor in possession (DIP) retains the management of the estate under the supervision of a court appointed trustee. The rule is that the debtor is entitled to enter into any kind of agreement, but the law establishes certain acts that the debtor is not allowed to enter into and other kinds of acts which are subject to prior Court authorization.

The prohibited acts are those which do not contemplate any consideration for the debtor and all other acts which may result in a change of the standing of the creditors.

Prior authorization from the Court shall be required to perform any acts that result in the granting of a mortgage or chattel mortgage; the transfer of real estate or the transfer of assets belonging to the estate; the issuance of bonds with special or floating guarantee; the granting of chattel mortgage or pledges and any act other than those performed in the regular course of the debtor’s business.

Therefore, although the law in principle allows the debtor to execute any kind of financing agreement during its restructuring process, in practice DIP financing shall be in most cases subject to prior Court authorization, since ABL does not recognize seniority to DIP financing and thus, lender will normally request a guarantee from the debtor prior to the disbursement of fresh funds to a debtor that is undergoing reorganization proceedings.

The Court’s prior authorization procedure for acts that result in the granting of a mortgage or chattel mortgage or other kind of guarantee that affects the debtor’s assets, involves a hearing held with the Court appointed trustee and the creditor’s committee. In order to grant such authorization the Court shall asses the advisability thereof vis-à-vis the continuation of the debtor’s activities and the protection of creditors’ interests.

If the Court grants such authorization the authorized act cannot be later declared ineffective in respect of the creditors if the reorganization proceedings fail and the debtor goes into liquidation proceedings.

In practice, Courts are generally reluctant to authorize the debtor to perform acts that result in the granting of a mortgage or a chattel mortgage or the issuance of other kind of guarantees. This is especially true at the first stage of the reorganization proceedings, because of the poor quality of the information available for the Court regarding the financial condition of the debtor, its need for financing and the debtor’s capacity of putting together a reorganization plan that could result in creditors receiving better consideration than they may obtain in case of having to collect their credits from the proceeds of the auction of the debtor’s assets under a liquidation scenario. It is important to point out that the ABL does not contemplate the debtor submitting its reorganization plan to the Court until the very last stage of the reorganization proceedings and thus the Court is not given the opportunity to analyze the feasibility of the debtor’s reorganization plan until the plan is presented to the Court for confirmation, i.e. when such reorganization plan has been already approved by the majority of creditors required by the ABL.

2. Are there differences in seniority between the claims originated from DIP financing and the other post-petition claims? Are DIP financing claims given a super-priority over pre restructuring claims not subject to the reorganization plan?

Fernando Jamarne (Chile): Once the restructuring agreement is approved, there are no differences in seniority among the pre petition claims -included in the roster of claims- as registered by the trustee and the post petition claims, except those that by operation of law are privileged and will continue to enjoy such privilege, provided that the holders of said claims do not participate in the restructuring. Also, DIP financing claims are not given a super-priority over pre petition claims not subject to the reorganization plan. Only claims related to the financing obtained by the trustee, after the bankruptcy declaration, have priority due to the fact that they are considered to be an expense of the bankruptcy.

Thomas Felsberg (Brasil): There are no differences in seniority between claims derived from DIP financing and those derived from other post-petition claims. All post-petition claims are ranked according to the same priority rule applicable to pre-petition claims. DIP financing claims may have secured or unsecured status and they are grouped together with other post-petition claims of the same class. In any event, labor claims incurred after the filing of the restructuring are given seniority over DIP financing claims.

DIP financing claims in a subsequent liquidation are senior to most claims which are subject to the restructuring plan, with the sole exception of labor wage claims up to the limit of five monthly minimum wages.

There are some claims, however, which are not subject to a judicial or an out-of-court restructuring. For example, tax claims cannot be included in a restructuring.

There are also the third party assets held by the debtor and which are restituted to the creditor in a liquidation proceeding. Such assets do not belong to the debtor, and therefore they are excluded from the bankrupt estate and are not subject to both liquidation and restructuring proceedings. Under Brazilian Law, some contracts, such as chattel mortgages (“Alienação Fiduciária em Garantia”), lease arrangements (“Arrendamento Mercantil”) and advances on foreign exchange contracts, transfer the legal ownership of an asset to a third party, although the possession remains with the debtor. The legal owners of such assets are entitled to restitution of these assets and, thus, they are given priority over all claims, regardless if they originated before of after the petition for restructuring has been accepted by the Restructuring Court. If these assets are sold, the owners are entitled to the corresponding value.

To sum it up, in the event of a liquidation, the absolute priority rule, encompassing all claims, is as follows:

(1) Restitution claims (excluded from the bankruptcy); (2) Labor wage claims up to the above mentioned limit; (3) Credits deriving from the sale of assets which were subject to restitution, but were sold; (4) Claims incurred by the debtor after the filing for restructuring or after the decree of bankruptcy, according to the following order: a. Fees payable to the judicial administrator and his assistants, and labor claims or occupational accidents referring to services rendered after the decree of bankruptcy; b. Sums provided to the bankrupt estate ; c. Expenses with the liquidation proceeding, including court costs, management, asset realization and distribution of the proceeds; d. Court costs derived from lawsuits in which the bankrupt debtor is defeated; e. Obligations resulting from valid acts performed during the court-supervised restructuring or after the decree of bankruptcy and taxes relating to events occurring after the decree of bankruptcy, according to the following order: i. Labor claims, limited to 150 minimum monthly wages, and claims deriving from occupational accidents; ii. Secured claims, up to the limit of the security; iii. Tax claims; iv. Special privileged claims; v. General privileged claims; vi. Unsecured claims; vii. Contractual penalties and tax fines; viii. Subordinate claims; (5) Obligations incurred by the debtor before the filing for restructuring or after the decree of bankruptcy (in the event no restructuring petition was filed), according to the following order: a. Labor claims, limited to 150 minimum monthly wages, and claims derived from occupational accidents; b. Secured claims, up to the limit of the security; c. Tax claims; d. Special privileged claims; e. General privileged claims; f. Unsecured claims; g. Contractual penalties and fines; h. Subordinate claims.

DIP financing claims are included in class (4)(e)(ii) (if they are secured) or in class (4)(e)(vi) (if they are unsecured).

Agustín Berdeja Prieto (México): Debtor in possession or “DIP” financing agreements are considered to create claims against the insolvency estate (masa). Certain labor claims for wages and other benefits have superpriority, and thus must be paid before any of the debtor’s creditors. The reorganization agreement must include the payment terms for claims against the insolvency estate, including post-petition claims based on DIP financing agreements. Except for certain labor claims, claims arising from DIP financing agreements rank the highest among post-petition claims. It is noteworthy that, to the best of my knowledge, no DIP financing agreement has been filed with IFECOM yet in connection with any reorganization.

Pre-petition claims will rank according to their category. The LCM, the Federal Labor Law and the Fiscal Code of the Federation establish 5 (five) categories of creditor rankings. Other statutes also include their own set of rankings and priorities, although the provisions of the LCM, which is the statute that applies to insolvency proceedings (whether reorganization or bankruptcy), prevail in case of a discrepancy. Under the LCM, the general rankings of claims are listed in descending order of preference.

First, “exclusively privileged creditors” include, in connection with individuals, creditors for burial expenses of the debtor as well as expenses related to the disease that caused the death of the debtor.

Second, “secured creditors” include creditors under mortgage, pledge, and purchase finance agreements.

Third, the federal tax authority for so-called “social claims”, namely, unpaid federal taxes. Certain labor claims rank pari passu with tax claims.

Fourth, “creditors with special privilege” comprise all those creditors that have a special privilege or right of retention. This category of creditors includes commission agents, merchandise vendors, and carriers.

Fifth, “common creditors”. All other creditors holding claims not falling within any of the above categories are treated as non-priority (general) unsecured creditors.

Creditor ranking (graduación) and creditor priority or “degree” (grados) within each ranking (prelación), as provided by the law, determine payment order. Generally, creditors of the first through fourth priority categories have the highest probability of being paid in full. When assets are insufficient, first priority creditors are paid in full before second priority creditors and so forth. Fifth priority creditors are paid a pro-rata reduced amount.

The fees of the insolvency examiner, the mediator, the trustee and other specialists involved in the estate’s preservation and administration , are payable as ordinary operating expenses.

David Gurfinkel (Argentina): Under the ABL there are no differences in seniority between the claims originated from DIP financing and the other post-petition claims. DIP financing claims are not given super-priority over pre-petition claims not subject to the reorganization plan either.

The only way for DIP financing claims to be given seniority over other post-petition claims or to be given super-priority over pre-petition claims not subject to the reorganization plan is by means of establishing a mortgage, a chattel mortgage or other kind of guarantee involving DIP’s assets and prior Court authorization is always required.

In some exceptional cases, the debtor’s reorganization plan includes a specific clause in which creditors are informed that the debtor shall grant a mortgage, a chattel mortgage or another kind of guarantee involving certain assets of the debtor in order to have access to fresh funds once the reorganization plan has been approved by the requested majority of creditors. In those cases, the approval of the plan by the requested majority of creditors and the subsequent confirmation by the Court of the reorganization plan shall give seniority to such DIP financing claim vis-à-vis other post-petition claims and also over pre-petition claims which are subject to the reorganization plan. In order for a DIP financing claim to have super-priority over pre-petition claims that have a priority regarding certain assets of the debtor, express approval or consent from such pre-petition creditors is required. In any case, such seniority or super-priority of the DIP financing claim will only apply with regards to the proceeds of the assets which are subject to the mortgage, the chattel mortgage or other kind of guarantee.

3. Are there any other incentives for financing a reorganizing debtor?

Agustín Berdeja Prieto (México): No.

David Gurfinkel (Argentina) There are no incentives for DIP financing under the ABL. The lack of specific legislation regarding DIP financing is maybe one of the most important reasons for the failure of reorganization proceedings in Argentina.

In the event any legislation were to be passed to implement DIP financing, it would be advisable that it should provide the improvement of the quality, the quantity and the timing of the information made available to the Court during the reorganization proceedings, and an improvement of the structure of the bankruptcy Courts to facilitate a deeper and more comprehensive analysis by them of the feasibility of the reorganization plan at an earlier stage of the proceedings and thus to decide if DIP financing is convenient for both the creditors and the debtor.

Thomas Felsberg (Brasil): There are no substantive incentives for financing a debtor in an insolvency proceeding. Brazilian Insolvency Law provides that unsecured claims held by suppliers of goods and services who continue to regularly make such goods and services available to the debtor after the filing for restructuring has been accepted by the Restructuring Court, shall be granted general privilege in the event of liquidation, proportional to the amount of goods and services delivered during the restructuring. This provision, however, is not applicable to loans.

Fernando Jamarne (Chile): No, there is nothing with respect to a rescue operation for debtors’ distress!!

4. Which is the standard of responsibility of the court administrator regarding the financing decisions taken during the debtor’s reorganization? Are there any protections to shield them from liability in the event the new financing cannot be repaid, or if repayment affects the ability to pay the other creditors?

Fernando Jamarne (Chile): The trustee is required to act with the highest degree of care in his duty as administrator during bankruptcy including the debt restructuring or reorganization of the debtor's business. There is no such shield under Chilean law.

Thomas Felsberg (Brasil): Under Brazilian Insolvency Law, the debtor remains in possession of the firm after a restructuring petition has been accepted by the Restructuring Court. The judicial administrator (“administrador judicial”) is appointed by the court to supervise the proceedings.

A debtor may, in some cases, be removed from administration of its assets. In this case, the court convenes a meeting of creditors to appoint an administrator (“gestor judicial”), who becomes responsible for managing the debtor.

Brazilian Insolvency Law is not clear on the responsibility standard of the administrator. It goes no further than stating that the same rules governing the conduct of the judicial administrator shall apply to the administrator appointed by the creditors.

In the absence of a specific standard of responsibility, the administrator appointed by the creditors is subject to the general rules provided by the Civil Code. Therefore, the administrator is held liable in the event its acts constitute misconduct or negligence.

Regarding DIP financing issues, the Insolvency Law states that any decision on the contracting of loans that precedes the submission of the restructuring plan, in the event the debtor is not in possession, must be submitted by the Creditors’ Committee to the prior approval of the court. If financing of the debtor is necessary for the continuation of its activities, such financing must be included as a means of restructuring provided by the restructuring plan.

Therefore, administrators may protect themselves in the event the new financing cannot be repaid by seeking and obtaining the approval of the Creditors’ Committee or of the Creditors’ General Meeting before taking any decision. Otherwise, they could be accused of performing acts beyond the scope of their powers.

Agustín Berdeja Prieto (México): There are no statutory provisions to shield insolvency specialists from liability in the event a new financing cannot be repaid, or if repayment affects the debtor’s ability to pay the other creditors. However, the insolvency examiner, the mediator and the trustee shall be responsible vis-à-vis the Merchant and the creditors for any losses or damages (unduly) caused by their actions (as well as those of their assistants’). They shall also be responsible for any “breach of their duties” and for any “disclosure of confidential data that they may have obtained by virtue of their position”.

In addition, the trustee, in managing the bankrupt company, must act “always as a diligent administrator” as if it were “his/her own enterprise”, he/she being responsible for any losses or damages that the bankrupt company may suffer due to his/her “fault or negligence”.

It is noteworthy that the LCM includes an entire section on the “Criminal Aspects of Commercial Insolvencies”, namely Title Eleventh, Sole Chapter. This Title regulates insolvency-related crimes in 7 (seven) articles. Most of these provisions concern general principles applicable to such crimes. They also contemplate sanctions for specific criminal behavior of Merchants.

The foregoing notwithstanding, however, nothing precludes the application of criminal statutes such as the Federal Criminal Code (Código Penal Federal) to the court administrators where their

actions so justify it.

IFECOM’s specialists may be removed with or without cause.

The Merchant, the District Attorney (Ministerio Público), any of the intervenors and any of the creditors may notify the judge of illegal actions or omissions of the insolvency examiner, the mediator or the trustee. The judge shall have broad authority to act upon such notification and he/she may order IFECOM to replace the insolvency examiner, the mediator or the trustee “in order to prevent losses for the estate.”

Thus, the LCM contemplates that failure to comply with certain specific duties may give rise to the judge issuing an order for IFECOM to remove a specialist. The LCM also allows for a mediator to be replaced “without cause” i.e. by agreement between the Merchant and creditors representing a specified minimum percentage (75%) of the credits. Where creditors representing such credits and the Merchant shall so agree, they shall be authorized to petition the court to appoint an outside mediator, namely one that is not IFECOM-registered.

David Gurfinkel (Argentina) Under the ABL the debtor maintains the management of the estate under the supervision of a court appointed trustee. Any financing decisions will generally require prior Court authorization. Therefore, technically speaking, there is no court administrator, but rather the management of the indebted company is the one taking decisions regarding post-filing financing.

Also, since in most cases DIP financing is preceded by Court authorization, the responsibility of the management that takes such decisions is in some way protected from liability in the event the new financing cannot be repaid or if repayment affects the ability to pay the other creditors.

In the event the new financing cannot be repaid, bearing in mind the lack of legislation regarding DIP financing under ABL, such liability will at the same time be very difficult to claim at Court because a diligent lender should be perfectly aware of the financial difficulties that the debtor is undergoing and thus, also aware of the significant risk involved in such financing operation.

Under Argentine law the directors or managers of the indebted company are subject to the standard of loyalty and diligence of a good businessman. Failure to meet such standard (e.g., for mismanagement or violation of the law or the company's by laws, fraud or negligence) will normally result in being held jointly and severally liable to the corporation, its shareholders and third parties. Although the general rule is directors or managers may not be held personally liable for the obligations of the indebted company, they may face liability in connection with –among others- unpaid taxes, import and export duties and unpaid social security contributions. The lack of payment of a loan, even new financing taken during reorganization proceedings will not typically make them personally liable for the unpaid loan.