Set-Off During Suspension of Financial Institutions - International Law Office

Insolvency Proceedings
Suspension of Operations
Set-Off During Suspension
Comment

The legality of offsetting debits and credits with a suspended financial institution is much debated. Many international players carefully analyze this issue when evaluating derivative or other financial transactions with Argentine financial institutions.

In July 2006, in Banco Patricios SA, the National Supreme Court of Justice of Argentina ruled that set-off cannot take place during the suspension of a financial institution.

Insolvency Proceedings

In Argentina, the insolvency proceedings of financial institutions differ from insolvency proceedings of other entities. Neither financial entities nor their creditors may request the bankruptcy of the financial institution until its licence has been revoked by the Argentine Central Bank. The financial institution may also not request reorganization until its licence has been revoked.

In addition, the Central Bank Charter (Law 24,144, as amended) and the Financial Institutions Law 21,526, as amended, provide special proceedings to which financial entities may be subject, as follows:

• All or part of the operations of a financial entity may be temporarily suspended (Article 49 of the Central Bank Charter);
  
  
• A financial entity may be requested to submit a regularization plan (Article 34 of the Financial Institutions Law);
  
  
• A financial institution may be restructured to protect depositors (Article 35(2) of the Financial Institutions Law); and
  
  
• a financial entity's licence may be revoked (Article 44 of the Financial Institutions Law).

Suspension of Operations of Financial Institution

The suspension of all or part of a financial institution's operations for up to 30 days may be ordered by the superintendent of financial institutions (an officer of the Central Bank), with the prior consent of the president of the Central Bank. The board of directors of the Central Bank may approve an extension of the suspension for up to 90 days.

During the term of the suspension the enforceability of credits and the accrual of interest against the financial entity (except for debts with the Central Bank) are suspended and agreements increasing the debt of the financial entity are considered null and void. In addition, during the suspension no enforcement or injunction order may be sought against the suspended financial entity.

Set-Off During Suspension

In the present case, during the suspension of operations of Banco Patricios SA, Banco de Formosa SA (then a subsidiary of Banco Patricios) offset its debt towards the suspended entity in the form of the distribution of dividends against a loan granted by Banco de Formosa to the suspended bank, which had been renewed a few days before the suspension was decided.

The lower court considered that the set-off was contrary to the provisions regulating the suspension of financial entities. The court of appeals revoked the lower court's resolution, stating that the relevant regulations do not bar set-off if that set-off involves court proceedings or agreements increasing the debt of the financial entity.

The Supreme Court overruled the court of appeal's resolution, indicating that the Civil Code allows the set-off of credits that are enforceable and that, given that credits against a suspended financial institution are not enforceable, set-off may not take place during suspension.

Comment

The criteria established by the Argentine Supreme Court in this case imply that, during the suspension of an Argentine financial institution, a creditor may not offset its credit against any other debt it may have with the financial institution.

For further information on this topic please contact Gabriel G Matarasso or Cecilia Reynolds at Marval, O'Farrell & Mairal by telephone (+54 11 4310 0100) or by fax (+ 54 11 4310 0200) or by email (gm@marval.com.ar or cr@marval.com.ar). The Marval, O'Farrell & Mairal website can be accessed at www.marval.com.ar.