Secured vs.

Unsecured Creditors:
A review of Argentina´s Supreme Court Precedents

Introduction

In the last decade the scheme of preferences in corporate insolvencies under the Insolvency Act
24.522 has become greatly controversial. The main debate arises out of the human rights
perspective which suggests that labor and involuntary creditors ought to prevail over secured
creditors in certain circumstances.

National courts have therefore repeatedly exercised the control of conventionality1 which ultimately
has allowed a few cases over disputes among secured and unsecured creditors concerning the
giving and setting aside of preferences reach the Supreme Court – in its appellate jurisdiction.

Hence, the Highest Court of the Nation has reviewed the decisions of lower courts and has
analyzed if such decisions were compatible with international standards.

The conflict of different interpretations however remains unsolved for the Supreme Court has not
been consistent in its rulings with respect to whose right prevails in case of collision.

The Main Precedents

In re "Pinturas y Revestimientos aplicados Ltd. s/quiebra"2 (March 26th, 2014)

In this insolvency proceeding of an employer, the collision of rights resulted from the claim of the
State3 and a labor claim arising from a compensation payable directly by the employer in respect
of an occupational accident.

The Supreme Court came to the conclusion that articles 239, 247 and 249 of Insolvency Act 24.522
that recognized a preference to claims of the State over labor claims violated the International
Labor Organization Convention Number 1734 and its Recommendation Number 1805.

As a result, the Supreme Court ruled that the worker´s claim ranked higher than those of the State
and the Social Security System (although such privilege was not contemplated in Insolvency Act
24.522), and allowed the worker to get paid out of the assets of the insolvent employer before the
latter could be paid their share.

1
And performed therefore the test of compatibility of national norms and international standards

2Corte Suprema de Justicia de la Nación, https://aldiaargentina.microjuris.com/2014/04/29/csjn-el-credito-laboral-

originado-en-una-indemnizacion-por-accidente-de-trabajo-goza-de-privilegio-sobre-los-de-la-afip/

3 In the case, the claims of AFIP (Administración Federal de Ingresos Públicos)

4 https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:12100:0::NO::P12100_ILO_CODE:C173

5 https://www.ilo.org/dyn/normlex/en/f?p=NORMLEXPUB:12100:::NO:12100:P12100_ILO_CODE:R180:NO
In re "Asociación Francesa Filantrópica y de Beneficencia s/quiebra s/incidente de verifiación de
crédito por L.A.R. y otros"6 (November 6th, 2018)

The case was taken to court to solve an apparent conflict in the prevalence of rights between a
mortgage creditor (secured claim of the highest rank) and a medical malpractice victim entitled to
claim damages (an unsecured creditor).

In the decision-making process a majority of Justices (3 to 2) agreed that:

• Neither the Convention on the Rights of the Child7 nor the Convention on the Rights of
Persons with Disabilities8 grant a medical malpractice victim (children or adult) higher rank
of privilege than a creditor secured by mortgage in the insolvency proceeding of the
medical institution where the malpractice occurred;

• Privileges, insofar, as they constitute an exception to the principle of par conditio

creditorum must be interpreted restrictively to prevent constriction of third parties’ rights;

• The distributional issues involved in determining the creditors legal pecking order in
insolvency proceedings is a bankruptcy policy decision for the legislators to make, not the
judges.

• If the Supreme Court was to give an unsecured creditor protection by granting a privilege
not regulated in the Insolvency Act 24.522, that would imply stating a contra legem
preferences scheme with unforeseeable legal implications and consequences in the credit
environment of the country.

Predictability is a key driver to expand access to credit, and any judicial ruling that entitles
unsecured creditors to collect their claims before creditors secured with mortgages would
undermine and weaken the debt recovery systems and increase the cost for obtaining
credit. In this specific case, it would imply a higher cost of capital for health institutions and,
ultimately, a higher cost of health services for the entire community.

Consequently, the Supreme Court decided that holding preference for the secured creditor over
the unsecured creditor was the only possible and coherent legal decision in conformity with the
Insolvency Act 24.522, the Argentine Constitution and the International legal order.

In re “Institutos Médicos Antártida s/quiebra s/ inc. De v erificación (R.A.F. y L.R.H. de F.)” 9

(March 26th, 2019)

Only four months after passing sentence in the case above, the Supreme Court took exactly the
opposite direction in a similar dispute concerning the predominance of rights between a medical

6 Corte Suprema de Justicia de la Nación, https://camoron.org.ar/wp-content/uploads/2019/08/FALLO-

ASOCIACION-FILANTROPICA.pdf

7 https://www.ohchr.org/en/instruments-mechanisms/instruments/convention-rights-child

8https://www.un.org/development/desa/disabilities/convention-on-the-rights-of-persons-with-
disabilities.html#Fulltext

9Corte Suprema de Justicia de la Nación, https://aldiaargentina.microjuris.com/2019/04/16/credito-privilegiado-la-

corte-reconocio-el-privilegio-especial-de-primer-orden-al-credito-por-mala-praxis-por-el-parto-que-causo-una-
discapacidad-irreversible/
malpractice victim claim and a mortgage secured creditor in the insolvency proceeding of the
medical institution where the malpractice took place.

The grounds of the decision relied upon the belief that the scheme of preferences under the
Insolvency Act did not pass the test of compatibility with the international standards.

In compliance with the Convention on the Rights of the Child, the Convention on the Rights of
Persons with Disabilities and the American Convention on Human rights, the highest Court of the
Nation ruled that the involuntary tort creditor was in a vulnerable position which the Insolvency Act
failed to protect. Therefore, this Court declared that its provisions 239, 242, 242 and 243 of the
Insolvency Act were incompatible with the abovementioned international treaties and, thus, lacked
legal effect.

With the same majority (3 to 2) as in the case above – but having one of the Justices disqualified
himself from the proceeding and, been replaced by a Justice who held a different view in the matter
10– the Supreme Court declared the unconstitutionality of the scheme of preferences under the

Insolvency Act 24.522.

This time, the involuntary tort creditor was granted priority to collect credits out of the mortgaged
asset over of the secured creditor.

Conclusion

Argentina currently lacks consistent judicial appreciations when addressing human rights in
collision with the scheme of preferences under the Insolvency Act 24.522. In this scenario, it is not
feasible to predict how courts are going to rule and which claim is going to prevail in any given
insolvency proceeding.

All things considered, amending the Insolvency Act appears to be crucial to avoid disparities in
judicial decisions.

After all, contradictions in the Supreme Court precedents only lead to legal uncertainty and that
can never be good news for a country that is still struggling to develop.

Author:

Mauricio Boretto

Doctor of Legal Sciences (Universidad Nacional de Córdoba, Argentina).

Full professor Bankruptcy Law, Faculty of Law, Universidad Nacional de Cuyo

ESTUDIO JURÍDICO BORETTO - DELLA SAVIA & ASOCIADOS

mauricioboretto@gmail.com

10 The vote that overturned the previous landmark decision came from substitute justice, Graciela Medina.