The Interplay Between Different Stakeholders in Mexican Restructurings: Equity Versus Debt

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The Insolvency Law[2] does not explicitly provide for informal out-of-court restructurings prior to insolvency; however, out-of-court restructuring may be entered into with all or a portion of a debtor’s creditors. The creditors that do not enter into the restructuring plan, out-of-court, will not be bound by the restructuring terms, and the original terms and conditions agreed with the debtor will remain in force and effect. Out-of-court restructuring is not mandatory for dissenting stakeholders.

Since most concurso restructurings in Mexico are debtor-in-possession proceedings, the role of the company (debtor) is always very important. The approval of a reorganisation plan will always require the debtor’s approval, and in the equitisation of claims (debt into equity conversions), certain corporate acts would need to be agreed by existing shareholders for the equitisation to be effective and enforceable.

There is still a tendency in the courts to favour debtor protection. Courts constantly issue reliefs (stay) to protect the debtor, which allow a company to operate more easily during proceedings as a going concern with certain limitations and under certain supervision.

Court-appointed officials, such as examiners, conciliators and receivers, also have a key role as facilitators between the debtor, the creditors and the judge. They oversee the process, and are entitled to make proposals and authorise most of the company’s relevant transactions, which depends on the stage of the concurso process.

The role of the conciliator is important as a mediator between the creditors and debtor and has the capacity to make restructuring proposals and has the power to authorise certain transactions in addition to be in charge of the recognition of claims process during the stage of conciliación.

Creditors are relevant, too, as the consent of certain majority to the reorganisation plan is needed prior to its approval pursuant to the rules under the Concursos Law. A validly approved agreement binds all creditors. However, secured creditors that do not approve the agreement are not bound by it and may continue with the enforcement proceedings of their collateral, unless the plan provides for their full payment within the following 30 business days or the restructuring of their claims according to the plan approved by the secured creditors. If a company and its creditors reach a restructuring agreement during the conciliation stage, the company will pay its debts pursuant to the terms of the reorganisation plan and the insolvency proceeding (concurso) will be terminated.

Employees are given priority under the rules of insolvency proceedings. They are entitled to accrued and unpaid salaries and benefits as well as severance payments in case of termination of their employment relationship. These claims, and the enforcement of other labour and employment claims, are not subject to a concurso stay. Employees may amicably assist in the process or frustrate any attempted restructuring. Labour laws in Mexico are very protective and conservative, and employees cannot waive any accrued and unpaid benefits (including salary),[3] making it very difficult to amend any labour conditions, such as economic conditions, suspensions or termination of relationships, without the consent of a labour court.

The interplay between the different stakeholders in the implementation of a financial and legal agreement is dependent on various factors: the situation of the debtor, the calibre and experience of the parties involved, and the jurisdictions involved, among other things.

The process can be complex, owing to the number of possible variants and, thus, the diversity of alternatives that can be applied during a restructuring process, depending on the expectations of the parties and the sector involved. The interests of all stakeholders in a restructuring proceeding – which can include the shareholders, board, employees (including unions), authorities, regulators and creditors (government, suppliers, banks, etc.) – must be taken into account.

The ability to reach consensual decisions among creditors is critical in a successful negotiation since restructurings in Mexico, as mentioned above, are mostly debtor-in-possession proceedings.

One of the main issues to be addressed in a Mexican restructuring is to restore trust among stakeholders to achieve an agreement. Whether this is achieved will depend to a large extent on communication and the delivery of credible and regular information to creditors.

The control of many companies in Mexico is in the hands of a family, including in many cases public companies. This can result in some deficiencies in the administration of the company, which can bring about potential failures in internal controls. In many family-owned businesses, family members are on the board or in high-level official positions.

In certain cases concerning public service providers under a concession, the industry regulator has a key role in appointing the conciliator or receiver and also has the power of veto over the reorganisation plan.

Creditors with higher priority will be paid in full, and those with lower priority will be repaid (totally or partially) only if there are sufficient remaining funds. The current Insolvency Law classifies creditors in the following main categories or classes (and with the following rankings or preferences):

  • first-priority claims against the ‘estate’ (assets) of the debtor (créditos contra la masa), which include:
    • special labour claims (severance payments and unpaid accrued wages) protected under Section XXIII, Chapter A of Article 123 of the Constitution and applicable regulations, by increasing wages during the corre­sponding two years prior to the concurso judgment (formal commencement of the concurso procedure of the debtor) and owed payments to the Social Security Institute;
    • debt incurred for management of the estate of the debtor with the authorisation of the conciliator or the receiver, as the case may be, or or those dip-financing structured contracted directly by the conciliator;
    • debt (including debtor-in-possession financing) incurred to cover ordinary expenses for the safety and protection of the assets, and their repairs, conservation and management; and
    • debt incurred through judicial or extrajudicial acts for the benefit of the estate; provided, however, that under Article 225 of the Insolvency Law with respect to secured creditors, with mortgages or pledges, or creditors with special privileges,[4] the preference or privilege of the claims against the estate would not apply, except for the following claims:
      • the ‘special labour claims’ referred to above;
      • the litigation expenses incurred for the defence or recovery of goods or assets subject to the security interest of the secured claims or over those assets that are included as part of a ‘special privilege’; and
      • the expenses necessary for the repair, conservation and sale of those assets;
  • secured creditors (those with mortgages and pledges over assets of the debtor) and tax claims secured with a security in rem (up to the value of the guarantee), which are paid first with proceeds from the sale of mortgaged or pledged items. If the items have a value or a price in excess of the debt, any such excess or remaining value is directed to cover subsequent debt payments to other creditors. If the price does not cover the debt, mortgage or pledge, the corre­sponding creditor may participate, pro rata, as a common or unsecured creditor, to collect the remaining amount. In principle, assets transferred out of the estate in the form of true-sale vehicles (trust agreements) may be excluded from the estate (although such vehicles might be challenged if they have been structured as simple guarantee trusts rather than as true-sale mechanisms);
  • other tax claims and general labour claims;
  • common or unsecured creditors (trade creditors would usually rank as unsecured creditors and there are no particular mechanisms to secure their unpaid, pre-petition, debts by statute); and
  • subordinated creditors (intercompany claims).

Shareholders do not participate in concurso proceedings and, thus, they are not part of any class of creditors. However, if the concurso plan contemplates equitisation of claims, then in all cases a Shareholders’ Resolution will be required to effectuate the capital stock increase and the consequent dilution of existing shareholders. the latter have pre-emptive right to participate in capital increases a pro rata to their equity holdings.

Once a concurso judge declares the debtor’s bankruptcy or liquidation, shareholders would be liquidated only if there is any balance remaining after all creditors have been paid (either through a liquidation of the assets through public bids or by agreeing a reorganisation plan at the liquidation stage).

It is important to note that concurso provisions allow the debtor to incur unsecured or secured indebtedness (dip financing) in the ordinary course of business. If such credit is approved by the court or conciliator, as the case may be, it provides a priority claim or a lien to a lender on the debtor’s unencumbered assets or a second priority claim on encumbered assets (in the latter, with approval of the first-lien secured creditors).

Debtor-in-possession loans have a priority claim in the insolvency, except for certain labour, tax and secured claims.

Key suppliers and vendors required for the on going concern of the business of the debtor can continue to be paid during the concurso process.

Case study: the airline industry

Owing to its complex nature, the airline industry[5] is one business that serves as a good example of debtors dealing with a number of counterparties and stakeholders. It is a unique environment with various actors involved and with challenges that require treatment from different perspectives.

It is one of the most heavily regulated industries and any insolvency proceeding must rapidly assimilate and process a large amount of information and understanding of the business because of the sensitive timelines involved.

The airline industry is relevant to any government as it is a major contributor to the gross domestic product.

Likewise, asset preservation is key as aircraft depreciate rapidly if not operated and maintained regularly. Pilots are in high demand in the market and thousands of other jobs are supported by this industry.

Moreover, the very nature of the business means that the assets of the company may be located in more than one jurisdiction, and so the proceeding will turn into a cross-border insolvency.

The complexity of the industry is such that some jurisdictions have even developed, or are in the process of developing, legal provisions focused specifically on dealing with insolvencies in the airline sector.

Airline insolvencies differ from those of companies in other business sectors in a number of respects. Most of the matters are urgent and important and, therefore, have to be negotiated in parallel to running an airline as a going concern. In a recent case involving a publicly held Mexican airline, the main issues that had to be addressed simultaneously with making arrangements among stakeholders included the following:

  • creditors and claims:
    • negotiations, arrangements and agreements had to be made with lessors, financing entities (many of them with heavy collateral securing their contracts), key suppliers of services and products (food, appliances, spare parts, etc.), among other things; and
    • honouring essential contracts and terminating non-essential ones;
  • regulatory matters: one of the most relevant aspects as the airline industry is heavily regulated and regulations to which airlines are subject impose various limitations on the way they operate. Agreements had to be reached with the government and authorities with respect to licences, slots and traffic rights, taxes, jet fuel and airport charges, and antitrust matters; and
  • employees and unions: the practitioners in this field are very highly skilled and technical. It was urgent to take action and negotiate new labour conditions and compensation plans with pilots, flight assistants and ground crew unions and the termination of certain existing labour relationships.
  • DIP-financing: a DIP-financing was required to be obtained, requiring negotiations and formation of collateral packages.

Footnotes

[1] Alejandro Sainz, and Gabriela Avendaño are partners at Sainz Abogados, SC.

[2] Ley de Concursos Mercantiles (https://mexico.justia.com/federales/leyes/ley-de-concursos-mercantiles/ (in Spanish) (last accessed 8 June 2022)).

[3] Any waiver in such regard is considered to be null and void .

[4] Special privilege creditors are those that are qualified as such by law or that have a withholding right. A withholding right provides the possibility to withhold something that you do not own and that should be delivered to a third party. The person with a withholding right has the possession of an asset of a debtor and is authorised to have possession until the debtor fulfils his or her obligation.

[5] For further discussion about the airline industry, see Chapter 14.

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