Insolvency law does not explicitly provide for informal out-of-court restructurings prior to insolvency; however, an amicable restructuring can be concluded with all or part of a debtor’s creditors. Creditors who do not participate in the restructuring plan will not be bound by the terms of the restructuring, and the terms and conditions originally agreed with the debtor will remain in effect. Out-of-court restructuring is not mandatory for dissident stakeholders.
Since most restructurings in Mexico are debtor in possession proceedings, the role of the company is always very important. The approval of a plan of reorganization will always require the approval of the debtor and, within the framework of the assignment in debt capital, certain corporate acts will have to be approved by the existing shareholders.
The courts still tend to favor the protection of the debtor. Courts consistently issue relief to protect the debtor, making it easier for a business to operate during the proceedings.
Court-appointed officials, such as examiners, conciliators and receivers, also play a key role as mediators between debtor, creditors and the judge. They oversee the process, are empowered to make proposals and authorize most relevant business transactions.
The conciliator is important as a mediator between creditors and debtor and has the ability to make proposals and even authorize certain transactions.
Creditors are also relevant, as majority consent to the reorganization plan is required prior to its approval under the rules of insolvency law. A validly approved agreement binds all unsecured creditors. Secured creditors who do not approve of the agreement are not bound by it and may proceed to enforce their security unless the plan provides for their payment in full within 30 business days. If a company and its creditors reach a restructuring agreement during the conciliation phase, the company will pay its debts in accordance with the reorganization plan and the insolvency procedure (competition) will be terminated.
Employees have priority under the rules of insolvency proceedings. They are entitled to salary and benefits as well as severance pay. These claims, and the enforcement of other labor and employment claims, are not subject to competition stay. Employees can amicably help in the process or thwart any attempt at restructuring. Labor laws in Mexico are very protective and conservative, and employees cannot waive accrued and unpaid benefits (including salary), which makes it very difficult to change working conditions, such as economic conditions, suspensions or termination of relations, without the consent of a labor court.
The interaction between the different stakeholders in the implementation of a financial and legal agreement depends on various factors: the situation of the debtor, the quality and experience of the parties involved, and the jurisdictions involved, among others.
The process can be complex, due to the number of possible variants and therefore the diversity of alternatives that can be applied during a restructuring process, depending on the expectations of the parties and the sector concerned. The interests of all stakeholders in a restructuring procedure – which may include shareholders, the board of directors, employees (including trade unions), authorities, regulators and creditors (government, suppliers, banks, etc.) .) – must be taken into account.
The ability to reach consensual decisions among creditors is critical to successful negotiations since restructurings in Mexico, as mentioned above, are primarily debtor in possession proceedings.
One of the main problems to solve in a Mexican restructuring is to restore confidence between the stakeholders to reach an agreement. Achieving this objective will depend to a large extent on the communication and provision of credible and regular information to creditors.
Control of many listed companies in Mexico is in the hands of one family. This can lead to manipulation by the administration of the company, which can lead to failures in internal controls. In many family businesses, family members sit on the board of directors or hold high-level official positions.
In some cases involving utility providers, the sector regulator has a key role in appointing the conciliator or receiver and also has veto power over the reorganization plan.
Creditors with higher priority will be paid in full, and those with lower priority will only be rewarded if sufficient funds remain. Current insolvency law classifies creditors into the following main categories or classes (and with the following rankings or preferences):
- first-ranking claims on the “estate” (the assets) of the debtor (creditos against the masa), which includes:
- special labor claims (severance pay and unpaid accrued wages) under Section XXIII, Chapter A of Article 123 of the Constitution and applicable regulations, increasing wages during the corresponding two years prior to the competition judgment (formal opening of the competition debtor’s procedure);
- debts contracted for the management of the debtor’s assets with the authorization of the conciliator or the sequestrator, as the case may be, or those contracted directly by the conciliator;
- debt (including debtor-in-possession financing) incurred to cover ordinary expenses for the security and protection of assets, as well as their repairs, preservation and management; and
- debt contracted by judicial or extrajudicial acts for the benefit of the estate; provided, however, that under Section 225 of the Insolvency Act with respect to secured creditors, holders of mortgages or pledges, or creditors with special privileges, the preference or lien of claims on the estate would not apply, with the exception of the following claims:
- the “special labor requests” mentioned above;
- legal costs incurred in the defense or recovery of property or assets subject to the security of the secured debts or on the assets forming part of a “special lien”; and
- the expenses necessary for the repair, conservation and sale of these goods;
- secured creditors (those who have mortgages and pledges over the debtor’s assets) and tax claims secured by collateral in rem (up to the value of the guarantee), which are paid in priority with the proceeds of the sale of the mortgaged or pledged goods. If the items have a value or price greater than the debt, any excess or remaining value is intended to cover subsequent payments of the debt to other creditors. If the price does not cover the claim, the mortgage or the pledge, the corresponding creditor may participate, on a pro rata basis, as common or unsecured creditor, in the recovery of the remainder. In principle, assets transferred out of the estate in the form of bona fide sales vehicles (trust contracts) should be excluded from the estate (although such vehicles may be challenged if they have been structured as mere collateral trusts rather as true sales mechanisms);
- other tax receivables and general social receivables;
- common or unsecured creditors (commercial creditors would generally be classified as unsecured creditors and there are no particular mechanisms to secure their unpaid debts by law); and
- subordinated creditors (reciprocal claims).
Once a judge declares bankruptcy or liquidation of the debtor, shareholders would only be liquidated if a balance remains after all creditors have been paid (either through a liquidation of assets through public offerings, or by agreeing a reorganization plan at the liquidation stage).
It is important to note that competition provisions allow the debtor to incur unsecured or secured debt in the normal course of business. If this credit is approved by the court or the conciliator, as the case may be, it gives the lender a priority claim or a lien on the unencumbered assets of the debtor or a second claim on the encumbered assets.
Loans to debtors in possession have a priority right in the event of insolvency, except for certain labour, tax and collateral rights.
Case study: the airline industry
Due to its complex nature, the airline industry is a 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 challenges that require treatment from different angles.
It is one of the most regulated sectors and any insolvency proceeding must quickly absorb and process a large amount of information and understanding of the business due to the sensitive timeframes involved.
The airline industry is relevant to any government as it is a major contributor to gross domestic product.
Likewise, asset preservation is essential because aircraft depreciate quickly if they are 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 thus 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 specifically focused on dealing with airline insolvencies.
Airline insolvencies differ from those of companies in other industries in several respects. Most matters are urgent and important and therefore need to be negotiated alongside running an airline as a going concern. In a recent case involving a Mexican airline, the main issues that needed to be resolved along with the conclusion of arrangements between the stakeholders were:
- creditors and receivables:
- negotiations, arrangements and agreements had to be made with donors, financing entities (many with heavy guarantees guaranteeing their contracts), suppliers of services and products (food, appliances, spare parts, etc.). ), among others; and
- securing essential contracts and terminating non-essential contracts;
- regulatory issues: one of the most relevant aspects as the airline industry is highly regulated and the regulations to which airlines are subject impose various limitations on their mode of operation. Agreements had to be reached with the government and authorities regarding licenses, slots and traffic rights, taxes, fuel and airport charges, and antitrust matters; and
- employees and unions: practitioners in this field are very competent and technical. There was an urgent need to act and negotiate new working conditions and compensation plans with the unions of pilots, flight attendants and ground staff and the severing of some existing working relationships.