IFLR. Americas Regional Report Featuring contributions from:

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1 Americas Regional Report 2016 Featuring contributions from: Arias Fábrega & Fábrega (ARIFA) Banco de la Republica Colombia BLP Credicorp Capital Creel García-Cuéllar Aiza y Enriquez Guzmán Ariza Headrick Rizik Alvarez & Fernández Inter-Quimica Litwak & Partners IFLR international financial law review

2 A smoother process Mexico s insolvency law has undergone a transformation in the past 12 months, leading to a more modern procedural approach. Here the key changes are assessed Mainly motivated by the cram-downs imposed on creditors by related parties in the Vitro concurso mercantil proceedings and the protracted Mexicana de Aviación insolvency, in January 2014, several amendments to the Mexican Insolvency Law Ley de Concursos Mercantiles (Insolvency Law) were enacted. Those amendments were also designed to address long-standing concerns arising from inefficiencies and lack of certainty over the results of collection efforts and the foreclosure of collateral by lenders. Some of the main concepts contained in the amendments to the Insolvency Law, were: the limitation of rights of related parties of an insolvent entity to impose a reorganisation agreement on other creditors (see below); hard deadlines for the reorganisation of an insolvent company (that is, the mediation stage of the concurso mercantil procedure may not exceed Due to the new hard deadlines and the pre-pack concept, and based on certain recent cases, shorter concurso mercantil procedures should be expected a 185-day initial period, with two possible 90-day extensions); the Introduction of pre-pack proceedings in order to reduce the time to conclude insolvency proceedings with a valid reorganisation plan (see below); and, the approval of financing alternatives for the insolvent entity during the concurso mercantil stage. Under the amendments to the Insolvency Law, the concept of debtor-in-possession (DIP) financing was introduced. Under this concept, lenders will be able to receive super-priority status in insolvency proceedings, to the extent that the financing: (a) is granted with the advance authorisation of the court or mediator conciliador (Mediator), as further defined below; and, (b) does not contravene any resolutions issued by the court or any authorisation granted by the Mediator. Predicting the future Due to the new hard deadlines and the pre-pack concept, and based on certain recent cases (mainly in the housing sector), shorter concurso mercantil procedures should be expected. On the flow of DIP financing, our predictions are not very optimistic for the near future. Due to strict capital reserve requirements, exposure to certain particular industries and lack of collateral to be provided by the insolvent entity, lenders are taking a cautious approach. Facts and resolutions on future cases will be essential to measure the success of the amendments to the Insolvency Law, and to determine whether further new amendments to the Law will be required in the near future. 26 IFLR REPORT AMERICAS REGIONAL REPORT

3 Processes and procedures The Insolvency Law contemplates single proceedings for reorganisation (concurso mercantil) and bankruptcy (quiebra), with two successive stages: Mediation: The first stage, known as the mediation stage (conciliación), is compulsory and is designed to reorganise the insolvent entity (Mediation Stage). The Mediation Stage commences on the date the insolvency judgment is rendered and concludes 185 calendar days after the last date of publication of the insolvency judgment in the official Journal of the Federation (Diario Oficial de la Federación); provided, that if a reorganisation agreement with creditors is not executed before the expiry of that 185 day period: (i) the Mediation Stage may be extended by 90 calendar days at the request of the Mediator or with the consent of those recognised creditors creditors whose claims have been recognised by the court (Recognised Creditors) holding title to more than 50% of all aggregate recognised claims (claims recognised by the court); and, (ii) the term may be further extended for an additional 90 calendar days at the request of the insolvent entity and those Recognised Creditors holding title to at least 75% of all aggregate recognised claims, for a maximum term of 365 calendar days, whenever they consider that the execution of the reorganisation agreement is forthcoming. If a valid reorganisation agreement has not been reached upon the conclusion of these periods, the insolvent entity will be automatically declared in bankruptcy, without the need for a ruling (the judge will only have the authority to certify the termination of the term, but may not issue a ruling concerning the termination of the Mediation Stage). The corresponding insolvency court may terminate the Mediation Stage at any time if either the insolvent entity or its creditors are unwilling or unable to reach an agreement. Bankruptcy: The second stage, known as the bankruptcy stage (quiebra), provides for the bankruptcy and liquidation of the insolvent entity (Bankruptcy Stage). The Bankruptcy Stage, which provides for the bankruptcy and liquidation of the insolvent entity, may be declared by the insolvency court (a) at the request of the insolvent entity, or at the request of its creditors (but only to the extent that the insolvent entity agrees with the request); or, (b) if the Mediation Stage expires without the filing of an approved creditors agreement before the insolvency court; or, (c) at the request of the Mediator participating in the insolvency proceedings. As a general rule, a company may be declared insolvent (in concurso mercantil) when it has defaulted on its payment obligations to two or more creditors, and on the date of filing of the insolvency petition: its due obligations that have been delinquent for more than 30 days represent 35% or more of its total outstanding obligations, and/or, it does not have sufficient liquid assets (that is, cash and cash equivalents, such as bank deposits and other receivables with a maturity of no more than 90 days, or securities that may be sold within 30 days, in each case from the date of filing of the insolvency petition) to pay for at least 80% of its obligations that are due and payable on that date. Once the company has defaulted in its payment obligations to two or more creditors, it may file an insolvency petition when only one of the conditions described in items (a) or (b) above has been satisfied. By contrast, creditors of the company or the attorney general s office may also file an insolvency claim against the company, but only if it satisfies both such conditions. In addition, the recent amendments to the Insolvency Law now allow for a company to file an insolvency petition by declaring under oath that a state of insolvency under items (a) or (b) is imminent (that is, that the company will unavoidably meet any of the conditions described therein within the 90 calendar days following the insolvency request), without complying with those conditions at the time the filing is made. Some of the main characteristics of a concurso mercantil procedure are: A stay against creditors arises upon the issuance of the insolvency judgment. The Federal Institute of Insolvency Specialists (Instituto Federal de Especialistas de Concursos Mercantiles) (IFECOM) designates and appoints a Mediator (conciliador). The Mediator is in charge of facilitating negotiations between the insolvent entity and the creditors leading up to a reorganisation agreement with creditors and supervising the accounting books of the insolvent entity. The insolvent entity is usually managed by the existing management (unless the court approves a change in management). For fraudulent conveyance purposes, the insolvency judgment becomes effective retroactively 270 calendar days before the date of the applicable insolvency judgment (Effective Date). The Effective Date may be extended if: (i) the Mediator, the receiver síndico (Receiver) (as further defined below) or any creditor describes a series of acts that may be deemed fraudulent and therefore requests the extension, which may not The first stage, known as the mediation stage, is compulsory and is designed to reorganise the insolvent exceed three years; or, (ii) regarding acts involving related parties, the insolvency judgment will become effective 540 days before those acts. A stay against actions of creditors will only arise when the insolvency court issues a judicial resolution declaring a company in concurso mercantil. For such purposes, once the court receives an insolvency petition, the court will be required to instruct the IFECOM to appoint an inspector (visitador) to review the accounting and financial records of the company in order to determine whether the company is insolvent (based on the standards described above) and to issue an insolvency opinion that would enable the court to issue the judicial resolutions declaring the insolvency of the company. Implementing a reorganisation plan During the Mediation Stage, the insolvent company or any of the creditors may propose a reorganisation plan. In addition, recent amendments to the Insolvency Law now allow an insolvent entity to file an insolvency petition with a pre-agreed reorganisation plan, in which case the company may be declared insolvent by the court without an insolvency opinion from an inspector. The pre-agreed reorganisation plan would need to be signed by the debtor and those creditors representing at least a simple majority of all outstanding indebtedness (although this plan would need to comply with the approval requirements described in the following paragraph to become enforceable). In order for a reorganisation plan to become effective, it would need to be entered into by the insolvent company and those Recognised Creditors that represent more than 50% of the sum of: (i) the amount of all recognised claims in favour of all unsecured creditors and subordinated creditors of the insolvent entity; plus (ii) the amount of all recognised claims in favour of those secured (claims benefiting from a specific collateral or other form of statutory privilege or priority payment) Recognised Creditors that enter into the proposed reorganisation agreement. Notwithstanding, under the amendments to the Insolvency Law, if the recognised claims of subordinated creditors of the company (including certain unsecured related party claims) represent 25% or more of the total amount of all recognised claims, then IFLR REPORT AMERICAS REGIONAL REPORT

4 those subordinated claims will not be taken into account for the voting requirements described above. proceeds of which would be used to pay all the debtor s liabilities in the order of priority set out in the Insolvency Law. In the context of the amendment to the Insolvency Law, a subordinated creditor is defined as: (i) an unsecured creditor that has contractually agreed to subordinate its claim with respect to other unsecured creditors; and, (ii) certain related party unsecured creditors. Cram-downs A reorganisation agreement that complies with the voting requirements described above will only become binding on those unsecured Recognised Creditors that did not enter into the agreement to the extent that: any cramdown, standstill, or any combination imposed on the unsecured Recognised Creditors is at least equal to the lesser cram-down, longer standstill, or combination, of unsecured Recognised Creditors that did enter into the reorganisation agreement, and that represent 30% of the total amount of unsecured recognised claims. On the other hand, a reorganisation agreement will only become binding on secured recognised creditors (those whose claims are secured by a mortgage or a pledge) that actually sign the agreement. Other secured creditors that do not sign the agreement will not be bound by it, and may initiate or continue foreclosure of their respective collateral, unless: (a) the agreement provides for full payment of their respective claims, in which case those creditors would not be able to foreclose on their respective collateral; or, (b) the agreement provides for the payment of the value of the collateral, in which case the excess would be deemed to be an unsecured recognised claim within the insolvency proceedings. The second stage, known as the bankruptcy stage, provides for the bankruptcy and liquidation of the insolvent entity A reorganisation agreement that complies with the voting requirements described above may be vetoed by those unsecured Recognised Creditors that did not enter into the reorganisation agreement and that jointly represent more than 50% of the total amount of unsecured recognised claims. Unsecured creditors may not participate in the veto if the approved reorganisation agreement provides for the full payment of their respective claims. It is important to highlight that before the amendments to the Insolvency Law, all unsecured creditors, including related party creditors, were treated equally and had the same voting powers for purposes of imposing an agreement or exercising vetoes. Based on the cram-down experience of the Vitro case, the legislator created the concept of subordinated creditors described above. Selling distressed debtors assets During the Mediation Stage, a debtor (with the advance approval of the court) may sell all or a portion of its assets in accordance with the terms of a validly approved reorganisation plan (see above), including through a stalking-horse bid. Upon initiation of the Bankruptcy Stage, the insolvency court will instruct the IFECOM to designate and appoint a Receiver (síndico). The IFE- COM may designate the Mediator or a third party as the Receiver. The Receiver will be charged with the management of the bankrupted entity until its liquidation. The Receiver will carry out the liquidation of the insolvent entity through the sale of its assets, in accordance with the procedure set forth in the Insolvency Law (that is, by means of a public auction), the Recent amendments to the Insolvency Law incorporate duties of care and loyalty for directors and key officers of an insolvent entity, similar to those applicable to public companies in Mexico. A breach of those duties now carries express liabilities similar to those available for directors of public companies, which range from economic sanctions to potential criminal liabilities. Challenging a debtor s transactions Under the Insolvency Law, all actions of the insolvent entity to defraud its creditors will be deemed null and void (Fraudulent Conveyance). Transactions before the rendering of the insolvency judgment Any transaction consummated by the insolvent entity before the date of the insolvency judgment will be deemed fraudulent when the insolvent entity is knowingly defrauding its creditors, and the third party participating in any such transaction had actual knowledge of that fraudulent intent. If the transaction is gratuitous, the transaction will be deemed fraudulent even if the third party had no actual knowledge of the fraudulent intent. Transactions after the Effective Date Any transaction consummated by the insolvent entity at any time after the Effective Date of the insolvency judgment: (a) will be deemed fraudulent when, inter alia, (i) the insolvent entity receives no consideration, or the consideration received or paid by the insolvent entity, or the terms and conditions of the transaction, are materially different from the market standard; or, (ii) the insolvent entity makes a payment of indebtedness not yet due, or forgives the payment of receivables owed to it; and (b) will be presumed fraudulent, unless the interested third party proves that it was acting in good faith, when, (i) the insolvent entity granted or increased collateral that was not originally contemplated, and (ii) the insolvent entity makes any payments in-kind that were not originally contemplated. In addition, certain transactions among related parties will also be deemed fraudulent. Priority of claims The proceeds obtained from the liquidation of the assets of the insolvent entity will be applied by the receiver to make payments to creditors in the following order of priority: labour claims for salaries and severance for the calendar year immediately preceding the insolvency judgment; claims derived from financing incurred for the management of the estate of the insolvent entity or financing that is indispensable to maintain the ordinary operations of the company and the necessary liquidity during the insolvency proceedings, in each case, as approved by the Mediator and/or by the court; liabilities and obligations of the estate of the insolvent entity (that is, management costs, fees and expenses incurred after the insolvency judgment is issued); costs and expenses derived from judicial and extra-judicial proceedings for the benefit of the insolvency estate; amounts paid to secured creditors as described below; labour claims (different than those described in paragraph (i) above) and tax claims; claims of creditors that qualify as privileged under Mexican commercial laws (for example, creditors that are entitled to retain an asset until payment is made), but only to the extent of the value of the respective privilege; claims of unsecured creditors; and, claims of (a) subordinated creditors, and (b) creditors that are related parties of the insolvent company. In spite of the above, claims of secured creditors would be paid on a super-priority basis up to the amount of the respective collateral, and only the following claims would have priority over the amount of that collateral: 28 IFLR REPORT AMERICAS REGIONAL REPORT

5 labour claims for salaries and severance for the calendar year preceding the issuance of the insolvency judgment; litigation expenses for the defence or recovery of the secured assets; and, expenses relating to the repair, maintenance and disposition of the secured assets. The insolvency of financial institutions is also subject to the provisions of the Insolvency Law, and in the case of credit institutions, to the provisions of the Credit Institutions Law (Ley de Instituciones de Crédito). Cross-border issues The Insolvency Law sets forth special cross-border insolvency proceedings for foreign debtors (generally, provisions incorporated in the Practice Guide on Cross-Border Insolvency Cooperation prepared by the United Nations Commission on International Trade Law (UNCITRAL)). The foreign representative (representante extranjero, which is the individual or body even if designated for provisional purposes appointed in foreign proceedings to supervise the reorganisation or liquidation of the assets and business of an insolvent entity or to act as legal representative in the foreign proceedings) may request the insolvency court to acknowledge the relevant foreign insolvency proceedings. Recent amendments to the Insolvency Law incorporate duties of care and loyalty for directors and key officers of an insolvent entity Pedro Velasco Partner, Creel García-Cuéllar Aiza y Enriquez T: E: pedro.velasco@creel.mx Pedro Velasco is a partner with Creel García-Cuéllar Aiza y Enriquez, where he specialises in banking and finance, bankruptcy and restructurings and capital markets. He represents domestic and foreign financial institutions, as well as corporate borrowers, including private equity funds in secured and unsecured financings. Velasco s experience includes restructurings and workouts, acquisition financings, real estate financings, project finance and ship financings. In the bankruptcy and restructurings arena, he advises clients on all non-litigation aspects of corporate recovery, insolvency, restructurings and workouts. Velasco represents creditors and debtors on complex bankruptcy and out-of bankruptcy restructuring transactions and regulatory issues in non-judicial aspects of restructurings and workouts. Rodrigo Castelazo Partner, Creel García-Cuéllar Aiza y Enriquez T: E: rodrigo.castelazo@creel.mx Rodrigo Castelazo is a partner with Creel García-Cuéllar Aiza y Enriquez, in Mexico City, where he specialises in capital markets, secured lending, derivatives, securitisations, project finance, bankruptcy and restructurings. Castelazo has been very active advising distressed companies, participating in restructurings of credit facilities and debt instruments, and advising banks and other creditors in connection with workouts and liquidations. He also actively represents various domestic and foreign companies in several mortgage-backed securitisations, auto loan warehousing deals, CDOs, derivative transactions, and secured cross-border loans. Emilio Aarun Senior associate, Creel García-Cuéllar Aiza y Enriquez T: E: emilio.aarun@creel.mx Emilio Aarún is a senior associate at Creel García-Cuéllar Aiza y Enríquez in Mexico City, where he specialises in secured lending, structured finance, real estate finance, project finance, capital markets and regulatory aspects of financial law and workouts. Aarún has actively represented various Mexican and foreign companies and financial institutions in numerous secured and unsecured cross-border loan transactions, as well as in financial regulatory matters. IFLR REPORT AMERICAS REGIONAL REPORT