Legal corporate and financial considerations in Mexico: Restructuring - Part I

The purpose of this document is to analyze the scheme of a corporate or financial restructuring before a possible declaration of insolvency in Mexico, considering the provisions of the Mexican Commercial Insolvency Law (Ley de Concursos Mercantiles) (the "CIL").

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Before undertaking any corporate or financial restructuring in the context of the possible commencement of an insolvency proceeding, the risk should be considered that such restructuring can be considered as a fraud by the creditors in terms of the provisions of the CIL.

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For such purposes, in a financial restructuring it should analyzed and determined if the increase in the amount of credit exposure could mitigate any risk.

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Pursuant to the CIL, acts in fraud of creditors are those that the merchant has made before the declaration of insolvency, knowingly defrauding the creditors if the third party who intervened in the act was aware of this fraud. It should be noted that these acts will be ineffective against the portion of the assets of the merchant declared in insolvency integrated by their assets and rights, on which the creditors that are recognized and those who are entitled to make their credits.

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In accordance with the CIL, creditors frauds are the following, provided that they have been carried out from the date of retroactivity – calendar day two hundred and seventy immediately prior to the date of the insolvency declaration of bankruptcy declaration -:

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a.?? Acts free of charge;

b.?? Acts and disposals in which the merchant pays a notoriously superior consideration or receives a consideration less than the benefit of its counterparty;

c.??? Transactions carried out by the merchant in which conditions or terms have been agreed that significantly deviate from the prevailing conditions in the market in which they were entered into, at the date of their conclusion, or from commercial uses or practices;

d.?? Debt referrals made by the merchant;

e.?? Payments of unmatured obligations made by the merchant; and

f.???? Discounts that the merchant makes from his own effects after the retroactivity date, which will be considered as an advance payment.

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Additionally, they are presumed to be acts of creditors' fraud, if they are carried out as of the date of retroactive payment and unless the interested party proves his good faith: (1) the granting of guarantees or an increase of the valid ones, when the original obligation did not contemplate such guarantee or increase, and (2) the payments of debts made in kind, when this is different from the originally agreed or, when the agreed consideration has been in cash.

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Therefore, before carrying out any corporate or financial restructuring, such restructure must be analyzed to consider if it fits or not into any of the aforementioned cases of fraud of creditors and consider that such restructuring must be carried out in market terms and avoid damaging any third party.

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Notwithstanding the foregoing, it is important to mention that there will always be a risk that, depending on the terms and conditions of the corporate or financial restructuring, a third party alleges that the conclusion of such restructuring can be presumed as an act in fraud of creditors, which also makes relevant the credit graduation, since it will depend on the judge's decision for the priority of payments.