I. NECESSITY OF POST PETITION FINANCING & EXIT FINANCING
A. Labor Aspects.
It is well known that in Mexico -as in many other countries- the general trend is to provide precedence to the payment of labor credits.
That is to say, in the event that companies become insolvent, this goes to extremes, as considering that non-labor creditors may enter into agreements with companies subject to Concurso Mercantil-1 , in order to diminish or delay the payment of debts, aimed at preserving the company. Workers, however, can do nothing to save their work source. Applicable laws make it mandatory for them to continue all legal actions. It may be that, in an economic bonanza situation, those workers could -and should- exercise all their rights, but in an economic distressful situation this will not be of assistance, but will serve, instead, to destroy their work and income sources-2.
It would be evidently beneficial for the preservation of companies–and of the work sources they represent- if the workers in a company in Concurso Mercantil could enter into agreements with such company, just as any other creditor, and include the productive workforce in the business plan prepared so that said company re-enters the market, manufactures products and sells them. It could even be specified in such an agreement that, once the company re-starts producing, selling and earning the income so obtained would be applied first to pay labor creditors.
Current Mexican laws would not allow such a situation. On the contrary, it fosters that Mexican workers, individually or in group (such as unions), try to extract the maximum possible amount, even if to the detriment of other workers.
It is noticeable that amounts payable to non-labor creditors are classified per the provisions in the Ley de Concursos Mercantiles (also referred to herein as the LCM) and are to be paid pro rata among those of the same class3. However, in the event of labor credits, the Law makes no such
1 A Concurso Mercantil is a legal proceeding in Mexico for companies in distress. Somewhat similar to, but not comparable with, proceedings under Chapter 11 or Chapter 7 of the Uniform Commercial Code of the U.S.
2 In fact, under Art. 152 of the Ley de Concursos Mercantiles the entering into agreements among companies in bankruptcy and labor are indeed permitted, but under very limited terms. Article 152.- The Merchant may enter into agreements with its workers, provided that the terms of the obligations of said Merchant are not worsened…. Nevertheless under Art. 156 labor creditors are prohibited from entering into agreements regarding salaries and indemnifications corresponding to the latest year.
distinction, so that, if a worker becomes the creditor of a substantial amount, he/she may judicially attach all the assets of a company, foreclose them and be repaid with the amount obtained from the court-ordered-sale, even if after such a process there are no more assets -nor money- for other labor creditors.
Considering the foregoing, the company in Concurso Mercantil may consider the possibility of entering into an agreement with its labor creditors, on condition that such an agreement does not include salaries and indemnifications corresponding to the latest year, as indicated in the Art. 156 mentioned above. In other countries it is possible for a company to obtain financing after being adjudicated in insolvency, which would be designated as post-petition financings, granted after such company was judicially adjudicated in Concurso Mercantil.
In essence, what is sought with such financings is to reach a double goal: Short term, provide liquidity to the company during the processing of its Concurso Mercantil proceedings, to keep it open and not having to close it, and in the medium and long term, permit such company to exit its bankruptcy situation and reinstate it to working status.
In Mexico the situation is different. The LCM permits a company subject to Concurso Mercantil to receive financings, but only to maintain liquidity during the Concurso Mercantil legal procedures, and, therefore, the repayment of these financings must be made per the order of payments provided for in Art. 224 of said Law, even if they were granted after the Concurso Mercantil was declared. The result is that there is no incentive for possible financers, thus making an adequate financial status more and more difficult to attain.
The are a few isolated cases within Mexican legal provisions that seem to make the reader conclude that it was taken into account in the law-making process that there are situations that may be deemed to be exceptions to the general rule, destined to reach a greater good. Such is the case of the fourth paragraph of Article 367 of the General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito).
It is established in such article that when collateralized assets were acquired with the proceeds of a loan secured by a non-possessory pledge (“prenda sin transmisión de posesión”) the proceeds obtained by selling such asset swill be applied first to the payment of principal and interest owed to the creditor, even before labor credits. Now, what could have motivated the lawmakers to reform the law mentioned above and thus contravene the general trend? The only possible answer is that said lawmaker may have taken into account–correctly, we believe – that it is convenient for all to facilitate companies to acquire machinery and equipment, most of which machinery and equipment will be operated by employees, and which will modernize and expand production lines.
B. Bankruptcy Considerations.
As it has been mentioned before, Article 37, Section VIII, of the Ley de Concursos Mercantiles, as amended as of January 10, 2014,
“…From the request for commercial bankruptcy or, once admitted for processing, the Merchant may request the judge's authorization for the immediate contracting of credits essential to maintain the ordinary operation of the company and the necessary liquidity during the processing of the commercial bankruptcy. For the processing of the aforementioned credits, the judge may authorize the constitution of guarantees that are appropriate, if requested by the Merchant.
Once the Merchant's request has been presented and given the urgency and need for financing, the judge, following the opinion of the visitor, will decide regarding the authorization of financing with the aforementioned objective, proceeding to dictate the guidelines in which the respective credit and its payment will be authorized. ordinary during the commercial bankruptcy, taking into consideration its preferential priority in the terms of article 224 of the Law….”
In turn the art. 224 points out, where appropriate:
“Article 224.- They are credits against the Estate and will be paid in the order indicated and prior to any of those referred to in article 217 of this Law:
I. Those referred to in section XXIII, section A, of article 123 of the Constitution and its regulatory provisions;
II. Those required in order to manage the bankruptcy estate, incurred into by the Merchant with the authorization of the conciliador or síndico, as the case may be or, if applicable, the credits indispensable to maintain ordinary operations and the liquidity required during the processing of the concurso mercantil. …
The partial transcription above clearly indicates that the intention is to regulate financings provided to companies in Concurso Mercantil, but not so that they can emerge from such a distressed situation, but to maintain ordinary operations and liquidity during the processing of the Concurso Mercantil.
The is nothing to say about such financings/credits, save that in practice, it would be difficult to find someone interested in financing a company whose insolvency is well known, such as company in Concurso Mercantil, exclusively to maintain operations and liquidity during the Concurso Mercantil proceedings, and, despite the risk assumed, also expect to be repaid after paying operation expenses, fees payable to conciliador and/or síndico, and labor debts, and then only with the assets then remaining in the bankruptcy estate (if any) at the time payment is made to creditors, something that may occur after many years.
Very much in line with what has been mentioned about the possibility of rehabilitating a company subject to Concurso Mercantil and bring it out of insolvency is a leitmotif that seem to have been extensively studied in other countries, but not in México, and it is the financing of companies in distress.
Much has been said about the possibility of financing companies in distress or under bankruptcy proceedings. This concept seems to have become very popular in legal systems such as the United States, where creditors that have ventured to finance insolvent borrowers have found that, in many cases, the risk assumed has become good business, since they have the possibility of collecting before all other creditors, and generally under conditions that are advantageous for the creditor.
In general, legal systems acknowledge that creditors of a company in bankruptcy must be paid in an orderly fashion, and that such sequence of payments not necessarily follows the general principle of prior in tempore, potior in iure4, considering that such general principle is applicable under normal conditions, and when a company has been subject to bankruptcy proceedings its situation has changed.
It is really unattractive to think of a loan to maintain liquidity during the Concurso Mercantil proceedings, but that in the end will not solve the problem. On the contrary, it is quite interesting to think of loans destined for companies to get out of the Concurso Mercantil or bankruptcy situation and be repaid prior to all other creditors.
Firstly, if a lender takes the risk of financing a company undergoing bankruptcy proceedings, a company that other lenders and creditors no longer wish to finance, it deserves an advantage, which would be to collect before others.
Secondly, at this time financing companies undergoing bankruptcy proceedings may be useful only when reviewing situations that most probably will result in an agreement between the bankrupt company and its creditors, so there is an interest in preserving the company until it has reached an agreement, which would be consistent with the provisions in the Ley de Concursos Mercantiles, which call for the preservation of companies and of those that have business with them.
Therefore, financing a company to rehabilitate it and make it get out of Concurso Mercantil seems to have an objective more attuned to the situation of the company, and would signify an attractive risk for the lender, considering that such lender would grant a loan at a difficult moment for the company, financially speaking, and thus, it should be rewarded by seniority in the order of payments.
4 “first in time has a better right”
We consider it well worth it to analyze what happens in other countries, such as the United States of America, that, although it has a legal system that is different from ours, it shows aspects that are worth being analyzed, with the idea of adapting them to the Mexican legal system.
Of course, the United States’ legal system is not the only one that has regulated post-bankruptcy financings. In Spain, for example, the Real Decreto-ley 4/2014, de 7 de marzo was published in 2014, and under it urgent steps are taken regarding refinancing and restructuring a company’s debts.
Since no lender in its right mind would accept to lend money to a company that is already under bankruptcy proceedings, which shows it is notoriously insolvent, and since Mexican credit institutions would be regulatorily obligated to maintain reserves in an amount equal to 100% of each such loan, finding solutions is required.
Although it could be said that the situation has changed, at least from the strictly regulatory point of view, since regulators of the Mexican financial system amended certain accounting rules, applicable to financing entities. Before financing such entities must calculate the probability of a default, exposure to risk and other aspect. The truth is that post bankruptcy lending has not been encouraged.
Back to the U.S. legal system. As far as we know, financing insolvent companies has existed in the United States for a long time. It is known as DIP5 loans, DIP financing, or post-petition financing.
We could consider financings subsequent to the adjudication in Concurso Mercantil, destined to make companies re-emerge, and that these financings are granted seniority in payment. For example, if in the United States an insolvent debtor can evidence that it could not obtain traditional financing, the bankruptcy court entertaining the case may authorize that such debtor grants in rem security interests (that are senior to any other creditor existing prior to the Concurso Mercantil) and are even senior to administrative expenses and labor debts.
In México this would imply that the post- Concurso Mercantil lender would have the right (and the obligation) of recording its credit with the relevant Public Registry, and to pay all recording fees that may be applicable. The amount so resulting, paid by a lender/creditor, could be included as a part of the indebtedness of insolvent borrower.
What any lender under such circumstances would seek is to make sure that such lender has a legally acknowledged seniority, which is obtained with a DIP Financing, since such creditors collect first.
5 DIP: Debtor in Possession
On the other hand, as in all financings, at the beginning several commission fees are to be paid (opening, administration, management, etc.), even more if financings are granted by groups of banks, commonly referred to as syndicated loans. The payment of commission fees could also be allowed, considering such payments as expenses of the Concurso Mercantil.
Since at the beginning of the Concurso Mercantil it is more than probable that the company in bankruptcy has in rem secured creditors (loans secured by a mortgage, or a pledge), it is generally required to obtain the prior consent of such creditors, so that the bankrupt company may grant preferred collateral, so that already existing in rem security interests be subordinated to the payment of the post Concurso Mercantil debt.
Considering that the first step would be to know who the in rem secured creditors are, in México this would imply that we would need that the relevant court issues a judicial award concerning the acknowledgment, classification and order of payments (sentencia de reconocimiento, graduación y prelación de créditos), and that such judicial award has become unappealable, and since under normal circumstances financing is required immediately, and the judicial award concerning the acknowledgment, classification and order of payments make take months or years to be attained, under our legal system the only possible solution would be that post Concurso Mercantil creditors would have seniority in payment immediately and by law, without requiring any consent, and such preference in payment would only be lost if it is evidenced in court that resources were funneled elsewhere, or if funds were used for fraudulent purposes, more or less as it is now expressed in Article of the LCM.
The time period that may elapse prior to having an unappealable judicial award concerning the acknowledgment, classification and order of payments impairs, for all practical purposes, the entering into an agreement between the company in bankruptcy and its creditors, in which agreement the sequence of payments is to be different than as provided in the LCM.
In fact, the last paragraph of Article 153 of the LCM provides for the possibility for an Acknowledged Creditor (Acreedor Reconocido) accepts conditions that are different from what is provided in the LCM. Seems a solution, but is it is not. At such time said creditor must have qualified as an Acknowledged Creditor. The alternative to avoid the above would be a Concurso Mercantil with a priorly agreed to restructure plan, as referred to in Articles 339 et seq. of the LCM. Such an agreement would have to be signed by creditors representing more than 50% of the total indebtedness.
II. PRE-PETITION RE-FINANCINGS
During the first years of the 80’s decade, economic hardships prevailing at the time made creditors realize that it was much more productive to restructure debts than trying to collect them.
Those circumstances have not changed, in the sense that it will always (or almost always) be preferable for creditors to negotiate a restructure or a refinancing, prior to a Concurso Mercantil or during such proceeding, that produces for them some seniority in payment, or simply to provide to their debtor payment conditions that such debtor may comply with, considering its economic/financial situation.
As has been mentioned before here, the LCM clearly needs to permit and regulate post-petition financings, as is permitted and regulated under other legal systems.
Of course, by the time a company (or its creditors) files a petition for a Concurso Mercantil said company already has a number of creditors that are very annoyed and without collecting, thus more interested in collecting something than in granting reductions.
The evident alternative is the Concurso Mercantil with a priorly agreed restructure plan, also known as prearranged Concursos.
Prearranged Concursos have been used mainly by large companies, but nothing prevents a medium-sized company facing financial problems from restructuring debts by means of a prearranged Concurso, which will permit it to enter into agreements with creditors with whom it maintains a relatively good relationship, and forces minority creditors to agree under the same terms and conditions.
Success will reside in preparing an effective business plan, also known as a payment plan. If the business plan is good creditors will accept it more easily, even if it implies, as indicated in Article 153 in fine of the LCM, that creditors accept conditions different from those originally agreed.
From the business point of view, particular attention must be given to the quality of the collateral, cash flow, rights of third parties and the “ambiance” during the process. Having said that, once a very thorough and comprehensive financial analysis is carried out, it could be possible to conclude that some post-petition financings, or that may be the subject matter of a prearranged Concurso, represent an interesting possibility prior to the Concurso Mercantil, during the legal proceedings related thereto, and even after it is concluded, if aimed at the preservation of borrowers.
There are many techniques to analyze a company and determine if it may qualify for a loan, considering and underscoring the fact that success of a post-petition financing (and of any other financing, actually) does not reside in the value of the security interests, but in the liquidity and cash flow of a borrower, and its ability to generate sufficient resources so as to subsist and pay its debts pursuant in an orderly fashion. Not exactly an innovation, but solid ground on which to rebuild a relationship.
Financing is an integral part of any restructure. For obvious reasons, it will be much easier to be obtained when the company is not in Concurso Mercantil at least not yet, and, as we know, some companies have had limited success in prearranged Concursos. Moreover, since amendments made to the LCM in 2014, a company may seek financing from the moment it is adjudicated in Concurso Mercantil, although at such date there will not be many practical reasons for a lender to agree to finance or refinance a company already in Concurso Mercantil, and this only to maintain liquidity during the Concurso, reason why requesting such financing must be thoroughly thought beforehand.
There are different financing strategies, that will depend on the liquidity, cash flow and viability of the company. The first step will always be to maximize liquidity and provide some time, if it is deemed that this would provide viability to the company, while reducing expenses.
As has been mentioned, if a debtor calls its creditors before it is adjudicated in Concurso Mercantil and proposes a restructure, providing a sound business plan, that such debtor has prepared already, possibly with a refinancing, said creditors will be much more inclined to accept such terms. If one or more minority creditors are reluctant to join, the transaction could be handled as a prearranged Concurso, so as to force them to participate.
The members of the Firm have the expertise and the experience to provide effective legal advisory services in these matters, once the specific situation is analyzed.
EN 
ES