The Reorganization Plan

The reorganization plan is a cornerstone of the Mexican Insolvency Law, representing the primary mechanism through which a distressed business can restructure its debts and potentially return to financial health. The law provides a comprehensive framework for the development, approval, and implementation of reorganization plans, balancing the interests of the debtor and its various creditors.

The Reorganization Stage

The primary objective of the reorganization stage, or conciliación, is to facilitate the creation of a consensual plan that will allow the debtor to continue operations while addressing its financial difficulties. This stage is designed to be completed within 185 calendar days, although two 90-day extensions can be granted under certain circumstances, up to a maximum of 365 days.

During this period, a court-appointed conciliator plays a crucial role in mediating between the debtor and its creditors to arrive at a mutually acceptable plan. The conciliator's involvement is designed to bring expertise and impartiality to the negotiation process, increasing the chances of reaching a viable agreement.

Terms of the Reorganization Plan

The statue provides considerable flexibility in terms of the economic substance of reorganization plans. While it includes precise rules about the contents of the restructuring agreement, it allows the parties significant latitude in determining the specific terms. This flexibility can encompass various restructuring measures, such as debt rescheduling, debt-to-equity conversions, asset sales, or operational restructuring.

Restructured loans may be maintained in their original currency or unit of account, rather than being converted to a single common currency, such as pesos. This provision can be particularly important for foreign currency debts or in cases where maintaining the original terms of certain debts is crucial to the reorganization strategy.

Acceptance

General: For a reorganization plan to become effective, it must meet specific approval thresholds. The plan must be accepted by the debtor and creditors representing more than 50 percent of the sum of [i] all of the debtor's allowed unsecured and subordinated claims (regardless whether they accepted the plan), plus [ii] all of the debtor's allowed secured or privileged claims that have accepted the plan. This voting structure is designed to ensure that the plan has broad support across different classes of creditors.

Intercompany Claims: Statutory provisions are aimed at preventing debtors and insiders from unilaterally enforcing plans to the detriment of bona fide third-party claim holders, protecting against potential abuse. If intercompany claims represent more than 25% of the relevant claims, the majority required to approve the plan should be computed disregarding these intercompany claims. However, the effectiveness of these protections is somewhat diluted by a provision that allows intercompany claims to be counted if the intercompany creditors do not oppose the terms of the plan as agreed with other recognized claim holders.

Court Sanction, Veto and Cram-down

Once a plan receives the necessary creditor approval, the conciliator submits it to the court for review and approval. The court's role is to ensure that the plan meets all statutory requirements and is not inconsistent with public policy. 

Unsecured holdout creditors representing more than 50% of all unsecured claims have the right to veto the plan for a set period, providing an additional safeguard against unfair treatment.

If approved by the court, the reorganization plan becomes binding on all parties, including dissenting creditors. This "cram-down" provision is crucial for the effectiveness of the reorganization process, as it prevents a minority of creditors from derailing a plan that has broad support.

Prepackaged Plans

The Mexican Insolvency Law also provides for an expedited process for "prepackaged" reorganization plans. In these cases, if the debtor files a petition signed by creditors representing a majority of its outstanding debt, along with a proposed plan, the process can be streamlined, bypassing the initial stage of the standard procedure.

Conclusions

The rules governing reorganization plans provide a flexible yet structured framework for addressing business financial distress. By allowing for creative solutions while ensuring broad creditor support and court oversight, these provisions aim to facilitate effective reorganizations that can preserve business value and protect creditor interests. While challenges remain, particularly in balancing the interests of different creditor groups, the overall framework provides a solid basis for achieving successful reorganizations in the Mexican business landscape.

The complete version of this article can be found here