Mexican Legal Framework of Business Insolvency - White & Case

One of the risks that suppliers of New Money face is that in the case of failure of the
private workout and placement of the debtor en concurso, the privilege may be avoided.
Furthermore, subordination agreements may only be enforceable amongst creditors (that is,
not vis-à-vis the debtor), so the New Money provider will have to bear the additional risk of
creditor insolvency. These issues are further explored in Section 15.j in Part II.
4. Rescheduling Agreement
The end-product of a private workout is a rescheduling agreement. In broad terms, a
rescheduling agreement may be implemented in two forms: (1) by providing a New Money
facility in the rescheduled terms, to be used to repay the old debt (the “New Facility
Approach”); or (2) by changing the terms of the debt to conform to the rescheduled terms
(the “Novation Approach”). Each of these approaches has its advantages and disadvantages
from a legal perspective, as is discussed hereafter.
a. Settlement Risk
Under the New Facility Approach, money could get “trapped” in its route to payment
to creditors. Another creditor may be able to attach the money-in-transit or the debtor
may be violating a covenant with a nonparticipating creditor by incurring additional
indebtedness or using proceeds in a manner inconsistent with a prior agreement.
Under the Novation Approach, there is no exchange of money; therefore, the risk of
money being trapped or a covenant being violated is mitigated.
b. Validity of Original Claim
Under the New Facility Approach, the risk that the validity of the original claim will be
questioned is not eliminated but is, at least, mitigated. However, the invalidity of the
old claims would not, in itself, affect the validity of the new claim.
Under the Novation Approach, the original claim is still susceptible to challenge on
the grounds of validity, and its invalidity would impact the validity of the new claim
[CCF 2218].
White & Case
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