Trusts are the most commonly used special purpose vehicle (SPV) in Mexico. Most Mexican securitisations involve the use of a trust as the SPV. This has tax advantages, as the sale of the asset may be tax exempt, but – at the same time – will generally be considered a true sale.
Trusts are also used for secured loans. In addition, collateral or payment source trusts are often used in Mexican financings to segregate collateral from the debtor. Almost all project finance involves transferring assets – particularly cash-flow generating assets – to a trust in order for such trust to be the payment vehicle of the transaction. The rationale behind these transfers is to avoid consolidation of the transferred asset with the originator's estate.
However, a recent federal collegiate circuit court decision may have put these structures at risk.
On September 2 2016 a federal collegiate circuit court decision was published in the Mexican Judiciary Newspaper. The court resolved that transfers of future receivables under executory contracts are generally valid and should be upheld. However, these transfers may be clawed back in the context of an insolvency proceeding against the transferor – even outside the traditional 'look-up' period.
The federal court upheld an insolvency court decision ordering a debtor of receivables that had been properly transferred to a trust in order to avoid making payments to the trust and instead make them to the transferor. The rationale was that:
- insolvency law prescribes a specific priority of payments; and
- trusts should not be used to circumvent these rules.
The trust in this case was a collateral trust guaranteeing payments to a specific creditor. The court resolved that a trust and a private transaction cannot prevail over the public policy nature of insolvency law. Companies cannot commit future assets favouring specific creditors and in detriment of all creditors. Assets transferred to a trust may be clawed back by the insolvency estate in order to secure all creditors.
Is this decision binding on other courts?
The decision is not binding on other courts. In order for precedents to become binding, at least five uninterrupted precedents confirming the same criteria must be issued by:
- the Supreme Court of Justice by way of at least eight favourable votes;
- any chamber of the Supreme Court of Justice by way of at least four favourable votes; or
- a collegiate circuit court by way of a unanimous vote.
A precedent will also become binding if the Supreme Court of Justice or any of its chambers resolves a contradiction between two precedents.
This resolution adversely affects securitisations, which rely heavily on the non-consolidation of the transferred asset with the originator's estate. However, the asset transfer discussed by the federal collegiate circuit court did not seem to involve payment of a consideration from the trust to the transferor, as this always happens in securitisations. The court did not consider this in its analysis, but it could be argued as an essential fact to differentiate a securitisation from the facts of the case resolved by the court.
Impact on secured transactions and project finance
These transactions are more likely to be affected because the transfer of assets to a collateral or payment source trust does not involve consideration payable to the transferor. The facts of the case at hand seem to be similar to traditional project finance, in which a cash-flow generating contract is transferred to a trust and the trust becomes the source of payment.
One matter that the resolution has left unresolved is the status of creditors that are secured with the collateral or payment source trust after the insolvency estate claws back those assets. Will those creditors become unsecured creditors? If so, would it be better to structure the security package through traditional floating liens, mortgages and pledges? These questions still need to be analysed in light of this new resolution.
For further information on this topic please contact Federico de Noriega Olea or Maria Aldonza Sakar Almirante at Hogan Lovells BSTL by telephone (+52 55 5091 0000) or email ([email protected] or [email protected]). The Hogan Lovells website can be accessed at www.hoganlovells.com.
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