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14 September 2018
Collateral or payment source trusts are often used in Mexico to segregate collateral from debtors. Many loans involve the transfer of assets to a collateral or payment-source trust, especially (but not exclusively) when dealing with cash-generating assets, such as long-term contracts or receivables. The rationale behind these transfers is to avoid the transferred asset being consolidated with the originator's estate.
On 2 September 2016 the federal collegiate circuit court published judicial guidance in the Mexican Judiciary Newspaper which could jeopardise these structures in the context of insolvency proceedings.(1) However, on 30 May 2018 new judicial guidance was issued to reinforce traditional considerations regarding trusts and their overall use in project financing.(2)
The court published an excerpt of its 30 May 2018 guidance, the relevant points of which are set out below. Although other courts may use this guidance, it is not binding.
In conclusion, when forming a collateral or payment source trust, any assets transferred to a trust will exclusively serve its purposes. Thus, in the event of an insolvency proceeding, they will not form part of the insolvency estate.
Transferring an asset to a trust will remove it from the reach of other creditor's to the extent that the asset will be exclusively destined to serve a specific debt through a collateral or payment source trust. In such cases, the asset will no longer be considered under the relevant debtor's estate (the insolvent entity's estate).
In light of this new resolution, collateral or payment source trusts are regaining benefits that they lost due to other unfortunate precedents. However, a binding precedent is still required to provide greater legal certainty in this regard.
For further information on this topic please contact Federico De Noriega, Maria Aldonza Sakar Almirante or Juan E Lizardi at Hogan Lovells BSTL by telephone (+52 55 5091 0000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Hogan Lovells website can be accessed at www.hoganlovells.com.
(1) See the collegiate circuit court's isolated precedent entitled "Trusts or assignment of rights. In the event of insolvency, future income derived from a private executory contract, for purposes of securing or paying an obligation, shall not continue in force since the administration and application of future assets shall be regulated by public policy rules that apply to the assignor or settlor". Décima Época, Record 2012476. Collegiate Circuit Courts. Isolated. Judicial Weekly of the Federation and its Gazette. Book 34, September 2016, Volume IV Civil Matter, Thesis I.3o.C.230 C (10a). Page 2736.
(2) See the collegiate circuit court's isolated precedent entitled "Collateral trusts: their effects in case of debtor's insolvency". Décima Época, Record 2017494. Collegiate Circuit Courts. Isolated. Judicial Weekly of the Federation and its Gazette. August 2018, Thesis: I.8o.C.57 C (10a).
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Federico De Noriega
Maria Aldonza Sakar Almirante
Juan E Lizardi