Aviation Finance & Leasing 2021 Comparisons

Last Updated July 30, 2021

Law and Practice

Authors



Canales, Dávila, De La Paz, Enríquez, Sáenz, Leal, S.C. (Canales) is a boutique law and financial advisory firm with a solid reputation in Mexico. Since 2001, its service has positioned it as a prestigious law firm, committed to the continuing evolution of its practice. Its team is focused on corporate and transactional practice, advising clients in their day-to-day business, as well as participating in the design, structuring, implementation and start-up of their projects. In 2018, to meet the needs of its clients, the firm decided to integrate a financial practice as part of its services, adding a highly qualified team of financial advisers who are well regarded in the market. With offices in Monterrey and Mexico City, Canales is strategically located to continue to serve the needs of its domestic and foreign clients.

Only aircraft owned or in the possession of Mexican persons (by virtue of a lease or any other instrument conveying possession thereof), and aircraft owned by foreign persons for the exclusive provisioning of private non-commercial air transportation, can be registered in Mexico.

That said, the sale of aircraft registered in Mexico and owned by non-Mexican tax residents is not subject to VAT, regardless of the type of aircraft. However, if the aircraft being sold is registered in Mexico and has been imported on a temporary basis by a concession or permit-holder (pursuant to Section V, paragraph b) of Article 106 of the Customs Law), the aircraft must first be exported from Mexico in the same condition in which it was originally imported.

The sale of aircraft registered in Mexico and owned by Mexican tax residents is subject to the general 16% VAT, regardless of the type of aircraft. Furthermore, courts have resolved that if the seller is a Mexican tax resident (which definition may include certain foreign entities with an establishment in Mexico), VAT is due and payable, even if the transaction (understood as transfer of title and physical transfer of the aircraft) occurs outside of Mexican territory.

No stamp, registration or other taxes, duties, assessments, or governmental charges of whatsoever nature are payable in Mexico solely upon, or in connection with, the execution and delivery of aircraft or engine-sale agreements in Mexico.

It is advisable to notarise and translate into Spanish sale agreements entered into with domestic parties in Mexico. While signature and delivery of a sale agreement by a duly authorised officer constitutes legal, valid, binding and enforceable obligations of the party thereto, in the event that any legal proceedings are brought before the Mexican courts, a Spanish translation of the documents required in those proceedings, prepared by a court-approved translator, will be required and, furthermore, will have to be approved by the court, after the defendant has been given an opportunity to be heard, with respect to the accuracy of the translation, and proceedings will thereafter be based upon the translated documents.

For the purposes of the Income Tax Law, title to an aircraft and/or engine is deemed to have been transferred whenever any of the following occurs:

  • an invoice is issued;
  • the asset is shipped or delivered; or
  • when the agreed purchase price is due and payable, either in part or in whole.

Transfer of title to an aircraft or engine physically delivered in Mexico is recognised if the bill of sale is governed by English or New York law. For the purposes of registering such an aircraft or engine or a transfer of ownership, the Federal Civil Aviation Agency (Agencia Federal de Aviación Civil or AFAC) will require an original or certified copy of a bill of sale or document evidencing transfer of ownership. Furthermore, if that document was executed abroad, it must be notarised, apostilled, and translated into Spanish by a court-approved translator if executed in a language other than Spanish. Signatures of domestic individuals or entities, regardless of the language of the document to which they pertain, must be notarised.

While signature and delivery of a bill of sale by a duly authorised officer constitutes legal, valid, binding and enforceable obligations of the party thereto, in the event that any legal proceedings are brought before the Mexican courts, a Spanish translation of the documents required in those proceedings, prepared by a court-approved translator, will be required and, furthermore, will have to be approved by the court after the defendant has been given an opportunity to be heard with respect to the accuracy of the translation, and proceedings will thereafter be based upon the translated documents.

Bills of sale do not need to be registered or filed and are not subject to any consent from any government entity. Likewise, there are no government applications or consents required as a prerequisite to the execution and delivery of a bill of sale in relation to an aircraft or engine registered in Mexico. If such a bill of sale relates to an aircraft registered in Mexico, or to an aircraft that is intended to be registered in Mexico, the new owner shall file the following with the Mexican Aeronautic Registry (all documents executed abroad must be notarised, apostilled and translated into Spanish by a court-approved translator):

  • a registration application, executed by the owner or its duly appointed attorney-in-fact;
  • a power of attorney of the individual filing the registration application;
  • an original or certified copy of the bill of sale;
  • an original or certified copy of the aircraft’s certificate of registration; and
  • a payment of statutory fees.

Generally speaking, there are no taxes or duties payable for executing and/or delivering a bill of sale or consummating the sale of the ownership interest in an entity that owns an aircraft or engine, including where title to an aircraft or engine is transferred, while it is:

  • located in Mexico;
  • over international waters; or
  • in transit to/from Mexico, provided that the transferor and transferee are not Mexican tax residents (which definition may include certain foreign entities with an establishment in Mexico).

Operating/wet/finance leases, or leases concerning only engines or parts, are permissible and recognised in Mexico.

Pursuant to Article VIII of the Protocol to the Cape Town Convention on Matters Specific to Aircraft Equipment (and the relevant provisions of Mexican federal and local civil codes), contracting parties are free to choose the governing law of their contractual rights and obligations, except regarding:

  • the exercise of rights based on in rem, which includes the enforcement of rights under a mortgage; and
  • agreements in connection with mobile assets (Article 13 of the Federal Civil Code).

There are no material restrictions imposed on domestic lessees making rent payments to foreign lessors in US dollars. However, in the event that proceedings are brought in Mexico seeking performance of lessees’ payment obligations in Mexico, pursuant to the Mexican Monetary Law, lessees may discharge their obligations in Mexican currency at the exchange rate of the date on which payment is made, as published by the Banco de Mexico (Mexico’s central bank) in the Official Gazette of the Federation.

There are no exchange controls that could prevent rent payments under a lease or any repatriation of realisation proceeds (if such a lease were enforced by a foreign lessor).

There are no taxes/duties payable solely as a result of executing a lease physically in Mexico and/or by or to a domestic party, or as a consequence of an original or copy of a lease being brought into Mexico, either physically or electronically.

It is not necessary under the laws of Mexico to be licensed or otherwise qualified in Mexico in order to do business with a domestic lessee, or to enable any person to exercise or enforce its rights under any lease.

Under Mexican law, there are no mandatory terms required to be in a lease (or ancillary documents thereto) governed by English or New York law that would not typically already be included.

Tax and other withholding gross-up provisions are permissible and enforceable under Mexican law.

Under Mexican law, a lease may cover parts that are installed or replaced on an aircraft or engine after its execution. In the case of any such replacement, the lessor may opt for the execution and delivery of a lease supplement, which may or may not (at the lessor’s determination) be recorded with the Mexican Aeronautic Registry, after being notarised, apostilled and translated into Spanish by a court-approved translator.

Leases must be drafted in such a manner that risk of annexation is minimised. A strongly suggested practice is to install fireproof plates in the engines, expressly setting forth the name of the owner thereof.

The concept of trust and the role of an owner trustee under a lease are recognised in Mexico, to the same extent as any other entity acting in its capacity as owner, possessor, guarantor, or guarantee or security-holder with respect to an aircraft.

Mexico is a party to the Geneva Convention on the International Recognition of Rights in Aircraft, signed at Geneva on 19 June 1948. Therefore, rights in relation to the ownership or possession of aircraft are consistent with the rules set out therein. Upon registration with the Mexican Aeronautic Registry, any such agreements are enforceable against third parties.

Aircraft may be registered in Mexico in the name of the aircraft operator, even if the operator is not also the owner. If operator and owner are not one and the same, it is strongly recommended that it is ensured that both entities and their capacities are noted in the Certificate of Registration of the Aircraft. It is a common malpractice for operators to register aircraft in their own name (as owners), as opposed to registering them in the owner’s name and adequately reflecting their capacity as operators.

Pursuant to Article 45 of the Civil Aviation Law, the Mexican Aeronautic Registry is the public registry for registration of all matters pertaining to property, possession, and other real estate property rights with respect to Mexican aircraft and their engines, as well as for the leasing of Mexican and foreign aircraft and engines.

Only aircraft owned or in the possession of Mexican persons (by virtue of a lease or any other instrument conveying possession thereof), and aircraft owned by foreign persons for the exclusive provisioning of private non-commercial air transportation, can be registered in Mexico. Therefore, leases of aircraft that are intended to be registered in Mexico must be recorded with the Mexican Aeronautic Registry.

In addition to the foregoing, it is advisable to register an aircraft and/or engine lease with the Mexican Aeronautic Registry, to ensure that the lessor’s rights are enforceable against third parties. Such a filing is not subject to any consent from any government entity. Pursuant to Article 14 of the Regulations of the Mexican Aeronautic Registry, the formalities to effect such a registration are the same as those that apply to any transfer of title of an aircraft, namely, a written application setting forth the factual statements and attaching:

  • evidence of incorporation and existence of the applicant;
  • a power of attorney;
  • an address in Mexico to receive any notices;
  • proof of payment of the relevant statutory fees;
  • a description of the documents attached to the corresponding application;
  • the date of filing and original signature of the applicant (or its attorney-in-fact);
  • original of the certificate of registration marks and certificate of airworthiness of the aircraft; and
  • the documents by which the aircraft and/or engine lease assignment and assumption/novation was formalised (which must meet the formalities set forth in 1.2.2 Sales Governed by English or New York Law).

Leases do not need to be in a specific form to be valid and registrable in the Mexican Aeronautic Registry. However, documents executed abroad must be notarised and apostilled and, if executed in any language other than Spanish, be translated by a court-approved translator. Signatures of domestic individuals or entities, regardless of the language of the document to which they pertain, must be notarised.

The statutory fee for registering a lease with the Mexican Aeronautic Registry is the equivalent in Mexican pesos of approximately USD78. This fee is applicable per each document to be registered, including any supplements, notices, or assignments (if any). An identical additional amount is charged if the registration of such documents results in the issuance of a new certificate of registration.

The USA and Ireland are the two most popular alternative countries in which aircraft habitually based in Mexico are typically registered.

In order to register an aircraft, or a transfer of ownership thereof, the AFAC will require an original or certified copy of a bill of sale or document evidencing transfer of ownership. Furthermore, if that document was executed abroad, it must be notarised, apostilled, and translated into Spanish by a court-approved translator if it is executed in a language other than Spanish. Signatures of domestic individuals or entities, regardless of the language of the document to which they pertain, must be notarised.

Payments of rent and all payments by a Mexican lessee to a foreign lessor (that does not qualify as a Mexican resident for tax purposes) under an aircraft or engine lease agreement may be made free and clear of any taxes, duties, assessments or governmental charges of whatsoever nature imposed, levied, collected, withheld or assessed by Mexico or any political subdivision or authority thereof or therein having power to tax, except for withholding tax on payments of rent imposed under the Mexican Federal Income Tax Law, which at the time of writing sets forth a withholding tax rate of 1%.

A foreign lessor is not deemed to be resident, domiciled or carrying on business in Mexico only by reason of the execution, performance, or enforcement of a lease agreement.

Concession or permit-holders are liable for the maintenance and operation of the aircraft and engines they operate. This liability is not imposed on a lessor, whether domestic or foreign, solely for being a party to such a lease.

Pursuant to Article 61 of the Civil Aviation Law, public air transportation concession- or permit-holders are liable for damages caused to passengers, cargo, and luggage. With regard to private non-commercial air transportation aircraft, the owner or possessor thereof shall be liable for any damages or losses caused by that aircraft or engine.

A creditor of a domestic lessee cannot attach a lease to an aircraft that is leased to that creditor but owned by a different entity, since that aircraft is not part of the lessee’s assets.

Non-consensual interests that may have priority over lessor’s rights under an aircraft or engine lease (whether or not such a lease/lessor is registered in the Mexican Aeronautic Registry) include tax credits and labour credits. It must be noted that such interests can only be exercised against the owner of the relevant asset, provided that the owner is the direct debtor.

It is not mandatory that either all or part of the insurance be placed with Mexican insurance companies.

Pursuant to Article 74 of the Civil Aviation Law, and Chapter V of its Regulations, concession- and permit-holders transiting over national air space must maintain passenger, cargo, and third-party liability insurance. Prior to commencing operations, the interested party must file the corresponding insurance policy with the Secretariat of Communication and Transportation for its approval. With respect to aircraft destined for international air transportation, insurance policies must comply with the requirements set forth in the international treaties to which Mexico is a party.

Reinsurance can be placed outside of Mexico up to 100% coverage.

Article 18 of the Insurance Agreement Law sets forth that even when an insurance company reinsures against insured risks, it shall remain solely liable with respect to the insured party. However, “cut-through” clauses in insurance and reinsurance documents are common practice, and enforceable based on the principle of liberty of contract.

Assignments of insurance/reinsurance are permitted in Mexico.

Repossession, entry, removal, sale, transfer or other disposition of property (including aircraft), pursuant to remedial provisions under any relevant agreement, may not be made in Mexico without judicial intervention, pursuant to due legal process consistent with Mexican law provisions, including that the defendant be given the right to be heard and defended in court, as self-help remedies are not enforceable in Mexico.

See 2.6.1 Restrictions on Lessors’ Abilities.

The Mexican judicial system is not organised around particular sectors or industries, but rather around the nature of the dispute. Federal commercial courts will have jurisdiction for claims between a lessor and a lessee, or between an airline and any third parties acting in their capacity as traders. Criminal cases are heard by criminal courts; crimes in connection with aircraft or airports/airdromes would be heard by a federal criminal court. Civil matters are heard by civil courts. Disputes with the Mexican government, namely, airport taxes or navigation service taxes, are heard by federal administrative courts.

The Mexican Code of Commerce regulates precautionary measures generally. Aircraft are subject to such general regulations, and in any case any such request must be applied for, and a judge, based on the merits, shall rule on whether such a request is granted.

Mexican courts will uphold, subject to the considerations of public policy:

  • a foreign law as the governing law of an aircraft lease;
  • the submission to a foreign jurisdiction; and
  • a waiver of immunity by the parties to a lease.

Judgments obtained in foreign courts are recognised and enforced by the Mexican courts without a further review on the merits, pursuant to Article 1347-A of the Commerce Code, provided that:

  • the judgment is obtained in compliance with the legal requirements of the jurisdiction of the court rendering that judgment and in compliance with all legal requirements of the relevant transaction document;
  • the judgment is strictly for the payment of a certain sum of money, based on an in personam (as opposed to in rem) action;
  • service of process was made personally on the relevant party or on its appointed process agent;
  • the judgment does not contravene Mexican law, the public policy of Mexico, international treaties or agreements binding upon Mexico or generally accepted principles of international law;
  • the applicable procedure under the laws of Mexico with respect to the enforcement of foreign judgments (including issuance of a letter rogatory by the competent authority of the jurisdiction requesting enforcement of the judgment and the certification of that judgment as authentic by the corresponding authorities of that jurisdiction in accordance with the laws thereof) is complied with;
  • the judgment is final in the jurisdiction in which it was obtained;
  • the courts of the relevant jurisdiction recognise the principles of reciprocity in connection with the enforcement of Mexican judgments in that jurisdiction; and
  • the action, in respect of which the judgment is rendered, is not subject to legal proceedings in Mexico, among the same parties.

A lessor may obtain a judgment in a foreign currency. However, pursuant to the Mexican Monetary Law, the lessee may discharge its obligations in Mexican currency at the exchange rate of the date on which payment is made, as published in the Official Gazette of the Federation by Banco de Mexico (Mexico’s central bank).

Generally, there are no limitations on a lessor’s ability to recover default interest (or the compounding thereof). The parties may agree to a conventional default interest; however, if that interest is disproportionate to a degree where it may be reasonable to believe that abuse exists on the part of the creditor, the debtor may obtain an order from a judge to have it reduced.

Lessors are not required to pay taxes or fees in a significant amount in connection with the enforcement of a lease in Mexico.

Under Mexican law, there are no mandatory notice periods in connection with the termination of an aircraft lease agreement related to aircraft operated domestically or leased by a domestic operator.

A Mexican lessee is subject to civil and commercial law with respect to its obligations under a relevant lease agreement, and execution, delivery and performance thereof constitute private commercial acts rather than public or governmental acts.

Mexico has adopted the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Pursuant to Article 1461 of the Commerce Code, Mexican courts recognise and enforce arbitral decisions, which must be requested in writing to a competent judge, except if the defendant therein can prove that:

  • one of the parties was affected by legal incapacity;
  • service of process did not meet procedural requirements;
  • the arbitral decision refers to a controversy that was not subject to arbitration, or contains decisions that exceed the arbitration terms;
  • the arbitral court, or its procedures, were not subject to what was previously agreed to by the parties; or
  • the arbitral decision is not binding, or was nullified or suspended by a court of the country where it was issued.

See 2.6.1 Restrictions on Lessors’ Abilities.

Mexican law, by means of the Federal Civil Code, recognises the concepts of contractual assignment and novation.

Transfer by a lessor of its rights under a lease to a new lessor, pursuant to a New York or English law-governed assignment and assumption agreement or novation agreement (or deed), will be held valid by a domestic court. If the lease provides that such an assignment or novation may be made without the lessee’s consent, then any such consent is not required. However, obtaining the lessee’s written acknowledgement is suggested and common practice.

While signature and delivery of an assignment and assumption/novation agreement by a duly authorised officer constitutes legal, valid, binding and enforceable obligations of the party thereto, in the event that any legal proceedings are brought before the Mexican courts, a Spanish translation of the documents required in the proceedings, prepared by a court-approved translator, will be required and, furthermore, would have to be approved by the court after the defendant has been given an opportunity to be heard with respect to the accuracy of the translation, and proceedings would thereafter be based upon the translated documents.

It is advisable to register an aircraft and/or engine lease assignment and assumption/novation with the Mexican Aeronautic Registry to ensure that the assignee’s rights are enforceable against third parties. This filing is not subject to any consent from any government entity. Pursuant to Article 14 of the Regulations of the Mexican Aeronautic Registry, the formalities to effect such a registration are the same as those that apply to any transfer of title to an aircraft, namely, a written application setting forth the factual statements and attaching:

  • evidence of incorporation and existence of the applicant;
  • a power of attorney;
  • an address in Mexico to receive any notices;
  • proof of payment of the relevant statutory fees;
  • a description of the documents attached to the corresponding application;
  • the date of filing and original signature of the applicant (or its attorney-in-fact);
  • the original of the certificate of registration marks and certificate of airworthiness of the aircraft;
  • the documents by which the aircraft and/or engine lease assignment and assumption/novation was formalised (which must meet the formalities set forth in 2.7.3 Enforceability of Lease Assignments/Novations).

There are no taxes/duties payable in respect of an assignment and assumption/novation agreement, or as a consequence of an original or copy of it being brought into Mexico, other than those statutory fees required to effect its registration with the Mexican Aeronautic Registry.

Transfer of the ownership interest of an entity owning an aircraft is not considered to be a transfer of the title to the aircraft itself for the purposes of the Mexican Aeronautic Registry.

Pursuant to Article 46 of the Civil Aviation Law, an aircraft’s registration can be cancelled by written request of the owner or lawful possessor, provided that the aircraft in question is not subject to any liens, in which case the lien-holder’s consent is required. An aircraft’s registration can also be cancelled, inter alia:

  • by judicial resolution;
  • in the case of destruction, loss or abandonment;
  • by expiry of registration granted on a temporary basis; or
  • by virtue of registration of the aircraft in other country.

An aircraft owner, mortgagee or lessor cannot apply for the deregistration of the aircraft without the lessee’s or operator’s consent. The document by which the lessee or operator obtained possession of the aircraft must be legally terminated prior to deregistration and repossession of an aircraft by the lessor.

In order for the owner, mortgagee or lessor to deregister an aircraft, evidence of termination of the lease agreement, by way of a termination agreement, or by a court order issued on the basis of a final judgment, must be provided.

On the assumption that the lessee or lawful possessor co-operates with deregistration, this process can be completed within ten business days after the filing of the corresponding written application, including its corresponding exhibits, which include a duly executed lease-termination agreement. If the lessee or the aircraft’s lawful possessor does not co-operate, deregistration can only occur after termination of the lease determined by a competent judge. Timing varies significantly from case to case, but proceedings may take anywhere from 12 to 18 months on average.

The AFAC does not provide advance assurances to an aircraft owner, mortgagee, or lessor as to the prompt deregistration of the aircraft. Such requests are dealt with on a first-come, first-served basis, and response times often depend on the current workload.

There are no significant costs/fees/taxes payable to the Mexican Aeronautic Registry in connection with the deregistration of an aircraft.

A reasonable lessee will ensure that the authority granted to a lessor (or its representatives) under any deregistration power of attorney can only be exercised upon the occurrence of an event of default under a lease. Since self-help remedies are not enforceable in Mexico, any such default must first be ruled by a judge and the lease agreement be terminated. Only then may the authority granted under the deregistration power of attorney be exercised.

It is advisable that any deregistration power of attorney be granted before a notary public, in the Spanish language, and in observance of the formalities mandated by the Federal Civil Code.

Subject to 2.8.7 Deregistration Power of Attorney, a deregistration power of attorney granted before a notary public, in the Spanish language, and in observance of the formalities mandated by the Federal Civil Code, may be exercised without the need for additional documentation, other than those documents required for deregistration of an aircraft with the AFAC generally.

Powers of attorney granted to be exercised in Mexico must be governed by, and observe the formalities set forth in, Mexican law.

Pursuant to Article 2596 of the Federal Civil Code, powers of attorney granted as a condition under a bilateral agreement, or as a means to perform an assumed obligation, cannot be revoked by the grantor.

Subject to termination of the lease (whether on expiry or otherwise), the relevant mortgagee or lessor may export the aircraft from Mexico on a definitive basis without requiring any consents, approvals or licences from any governmental or regulatory authority of Mexico, except that (i) an export licence from the Secretariat of Finance and Public Credit (Secretaría de Hacienda y Crédito Público), and (ii) a ferry flight permit issued by the AFAC, will be required for the removal of the aircraft from Mexico.

See 2.8.11 Owner’s/Lessor’s Consent.

Other than customs agent fees and nominal fees payable with respect to the export licence from the Secretariat of Finance and Public Credit (Secretaría de Hacienda y Crédito Público), there are no significant costs/fees/taxes charged in respect of the export of an aircraft.

Mexico did not make a declaration under Article XIII of the Protocol to the Cape Town Convention on Matters Specific to Aircraft Equipment. Therefore, aircraft owners, mortgagees or lessors should not rely on irrevocable deregistration and export request authorisations (IDERAs) with respect to repossession rights in the case of a default, since such instruments are not effective in Mexico.

Insolvency proceedings in Mexico are regulated by the Insolvency Proceedings Law (Ley de Concursos Mercantiles), the General Law of Business Organisations, the Law of Credit Institutions and the Law of Insurance and Bonds Institutions.

The Insolvency Proceedings Law provides for a single kind of proceeding known as concurso mercantil, which comprehends conciliation, restructuring or insolvency and bankruptcy proceedings. Such a proceeding may be initiated voluntarily by debtor itself, or by any of its creditors, a judge, a public prosecutor, and tax authorities (with respect to tax credits).

If an insolvency proceeding is initiated by a lessee or by a third party with respect to a lessee, assets in possession of the latter are not considered its property (Article 70, Section VII, paragraph a) of the Insolvency Proceedings Law). However, a lessor must initiate a separatory incident (incidente de separatoria) in order to determine whether the lessee can continue performing its obligations under the lease, or otherwise cause the insolvency court to separate the aircraft, terminate the lease and allow the lessor to repossess the aircraft.

The Insolvency Proceedings Law recognises foreign proceedings in bankruptcy, insolvency and reorganisation, as well as foreign representatives appointed by means of a recognition request. Foreign proceedings are recognised when lawfully held in a foreign country, in accordance with bankruptcy or insolvency laws applicable to the relevant debtor, due to its activities, the location of its assets or other causes.

For the purposes of the Insolvency Proceedings Law, a "foreign representative" is an individual or entity that has been empowered under a foreign bankruptcy procedure to manage the reorganisation or settlement of a business, or has been appointed as the representative of that foreign bankruptcy procedure.

Such a foreign representative may request the presiding Mexican court for the recognition of the foreign bankruptcy procedure during an insolvency proceeding being conducted before Mexican courts. Consequently, the foreign representative is entitled to appear directly before the presiding Mexican court in all procedures brought under the Insolvency Proceedings Law.

As to recognition of foreign bankruptcy proceedings, the Insolvency Proceedings Law acknowledges two types thereof:

  • as a principal procedure, when the foreign procedure is brought to a court with jurisdiction in the place where the business has its main place of interests; or
  • as a non-principal procedure, when the foreign procedure is brought to a court with jurisdiction in the place where the business has an establishment.

The main difference between these two is the effect of such recognition with respect to the business’s assets located in Mexico.

If a foreign bankruptcy procedure is recognised as a principal procedure, foreclosure rights and rights to transfer or grant any lien over the business’ assets are suspended. A Mexican court would recognise the foreign bankruptcy procedure as a non-principal procedure, if the debtor has a permanent place of business outside Mexican territory.

The recognitions of a non-principal foreign bankruptcy procedure are the following:

  • the granting of injunctions that concede to a Mexican court to protect the business’s assets or the creditors’ interests, who may request through the foreign representative, that the receiver, conciliator or examiner, as the case may be:
    1. suspend all execution injunctions against the business’s assets, along with the rights to transfer of grant any lien over the business assets;
    2. order the delivery of evidence and/or information regarding the business’s assets, activities, rights, or liabilities;
    3. entrust the administration or foreclosure of all or part of the business’s assets located in Mexican territory to the foreign representative, the receiver, conciliator or examiner, as applicable; and
    4. extend any relevant granted injunction granted by the foreign recognition procedure request along with any other injunction available under Mexican law.

Upon the recognition of a foreign procedure, the foreign representative may request the receiver, conciliator or examiner to entrust the distribution of all the business’s assets located in Mexican territory.

Pursuant to the Insolvency Proceedings Law, Mexican courts co-operate with their foreign counterparts in aspects relating to insolvency proceedings in other jurisdictions. This law is based upon the International Institute for the Unification of Private Law's (UNIDROIT’s) “Model Law for Cross-Border Insolvency” and the World Bank's “Effective Insolvency Systems”.

Mexico did not make a declaration under Article XIII of the Protocol to the Cape Town Convention on Matters Specific to Aircraft Equipment. Therefore, IDERAs are not effective in Mexico.

See 2.9.1 Overview of Relevant Laws and Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations.

See 2.6.1 Restrictions on Lessors’ Abilities.

Moratorium and stay of enforcement proceedings against the assets of a debtor may be dictated ex officio or at the request of the relevant creditor, except for labour credits.

Pursuant to the Insolvency Proceedings Law, a domestic lessee may be liquidated or placed in administration or receivership voluntarily, or involuntarily, by any creditor, a public prosecutor, a judge or by tax authorities in their capacity as creditors. In either case, a bond must be posted to guarantee the liquidator’s fees.

Generally, the enforceability of a lease agreement is not affected by a liquidation procedure. However, Article 106 of the Insolvency Proceedings Law sets forth that the liquidator may opt for the termination of the agreement, in which case any agreed penalties or termination fees agreed under the relevant agreement shall be paid, or otherwise, three months’ rent for the anticipated termination.

If the lessee is wound up by a court or administration proceeding, a lessor, guarantee or lien-holder would need to initiate a separatory incident before the insolvency court. Upon the filing of such a separatory action, a debtor must determine whether it can comply with its obligations under the relevant agreement, or if it will agree to terminate it. If a debtor elects to terminate the relevant agreement, the insolvency court will order separation of the aircraft, any security deposit or maintenance reserves.

Mexico is a signatory and has ratified the Convention on International Interests in Mobile Equipment (the Convention) and the related Protocol on Matters specific to Aircraft Equipment (the Protocol), which have been in force and effect since 1 November 2007. Authorised entry point codes are necessary to effect registration of international interests. Waiting times to obtain such codes vary significantly from case to case; based on practice, the parties should allow at least 15 business days to ensure obtention thereof. Transacting parties (or professional user entities) can effect such registrations without the intervention of local entities.

Declarations made by Mexico regarding the Convention and the Protocol significantly limit their scope and make enforcement of remedies set forth therein impractical or inapplicable. These limitations include:

  • self-help remedies not being enforceable;
  • the Convention not applying to pre-existing interests; and
  • Alternative B being chosen under Article XI of the Protocol regarding remedies on insolvency.

Irrevocable deregistration powers of attorney are not effective in Mexico, since Mexico did not make a declaration under Article XIII of the Protocol to the Cape Town Convention on Matters Specific to Aircraft Equipment.

As Mexico adopted Alternative B under Article XI of the Protocol regarding remedies on insolvency, none of the cases regarding insolvency of lessees has been resolved within the scope of its terms. The Convention has proven to be ineffective until Mexico makes the right set of declarations thereunder. The insolvency proceedings of Mexicana (Mexico’s flagship airline) in 2011 confirmed this.

Mexico is a party to the 1948 Geneva Convention on the International Recognition of Rights in Aircraft, which became effective on 12 August 1982. Mexico is not a party to the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft.

There are no material restrictions on foreign lenders financing an aircraft locally or on borrowers using the loan proceeds.

There are no exchange controls that could prevent payments or any repatriation of realisation proceeds under a loan, guarantee, or security document.

Borrowers are permitted to grant security to foreign lenders.

Downstream, upstream, and/or cross-stream guarantees are permitted in favour of lenders. Under the Insolvency Proceedings Law (Ley de Concursos Mercantiles), gratuitous transactions can constitute a fraudulent conveyance in the event of an insolvency. Likewise, where a guarantor has not received fair consideration for the grant of a guarantee, that guarantee may be considered fraudulent if it was created during the statutory look-back period of 270 days before the date on which the relevant guarantor is found to be insolvent by a Mexican court.

Unless the Mexican guarantor derives a corporate benefit from the financing that constitutes fair consideration, downstream, upstream, and/or cross-stream guarantees may be troublesome under the Insolvency Proceedings Law.

Long-standing legal practice makes a mortgage the preferred alternative to take security over financed aircraft. However, a pledge of shares over a domestic special-purpose vehicle (SPV) that owns the financed aircraft would also be a valid form of security and is recognised by Mexican law.

Negative pledges are recognised by Mexican law, under the concept of obligaciones de no hacer.

There are no material restrictions or requirements imposed on intercreditor arrangements. As with other acquisition transactions, the cashflow of the target and/or the purchaser is concentrated in a security trust, which serves a double purpose as a security instrument and as a payment vehicle, in accordance with the priority agreed to by the parties.

The concept of agency, and the role of an agent (such as the facility agent), under a syndicated loan are recognised under Mexican law.

Contractual subordination, structural subordination and intercreditor agreements are permissible and recognised under Mexican Law, with contractual subordination being the most common in financing transactions. Since 2014, the Insolvency Proceedings Law has recognised this type of subordination in the event of a company insolvency, and Mexican courts recognise contractually subordinated claims with respect to other claims, whether secured or unsecured, of creditors of an insolvent company.

Transfer or assignment of all or part of an outstanding debt under an English or New York law-governed loan is permissible and recognised under Mexican law.

Mexican law prohibits usury without setting specific limits, provided that the relevant rate agreed upon by the parties is reasonable and within market practice. If that interest is disproportionate to a degree that it may be reasonably believed that abuse exists on the part of creditor, the debtor may obtain an order by a judge to have the interest reduced.

Mortgages are the most common form of security with respect to aircraft. Aircraft mortgages are regulated by the general provisions of the Federal Civil Code, applicable to any kind of mortgage. Non-possessory pledge agreements with respect to bank accounts or security trusts (fideicomiso de garantía), pursuant to which receivables can be deposited in a trust account and serve as collateral for any relevant secured obligations, are also typical forms of security.

Generally, there are no types of security that cannot be taken over an aircraft or related collateral such as engines, warranties, or insurance.

Mexican law recognises the concepts of trust (fideicomiso) and the role of a security trust/security trustee under the concept of fideicomiso de garantía and fiduciario de garantía.

A borrower can assign to a security trustee, pursuant to a security assignment or a mortgage, its rights to the aircraft or under an aircraft lease, including in relation to insurance. There are no limitations with respect to the form of such an assignment, except that the agreement would need to be recorded with the Mexican Aeronautic Registry. All requirements and formalities for the filing of documents with the Registry would be applicable (see 1.1.2 Enforceability against Domestic Parties).

It is possible, and common practice, to assign the rights and benefits only without also assigning the attendant obligations of the lessor under an aircraft lease.

Pursuant to Article VIII of the Protocol to the Cape Town Convention on Matters Specific to Aircraft Equipment (and the relevant provisions of Mexican federal and local civil codes), contracting parties are free to choose the governing law of their contractual rights and obligations, except regarding:

  • the exercise of rights based on in rem, which includes the enforcement of rights under a mortgage; and
  • agreements in connection with mobile assets (Article 13 of the Federal Civil Code).

A notice of assignment must be served on a lessee, otherwise the assignment will not be effective. Other than any such assignment being in writing, Mexican law does not provide for specific requirements regarding documentary formalities. While signature and delivery of the assignment agreement by a duly authorised officer constitutes legal, valid, binding and enforceable obligations of the party thereto, in the event that any legal proceedings are brought before the Mexican courts, a Spanish translation of the documents required in such proceedings, prepared by a court-approved translator, will be required, and furthermore, will have to be approved by the court after the defendant has been given an opportunity to be heard with respect to the accuracy of the translation, and proceedings will thereafter be based upon the translated documents.

Mortgages are the most common form of security with respect to aircraft. Aircraft mortgages are regulated by the general provisions of the Federal Civil Code, applicable to any kind of mortgage. Regarding aircraft mortgages specifically, the Civil Aviation Law provides the general requirement of registering with the Mexican Aeronautic Registry all liens, guarantees and possessory rights with respect to aircraft. Mortgages with respect to aircraft bearing Mexican registration marks must be registered with the Mexican Aeronautic Registry to be enforceable against third parties, and either:

  • be executed before a notary public as a public deed;
  • have the signatures of the parties thereto ratified before a Mexican notary public; or
  • if executed abroad, observe the general requirements and formalities for the filing of documents with the Registry (see 1.1.2 Enforceability against Domestic Parties).

Notarial and registration fees with the Registry are the most relevant costs associated with this process, which usually range between USD1,000 and USD2,000.

English or New York law-governed security assignments may not be registered in Mexico, while domestic law security instruments may. According to their natures, such instruments will be registered with the Mexican Aeronautic Registry (if a guarantee is granted with respect to an aircraft) or with the Sole Registry of Moveable Property, in the case of a pledge on receivables.

A transfer of security interests over an aircraft and/or engines is recognised under Mexican law.

Generally, the change of a secured party under a security assignment after its execution does not jeopardise the security interests, provided that, inter alia, any such assignment is allowed under the transaction documents, and notice thereof is provided to any relevant party if that requirement was agreed thereunder.

Parallel debt arrangements are not customary in Mexico, since there are no material restrictions on a security trustee holding security on behalf of multiple investors changing from time to time.

A secured party under a security assignment is not deemed to be resident, domiciled, carrying on business or subject to any taxes solely as a result of it being a party to, or its enforcement of, any relevant security assignment.

See 3.2.8 Domestic Law Security Instruments with respect to mortgages over aircraft.

As for spare engines, these are not subject to mortgages since they are regarded as movables. Security with respect thereof would be granted by means of a pledge, which would be recorded with the Sole Registry of Moveable Property.

Spare parts, such as engines, cannot be subject to a mortgage. Other forms of security, such as a pledge, can be granted with respect thereto (see 3.2.14 Perfection of Domestic Law Mortgages).

There are two main forms of security to take security over a bank account: pledge agreements and security trusts. Under a pledge agreement, a pledge can be created over a bank account. The pledgee must receive an original counterpart of the account agreement and the acknowledgement of the bank with which the account is maintained. Under a security trust, or fideicomiso de garantía, once the trust has been created and bank accounts have been opened, receivables can be deposited in those accounts and serve as collateral for any relevant secured obligations.

Third-party liens in relation to unpaid airport fees, navigation, charges, customs duties, repairers’ costs, or crews’ salaries are only enforceable against the operator of the aircraft, not against the aircraft owner or lessor. Therefore, a third party cannot take or register a lien over an aircraft or engine by virtue thereof.

On average, a lien or mortgage over an aircraft can be discharged within ten business days after the filing of the corresponding written application and exhibits.

Mortgages on aircraft registered in Mexico must be registered in the Aviation Section of the Mexican Aeronautic Registry to be binding upon third parties. The interests of an aircraft mortgagee or security trustee can be noted in the aircraft registry, and their consent will be required to allow deregistration of the relevant aircraft.

Detention rights may be allowed under certain circumstances, with the prior requirement of exhausting any court proceedings against the debtor.

The potential purchaser of an aircraft may search the Mexican Aeronautic Registry to verify if an aircraft is free of encumbrances. Any such search must be filed in person with the Registry and is not available online, as it is in some other countries.

There are no relevant differences in enforcing a security assignment as opposed to a loan or a guarantee.

A security trustee can enforce its rights under a security assignment pursuant only to a notice and acknowledgement executed by the lessor and the relevant lessee.

Mexican courts will uphold a foreign law as the governing law of a finance or security document, and the submission to a foreign jurisdiction in connection therewith, subject to the considerations of public policy.

See 2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards.

See 2.6.1 Restrictions on Lessors’ Abilities.

See 2.6.3 Specific Courts for Aviation Disputes.

See 2.6.4 Summary Judgment or Other Relief.

See 2.6.7 Judgments in Foreign Currencies.

A secured party is not required to pay taxes or fees in a non-nominal amount in connection with the enforcement of a security agreement/aircraft mortgage.

There are no other known relevant issues that a lender should be aware of in relation to the enforcement of its rights.

While it does not strictly relate to the purchase, sale, lease or debt finance of Aircraft, on 25 May 2021, the US Department of Transportation’s Federal Aviation Administration (FAA) announced that the Government of Mexico does not meet the International Civil Aviation Organization's (ICAO’s) safety standards. Based on this reassessment, the FAA downgraded Mexico’s rating to Category 2 from Category 1. While these measures do not directly affect existing service to the United States, it does prohibit new service and routes. Alongside this, Mexican airline flights will be subject to an increased scrutiny from the FAA.

In order to regain a Category 1 rating, the Government of Mexico must adhere once again to the ICAO’s safety standards, and be subject to a follow-up reassessment by the FAA’s International Aviation Safety Assessment (IASA) process. To date, there is no certainty as to when that will take place.

At the time that the downgrade to the Government of Mexico’s rating was imminent and had been anticipated on national newspapers, on 20 May 2021, an amendment to the Civil Aviation Law was published in the Official Gazette of the Federation. Amongst other matters, the amendment provides for the creation of the Commission for the Investigation and Assessment of Aircraft Accidents and further clarifies certain passenger rights, such as those relating to carry-on luggage.

Canales, Dávila, De La Paz, Enríquez, Sáenz, Leal, S.C.

Ricardo Margain 240
Tercer Piso
Col. Valle del Campestre
San Pedro Garza García, N.L.
México, C.P. 66265

+52 8183781887

bernardo@canales.com.mx www.canales.com.mx
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Law and Practice in Mexico

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Canales, Dávila, De La Paz, Enríquez, Sáenz, Leal, S.C. (Canales) is a boutique law and financial advisory firm with a solid reputation in Mexico. Since 2001, its service has positioned it as a prestigious law firm, committed to the continuing evolution of its practice. Its team is focused on corporate and transactional practice, advising clients in their day-to-day business, as well as participating in the design, structuring, implementation and start-up of their projects. In 2018, to meet the needs of its clients, the firm decided to integrate a financial practice as part of its services, adding a highly qualified team of financial advisers who are well regarded in the market. With offices in Monterrey and Mexico City, Canales is strategically located to continue to serve the needs of its domestic and foreign clients.