I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
Restructuring practice in Mexico in regard to corporations of any considerable size, measured by sales or assets, continues to focus on consensual, out-of-court workouts. Indeed, through the decades, since the 1980s, Mexico has been a jurisdiction of highly successful negotiated solutions, with the development and participation of highly sophisticated and experienced lawyers, bankers and financial advisers.
Perhaps no more than 20 material cases (involving liabilities over a US$100 million threshold) have gone through a formal insolvency proceeding (concurso mercantil) since the Law on Commercial Insolvency was passed in 2000. Notably, in the past two years, the three main homebuilders, with Corporación Geo being the largest to date, having restructured US$2.9 billion, were among the most recent cases. Obviously, with such a small volume of corporate cases, the federal judiciary has not found a need to actually develop specialised courts in insolvency matters.
In the past year, it has become fairly evident that Mexico as a jurisdiction has significantly failed in advancing the efficient development of a fair, equitable, transparent, reliable and predictable restructuring process through a court-supervised concurso mercantil.
There have been a number of court rulings that have fed the notion that concurso proceedings may be derailed with the use of excessive procedural manoeuvres, given a continuing emphasis on compliance with extreme formalities and an unfortunate use of rather inoperable formats developed for very small family-owned company restructurings. Several controversial rulings have placed a question mark on the very existence of a rule of law, and the prevalent use of procedural delaying tactics based upon extended notions of due process and ‘respect of human rights' have added to the ambiguity of what is otherwise clearly intended to be a reliable procedure aimed at conserving productive enterprises as ongoing concerns.
Not only do critical supporting factors remain dubious, such as the access to DIP financing, but a number of isolated decisions have led to extended procedures and a general and evident lack of adherence to the strict time frames provided for by the Concurso Law.
Among the more notorious decisions are: (1) the Third and Ninth Court of Appeals in Civil Matters of the First Circuit have put into question the effectiveness of well-established structured financing transactions, whereby through a trust a company has sold future receivables or guaranteed payment obligations with such future receivables, in favour of a financial institution, by holding that if the debtor enters concurso, other provisions of ‘public order' come into play protecting broader interests replacing commercial considerations and laws, and thus all future receivables will become a part of the estate, ‘true sales' notwithstanding (cases arising in the concurso of Oceanografia); (2) the Third of Appeals, two years after the exit from concurso of Corporación Geo, ruled, based on a provision of the Law found in the chapter of liquidation, that a company cannot exit concurso with a plan, even if approved by an overwhelming majority, if there are any appeals pending (appeals may well take years to be concluded), which criteria, if generalised, will mean the return to endless and obscure procedures; and (3) in a case involving Abengoa, the Sixth Federal Court in Civil Matters of Mexico City ruled, that notwithstanding that a duly approved auditor confirmed that the company did not fall under the parameters and definitions of insolvency established in the Concurso Law, there are other higher interests that should be protected, and then proceeded to involuntarily declare the company in concurso as insolvent. There were other recent rulings principally sustained on arguments of protection of the ‘human right to due process,' which have added to the uncertainly as to the outcome and reliability of formal in court insolvency procedures.
Nevertheless, the decisions have been isolated and are being contested or have been overturned. Moreover, in a publicised matter, the Council of the Federal Judiciary took disciplinary action against a judge known for his creativity.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
The Concurso Law was published in May of 2000 and has been amended twice, in December 2007, with the introduction of the Mexican version of a pre-pack, and in January 2014, with the more significant amendments summarised in Section III supra.
The Concurso Law is a complex statute, which will require continued careful application and interpretation by the federal courts, which have exclusive jurisdiction over insolvency proceedings. (although the concept has been legally challenged recently, it has been done so unsuccessfully up until now). Nevertheless, the relatively few cases that have been filed under the Concurso Law have mostly continued to fail in following strict adherence to the time-sensitive provisions of the Law, and certainty as to a final outcome continues to be clouded, although a handful cross-border cases have been true successes. In any event, there seems to be improvement when compared to the prior statute of 1943 (for example, the proceeding of Altos Hornos de México took over 17 years to get to the approval of an exit plan that is to be implemented in future years).
The following subsections present the principal aspects of the Concurso Law.
i One proceeding
The Concurso Law provides for one sole insolvency proceeding (concurso mercantil), encompassing two successive phases: a conciliatory phase of mediation among creditors and debtor, and bankruptcy. The objective of the conciliatory phase is to conserve the business enterprise as an ongoing concern through a restructuring agreement. On the other hand, the stated purpose of bankruptcy is to liquidate the business. Prior to a debtor being placed in concurso, the process includes a preliminary visit stage to verify whether the commencement standards have been met, unless a pre-pack is filed. Unfortunately, IFECOM formats relating to the visit seem to be designed for an audit of the company and not for a two-week review of the balance sheet, leading to delays and confusion.
ii Procedural terms
An important part of the Concurso Law involves measures to expedite the handling of mechanical aspects of insolvency. Procedural terms in legal proceedings are relatively short, yet most courts fail to abide by them.
Provisions in the law as to procedural exceptions in legal proceedings should no longer result in the automatic suspension of the conciliatory proceeding, as was the case under the prior law, yet federal judges continue to apply measures that have, in fact, halted concurso proceedings.
The conciliatory stage is designed to be completed in 185 calendar days in the best of cases, although two 90-day extensions may be granted if a qualified majority of creditors so approves. The Concurso Law clearly underlines that in no event may the conciliatory stage be extended beyond 365 days, whereupon bankruptcy and liquidation of assets are, in theory, to begin immediately. In practice, this is not the case.
iii Petition for commercial insolvency
A business enterprise that is generally in default with respect to its payment obligations will be declared commercially insolvent. The debtor, any creditor or the Office of the Attorney General may file for insolvency.
The Concurso Law establishes precise rules that determine when a debtor is ‘generally in default'. The principal indications are the failure by a debtor to comply with its payment obligations in respect of two or more creditors, and the existence of the following two conditions: 35 per cent or more of its liabilities outstanding are 30 days past due; and the debtor fails to have liquid assets and receivables, which are specifically defined, to support at least 80 per cent of its obligations, which are due and payable.
Specific instances, such as insufficiency of assets available for attachment or a payment default with respect to two or more creditors, are considered by the Concurso Law to be facts that by themselves will result in a presumption of insolvency.
In theory, the 2014 amendments allow the debtor to file for concurso if it can be anticipated that it will be generally be in default with respect to its payment obligations or falling within one or more of the presumptions of insolvency within 90 days from the petition filing. Involuntary filings have been largely unsuccessful because of the many formalities that must be met.
The federal courts have jurisdiction over concursos. While it is a fact that district judges are overburdened with constitutional challenges (amparos) and have little practice in regard to mercantile matters, the selection process, supervision, continued education and preparation of federal judges have been substantially improved in the recent past. Salaries have been materially increased, and there has been a greater impartiality. Nevertheless, the courts have been reluctant to accept insolvency cases given their considerable workload, among other reasons, and when they have accepted a major matter, the mere size and thousands, if not millions, of pages involved have made it a huge task to address and preside over these proceedings efficiently.
The Concurso Law provides for the use and training of experts in the field of insolvency with IFECOM as an entity to coordinate their efforts and provide continuing education.
The specialists who have a role in proceedings under the Concurso Law are:
- a the auditor, whose duties are to determine whether the debtor complies with the commencement standards and who participates in the proceeding up to the judge's declaration of insolvency;2
- b the conciliator, who is appointed in such declaration and who has broad powers to mediate, to take steps to protect the enterprise as an ongoing concern or to immediately begin bankruptcy and who takes on the significant responsibilities in a concurso; and
- c the receiver, who may or may not be the conciliator and whose principal function is to proceed with the sale of assets and payment of claims.
The judge also has a principal role, although the function of the mediator or conciliador is substantial (including the authority to approve DIP financing).
Those who wish to act as auditor, conciliador or receiver must ask IFECOM to register them in the special registry maintained by IFECOM. It is unfortunate that the registry, especially for complex cases, has not been opened for the large accounting or insolvency advisory firms, only for individuals.
There are numerous restrictions prohibiting conflict-of-interest relationships. The appointment procedure is to be based on random, electronic selection from the classes and ranges of experience pertaining to the experts registered with IFECOM, classes that vary in accordance with the complexity and asset size of the business enterprise in question.
A qualified majority of creditors may replace or appoint a professional as conciliator or receiver even if the professional is not registered with IFECOM. In cases involving the insolvency of a company operating under a federal concession, the conciliador may be appointed at the request of the corresponding authority, such as the Ministry of Communications in the case of corporations in the telecommunications industry, as was the case with the SATMEX proceeding.
vi Related companies
Insolvency proceedings of two or more entities are not joined, although controlling and controlled companies' proceedings will be joined, but will be handled in separate records. A petition must be filed individually by each group member; nevertheless, the 2014 amendments introduced provisions to allow for the joint petition by multiple group members (untested as of today). Mexico does not, however, recognise substantive consolidation.
vii Identification of creditors and declaration of insolvency
The debtor that requests a judgment of declaration of concurso mercantil must furnish detailed lists of creditors and debtors, with a description of the nature of the debts. The amendments introduced a few relevant additions to the petition request: a copy of the corporate resolutions that approved the filing, a proposed reorganisation plan and enterprise conservation plan, which were intended to include DIP financing terms.
Absent a pre-pack, the day after the judge admits the petition, he or she must send a copy to IFECOM, ordering it to designate a visitor in five days. The judge will order the visit and immediately notify the debtor. The visitor will review the books and records of the debtor. The visitor will prepare minutes of the visit, which must also include a list of all creditors in IFECOM formats. The visitor may request that the judge issue precautionary measures needed to preserve the assets of the debtor. The visitor will render a report to the judge that will be sent to the debtor and the creditors for their respective comments, if any.
Within a maximum term of 83 days as of the initial filing, the Law provides that the judge must render a judgment of mercantile insolvency, which, among other things, must contain:
- a an order to IFECOM to appoint a conciliator;
- b a declaration of the opening of the conciliatory stage unless the debtor has requested bankruptcy;
- c an order to the debtor to deliver all books and records to the conciliator;
- d an order to the debtor to suspend the payment of its pre-petition indebtedness, other than those that are deemed to be essential for the continuation of the business enterprise;
- e an order to freeze all asset foreclosure and attachment proceedings; and
- f an order to publish a notice to all creditors (a filing proof of claim), so that they may appear in the proceeding, although this requirement is no longer mandatory.
The extensive participation of the conciliator in the proceedings should also be noted. The conciliator is also responsible for proposing the creditors who should be recognised and is mandated to proceed with notices and publications pursuant to provisions that are very specific as to terms. Formalities are always a major issue and creditors must be aware of tactics delaying the publications that may lead to material delays and uncertainty.
viii Effects of a declaration of insolvency
Once the initial judgment declares the debtor in a stage of concurso mercantil, attachment or foreclosure of assets is suspended during the conciliatory stage, with the sole exception of labour-related obligations; tax-related attachments or liquidations under specific provisions of the Concurso Law are specifically stayed.
The debtor maintains the administration during the conciliatory stage, although the conciliator may request the court removal of the administration. With the express purpose of conserving the enterprise as a going concern within the conciliatory stage, the conciliator is given broad powers to decide on the acceptance or rejection of contracts (within certain parameters), the contracting of new loans - although most litigators insist that the judge must approve - and the sale of non-essential assets. In all cases, the conciliator must constantly report to the court every 72 hours - which is obviously burdensome in major filings - of each and every payment to any supplier or person, irrespective of the amount.
ix Debts in foreign currency
The Concurso Law clearly attempts to correct prior judicial practice, which converted foreign currency debt to pesos early on in the proceeding. The Law establishes provisions that are designed to protect the monetary value of creditor loans. All peso-denominated obligations are converted into inflation-linked units known as UDIs; foreign currency-denominated obligations are converted into pesos at the prevailing rate of exchange on the date the insolvency judgment is rendered and then converted into UDIs. Only claims with a perfected security interest (mortgages or pledges - but not in regard to guarantee trusts) will be maintained in their original currency or unit of account, and will continue to accrue interest, but only to the extent of the value of the collateral.
x Fraudulent conveyances
The Concurso Law provides for a general rule as to the period when insolvency is presumed to have begun, which is of 270 calendar days prior to the judgment declaring insolvency (the ‘retroactive period'). Nevertheless, upon the reasoned request of the conciliador, the interventors, who may be appointed by the creditors to oversee the process, or any creditor, the judge may determine a longer period (at most, three years). Conveyances that are not arm's-length or commercially sound, and the creation or increase of security interests within the retroactive period will be presumed fraudulent to creditors and will not be recognised.
The general concept of netting is recognised by the Concurso Law, which specifies that netting is mandatory for parties to a transaction recognised by the Law, pursuant to terms agreed upon in the relevant contract, on the date of the declaration of insolvency, in respect of liabilities and rights arising from master or specific agreements entered into in connection with financial derivative transactions, reportos (Mexican law-governed repurchase transactions), securities lending transactions and other equivalent transactions.
Mandatory netting is also recognised by the Law as an exception to the ‘cherry-picking' powers given to the conciliador (i.e., mandatory netting applies, regardless of whether the conciliador decides to assume or reject the relevant executory contract).
Under the Concurso Law, the effects of a netted transaction are deemed to survive, even if the transaction was netted during the insolvency retroactivity period (as mentioned previously, generally 270 days). This provision constitutes another development that should give financial institutions certainty when netting, on a bona fide basis, financial derivative transactions.
Obviously, as a prerequisite to netting, the Concurso Law accepts the principle of early termination. It establishes that financial derivative transactions and reportos transactions, maturing after the date of the declaration of insolvency, shall be deemed terminated precisely on that date.
In connection with financial derivative transactions, the Concurso Law provides that, if the relevant agreement does not specify the terms pursuant to which a transaction is to be closed-out and netted, the value of the underlying assets and liabilities is to be determined on the basis of their market value on the date of the declaration of insolvency; if such market value is not available or cannot be demonstrated, the conciliador may request an experienced third party to determine such value.
The general concept of netting reflected in the Concurso Law should be broad enough to encompass transactions such as New York or English law-governed repurchase transactions, securities loan agreements and any other transactions that may be expressed in other currencies. However, the broad terms of the relevant provisions in the Concurso Law, may result in abuses that would seem to go beyond the intent of the drafters of the Law (i.e., creditors claiming that transactions that are not financial derivative transactions, and, therefore, not benefiting from netting provisions, be considered as derivatives, by virtue of the manner through which such transactions were documented). It is also expected that complex derivatives will be challenged as invalid, based on arguments of ultra vires, lack of authority, disproportional elements and the like, specifically in times of unforeseen volatility. While such issues have been addressed by US courts (principally in New York) in favour of creditor banks in matters where Mexican companies were plaintiffs, the subject of complex derivatives is far from settled in Mexico.
Under the Concurso Law, once obligations are netted, if a liability by the insolvent debtor results, the relevant creditor would need to claim it in the bankruptcy proceedings; if a liability by the relevant creditor results, such creditor would need to satisfy its obligations with the conciliator within 30 days of the date of the declaration of insolvency.
xii Restructuring plan; pre-packaged insolvency
To become effective, a restructuring plan must be subscribed to by the debtor and recognised creditors representing more than 50 per cent of the sum of the total recognised amount corresponding to unsecured creditors and the total recognised amount corresponding to secured or privileged creditors subscribing the plan. For acceptance, the favourable vote of 75 per cent of third-party unsecured claims if unsecured inter-company claims account for more than 25 per cent of unsecured claims must be obtained. Any such plan, with the validation of the court, would become binding on all creditors and the insolvency proceeding will be considered as final and concluded.
The Concurso Law provides that the insolvency procedure can begin at the conciliation stage (i.e., avoiding the visit) if the debtor, together with creditors representing at least 50 per cent of the credits so requests, accompanying a proposed restructure plan signed off by the debtor and such creditors.
The problem with the statute is that there are no provisions allowing qualified majorities to impose a plan on any recalcitrant participant in regard to secured creditors, although there are different untested theories as to how such imposition may be accomplished.
xiii Key procedural events
The key procedural events, in summary, are as follows (approximate terms as they should work are in parenthesis).
- a filing;
- b acceptance of filing (by day 10);
- c appointment of a visitor (by day 21);
- d judgment declaring insolvency (by day 80);
- e appointment of conciliator (by day 85);
- f judgment recognising creditors and establishing preferences (by day 145); and
- g restructuring agreement (by day 365); if not, bankruptcy is declared (on day 365, at the latest).
The bankruptcy stage may begin earlier, if requested at any time by the debtor or if the conciliador determines that it will be impossible to reach agreement in respect of a restructuring agreement. Creditors may demand that the concurso begin at the bankruptcy stage, but it is extremely unlikely any such demand will actually prevail. Once the bankruptcy stage is declared, a receiver is appointed, which may be the same person who acted as conciliator (by day five of the declaration); the receiver takes over possession of the enterprise and its management (by day 20); the receiver prepares and delivers liquidation balance sheets and inventories (by day 75); the individual assets or the enterprise as a whole are slated for the sale and notices are sent out to potential bidders (by day 135); asset sales begin (general rule is to conclude liquidation by day 180); and payment to recognised creditors, subject to the preference of labour and, thereafter, secured creditors and taxing authorities, will begin as soon as practicable. In practice, the very few cases that have reached this stage, and save for only one case, have all failed to adhere to the time frames set forth by the Law, missing the mark by years.
xiv Other provisions
The 2014 amendments overhauled the whole bank resolution regime, and expunged it from the Concurso Law so that it is governed solely by the Credit Institutions Law. It also includes a chapter that refers to international cooperation in insolvency proceedings (in a similar fashion as Chapter 15 in the US but with substantial changes that make it inoperative). Finally, it also refers to conducts and liabilities that will be considered criminal in nature, and refers to specific prison terms that may be applied to administrators and directors committing criminal conduct.
xv Duties of directors
The Concurso Law includes a regime for director liability for all business entities, which could have a significant impact on the manner in which directors behave in the imminence of insolvency and the way in which these issues are addressed by the courts.
Disinterested directors are protected from liability under ‘business judgement' provisions, based on the presumption that directors have acted on an informed, good faith basis, on the belief that the action taken was an adequate alternative, if based upon reliance on management and the advice of the corporation's external auditors or legal and financial advisers.
It is the view of the author that as a legal matter, directors and officers must manage an insolvent company and maximise its value for the benefit of all of its stakeholders. The focus should be maximising the value of the enterprise, rather than attempting to maximise recoveries for any particular constituency.
Iii Amendments and developments to concurso mercantil
The latest amendments to the Concurso Law were enacted by Congress in 2014. The principal objectives of the reform focused on the goals of a more expedient and efficient procedure, greater transparency and a reasoned intent to formally introduce DIP financing - certainly bold intentions.
The most relevant provisions introduced by Congress were:
- a the judge was prohibited from extending the periods set forth in the Concurso Law;
- b the consolidation of concurso mercantil proceedings of companies that are part of the same corporate group, the concept of which now includes companies that have the capability to make decisions with respect to another company, regardless of the actual shareholdings;
- c the ability of a debtor to request the concurso mercantil status prior to being generally in default with respect to its payment obligations, when such situation is expected to occur inevitably within the following 90 days;
- d the possibility of requesting a concurso mercantil directly in the stage of bankruptcy (liquidation);
- e permitting common representatives to file credit recognition claims on behalf of a group of creditors and the addition of certain rules for the subscription of the debt restructuring agreement in the case of collective credits through their individualisation;
- f allowing for the use of standardised forms to voluntary request or involuntary demand concurso mercantil;
- g the prospect of filing petitions and other communications electronically;
- h an emphasis on transparency;
- i provisions permitting debtors to obtain DIP financing as necessary to maintain the ongoing business of the company and the essential liquidity during the concurso, the financing of which will be considered privileged in ranking (with a preference over all secured creditors) for purposes of the preference of the payment thereof in the event of a liquidation;
- j the recognition of subordinated creditors, including inter-company creditors in accordance with certain rules, which, among others, establish that such inter-company creditors will not be allowed to vote for the approval of the debt restructuring agreement when such inter-company creditors represent 25 per cent or more of the total amount of recognised credits, unless such creditors consent to the agreement adopted by the rest of the recognised creditors of the same class; and
- k the broadening of the retroactivity period applicable for the review of fraudulent conveyances with respect to transactions entered into with inter-company or related creditors.
The Concurso Law now also clarifies that the netting or realisation of assets provided as collateral of derivative contracts, repo and securities lending transactions will be allowed when such agreements provide that the ownership of such collateral has been transferred to the creditor.
With respect to the concurso mercantil proceeding with pre-packaged plan, the Concurso Law permits the appointment of a conciliator who is not registered with the Federal Institute of Bankruptcy Specialists or IFECOM, by the agreement of the debtor and creditors representing at least the majority of the total amount of debt. Likewise, the percentage required for filing a petition for concurso mercantil with a pre-pack plan was increased to provide that creditors representing at least a majority of the total amount of the abilities of the company must subscribe to the pre-pack plan.
To avoid abuses in respect of an insolvent debtor, the amendments to the Concurso Law also included a new set of provisions that refer to the potential liability of the debtor's management and relevant employees for damages caused to the debtor company if:
- a acting with a conflict of interest;
- b favouring one or more shareholders and causing damages to other shareholders;
- c obtaining economic benefits for themselves or for others;
- d knowingly making, providing, disseminating, publishing or ordering false information;
- e ordering or causing the accounting registries, related documentation or conditions in a contract to be altered, modified or destroyed;
- f failing to register transactions or causing false information to be registered, or causing nonexistent transactions or expenses to be registered, or real transactions or expenses are exaggerated, or otherwise carrying out any act or transaction that is illegal or prohibited by law, causing a damage to the bankrupt debtor and obtaining an economic benefit, directly or indirectly; and
- g in general carrying out any wilful or illegal act or acting with bad faith pursuant to the Concurso Law or other laws.
Although the Concurso Law adopted the business judgment rule contained in the Securities Law applicable to the members of the board of publicly traded companies and allows such directors and relevant employees to obtain insurance, guaranty or bonds to cover the amount of the indemnification for losses and damages caused, except for wilful misconduct, acts of bad faith, the Concurso Law expressly prohibits any agreement, or provisions in the by-laws with respect to any type of consideration, benefit or exemption that may limit, release, substitute or redeem the liabilities of such members of the board and relevant employees of a bankrupt debtor in the event of wilful misconduct or bad faith.
iv SIGNIFICANT LEGAL DEVELOPMENTS
i Practical implementation of the reform
Recent cases, including those summarised in Section I, supra, have underlined material limitations in regard to concurso proceedings.
Although the Law allows creditors and debtor companies in a pre-pack concurso to appoint a conciliator who is not a member of IFECOM, understandably IFECOM has been a zealous protector of its oversight responsibility, placing a stringent scrutiny on any such conciliator, especially with respect to formalities that seem to go well beyond the Law. There continues to be a marked emphasis on the use of cumbersome IFECOM formats and computer programs, which are not designed for large corporations, in all stages of the procedure. The procedure and requirements that have been imposed by IFECOM in regard to the recognition of creditors, places an emphasis on physical delivery of original documents that in practice has meant that the conciliator may not rely on the audited financial statements of the company but on empirical evidence of debt, which may lead to months of otherwise inexplicable delay. Other practical issues have included the attempted imposition of the criteria that in the recognition of creditors secured by guarantees structured through trusts, they should only be recognised as common creditors, based upon the notion that such creditors have the potential of detaching assets in their trust from the estate, a proposition that, in fact, may take years to separate. In addition, in regard to individual bondholder recognitions, the compulsory IFECOM formats have referred to ‘assignment of credits' where in legal terms there were none, as the concept is the individualisation of a collective credit - the bond issue - and not an assignment.
Substantial formalities imposed on the judicial procedure have led to little transparency. The Federal Judiciary has failed to implement electronic filings of any sort, which leads to a considerable administrative burden on the courts themselves, not to mention a colossal waste of paper and natural resources. Reviewing all the documents actually filed as a consequence is a task of gargantuan proportions, which of course affects the timing of the concurso - the ‘strict' time periods in the Law have been extended more often than not - and moreover, create a perfect setting for many appalling delaying tactics, which do not merit a serious comment, although their existence is undeniable.
As to DIP financing, Mexican companies have not been aided by debtor-in-possession financing from Mexican banks or institutional sources, and foreign entities have failed to be persuaded to fund any such facilities until now, given continuing procedural uncertainties resulting in questions as to preference. Banking regulations governing mandatory reserves, default measurements and other relevant topics to potential DIP lending were only addressed recently to some extent. In any event, the demands by lenders once a concurso is in process for security over and above the statutory priority, have severely limited DIP financing.
As to the ranking of claims, only registered mortgages and pledges have been given statutory preference on a clearly reliable basis, given a literal reading of the Concurso Law. Creditors holding security rights under trusts or escrows have been recognised in most cases as common creditors only, although they are given the ‘privilege' of separating assets in trust from those of the company in question, a concept that makes little sense in view of the stated objective of the Law: to keep the corporation as an ongoing concern during the workout or conciliatory stage of the concurso. Breaking up operating assets is inconsistent with this objective. My view is that such creditors should be recognised as creditors with a stated contractual privilege to specific assets or flow of funds, irrespective of any procedure of separation.
As to expenses, formal cases have brought about a debate both at IFECOM and among a number of judges, as to which concepts will actually be recognised as reimbursable expenses in a concurso proceeding. Professional fees, legal and those of financial advisers, have often been considered as substantially onerous and have thus been reduced significantly. In the extreme, the professional fees of a conciliador in a major case, were turned down by the judge as unnecessary.
Among the more alarming points of view generally shared by the litigation bar, is that, to the extent a capitalisation of debt becomes part of an exit plan, even if voted upon and approved by overwhelming majorities of every class of creditor, shareholders do in fact have a veto power over a plan if they disagree. I do not share this perspective, even though my view is by no means widely accepted, as it is contrary to the notion of absolute priority, and because the Concurso Law empowers the judge to impose the capitalisation, although most judges are and will be reluctant to do so.
As a final point, most companies (notably service providers in the energy sector) have opted to stay away from concurso and have successfully restructured substantial liabilities. The construction and homebuilder sectors have turned to concurso with varying degrees of success.
The Concurso Law embraces, in form, the UNCITRAL Model Law on cross-border insolvency and international judicial cooperation. Mexican courts have sporadically recognised and given limited judicial assistance to foreign insolvency proceedings (provided that such proceedings do not contradict Mexican law or general principles of law), although there have been less than a handful of such cases. It is noted that the Concurso Law includes substantial changes to the UNCITRAL Model Law that make the process defective as it focuses on channelling procedures through a conciliator, and thus basically imposes the need to file a concurso proceeding in regard to any significant assets in Mexico.
Related to this topic, it has been more frequent for Mexican companies to file for protection in the bankruptcy courts of the US (mainly in the Southern District of New York) under Chapter 15, after initiation of a concurso in Mexico, and certainly such courts have responded efficiently, recognising the concurso as the main proceeding. In the Vitro case, however, the US Bankruptcy Court for the Northern District of Texas ruled against the acceptance of Vitro's formerly approved concurso plan as manifestly contrary to US public policy. Courts in the US have stated that this public policy exception must be narrowly construed and is limited to the most fundamental policies of the US. The US Bankruptcy Court's decision was upheld in appeal, although, the matter was finally settled before the case could have been heard by the US Supreme Court.
VI FUTURE DEVELOPMENTS
Concurso mercantil filings have been understandably few and sporadic, although there are benefits from a tax and other perspectives, specially when there are substantial liabilities from capital market placements. Indeed, concurso may be the only vehicle to achieve a successful restructuring and a cramdown. It is, in any event, a complex and expensive process which requires precise financial planning.
The Concurso Law itself may and should be revised and there is obvious room for improvement, although amendments are not expected anytime soon. Nevertheless, the principal concern relates to the inconsistency in the application of the Law. It is expected that IFECOM will continue to update its policies, its criteria and its function as the entity providing support to the Federal Judiciary for a more efficient and transparent procedure.
The Supreme Court and the Council of the Judiciary must place a higher scrutiny on improving filing systems, addressing the many delaying tactics arising from ‘unique' theories of human rights and due process that could well extinguish entire enterprises, and, most importantly, support the training and selection of judges that are versed on commercial and banking law, with a minimum degree of knowledge in accounting and essential finance.
One of Latin America's leading construction and engineering concerns, the iconic Empresas ICA, has been reported to be preparing its pre-packed filing under the Concurso Law during the second half of the year. Billions of US dollars of liabilities are expected to be restructured under a pre-approved plan. The banking and financial community in Mexico and internationally, will be attentive to the concurso proceedings.
The reliability of concurso mercantil and ultimately, the recognition of Mexico as a jurisdiction in which the role of law is upheld, will be at stake. The financial and legal communities remain confident that transparency, adherence to time sensitive milestones and efficiency will in due course prevail, thus allowing the conservation of thousands of jobs and maintaining value for all stakeholders, which will ultimately benefit the continuing development of a vibrant Mexico.
1 Thomas S Heather is a partner at Ritch, Mueller, Heather y Nicolau, SC.
2 Although the 2014 amendments introduced the possibility of avoiding the ‘visitation stage' in pre-packed filings, thus saving weeks of bureaucracy, the author is of the view that there is a benefit of having an auditor complete the many complex IFECOM formats that have proven to be indispensable in the ongoing proceeding.