i Statutory framework and substantive law

The Commercial Insolvency Law (LCM), enacted on 12 May 2000 and amended as of 14 January 2014, governs commercial insolvency. It is a federal law and it applies to merchants and traders, individuals and legal entities, including commercial companies, trusts engaged in business activities, financial institutions and state-owned commercial companies and in connection with small businesses with written agreements.

The federal district courts are the only courts with jurisdiction over commercial insolvency proceedings for traders. Non-traders are subject to state and local civil jurisdiction, and there are no specialist insolvency courts. Special federal district courts will be set up to hear insolvency cases.

Insolvency proceedings for traders start when relief begins – that is to say, when it is adjudicated – which creates the bankruptcy estate. Insolvency adjudication creates a special legal situation for the debtor and the stay, subject to the LCM.

Claims being pursued by the debtor and claims against the debtor before the insolvency proceeding adjudication may not be joined to the insolvency proceeding, including those involving arbitration.

Post-insolvency declaration claims, including post-arbitration claims, against a debtor adjudicated in concurso mercantil (bankruptcy) must not join the insolvency proceeding.

The final judgment on pre- and post-insolvency actions will be recognised by the insolvency court without review of the amount of the claim and its priority.

Transactions that may be annulled

In general, all fraudulent transactions executed against creditors and the insolvency estate may be set aside. The LCM defines as 'felonious' those fraudulent acts that cause or aggravate the cessation of payments, as provided by law. Such acts may also be set aside.

The LCM prescribes a 270-calendar-day 'suspect period' to be reviewed, counting backwards from the date the order for relief was made. This term may be doubled in the case of related subordinated creditors (intercompany or insiders' debt). A request for a longer review period of up to three years must be filed before the judgment on recognition, ranking and priority is entered. The burden to prove is more flexible to obtain extension of the suspicious period without need to prove the actual fraud, which is a separate cause of action. The new retroactive period must be announced by publication in the court's list of orders and in the Official Gazette of the Federation.

Directors' and officers' liability regime

Legal standing to enforce action seeking civil liability (damages) when upon fraudulent transactions (voidance actions) may be brought by: (1) one-fifth or more of the allowed creditors; (2) allowed creditors that jointly represent 20 per cent of the total allowed credits; (3) receivers (interventor) (4) the debtor; and (5) shareholders holding 25 per cent of the debtor's shares. The time-bar on damages actions is five years.

In the context of an insolvency proceeding, the LCM now provides a regime of strict civil and criminal liability for the debtor, debtor's general director, sole administrator, board of directors, legal representatives and key employees, including insiders and relatives when causing damages in regard to the facts and circumstances provided by the LCM. Damages shall be to the benefit of the estate. Civil liability is joint and several and is independent from criminal liability, which may be from three to 12 years' imprisonment.

ii Policy

As a matter of public policy, the LCM favours maximising the value of the insolvent estate's assets as well as the rehabilitation of enterprises (preservation) and creditor's rights. Consequently, liquidation only takes place when rehabilitation is impossible, reflecting the government's priorities of the preservation of jobs and of businesses as going concerns. During previous periods of systemic financial distress, the government has set up rescue programmes to assist companies to recover or start afresh, but these programmes have mainly applied following insolvency proceedings.2

Expedited reorganisations

Pre-packaged reorganisation is allowed by an agreement between the debtor and creditors holding simple majority 51 per cent of the total debt. The debtor and creditors execute the petition. The debtor must state under oath that it is already in a state of insolvency and explain why, or state that insolvency is imminent within 90 working days and that the creditors signing the petition hold at least simple majority 51 per cent of the total debt. A reorganisation plan proposal must be enclosed with the petition, as well as a preservation plan for the business as an ongoing concern. Full insolvency proceedings will be followed without an audit. Protection measures and stays may be requested and granted upon filing of the petition.

iii Insolvency procedures

The insolvency of non-merchants, such as individuals and consumers (civil insolvency), is governed by the state civil codes and state codes of civil procedure. Insolvency proceedings for merchants consist of a single process, comprising two major stages: conciliation and bankruptcy (liquidation). In conciliation, a conciliator is appointed and seeks to establish a reorganisation plan. If no reorganisation plan is agreed, the process is converted into bankruptcy (liquidation). A trustee is appointed for liquidation. Conciliation has a 185 calendar days period of time, counted as of the concurso mercantil adjudication, with two possible renewals of 90 calendar days each. It is mandatory that conciliation may not exceed 365 calendar days.

There is also a sub-stage – the initial audit (inspection) – wherein an auditor is appointed to inspect the debtor's premises and accounts to confirm that the standard for insolvency is met and reports accordingly to the competent district court, which may judge the debtor to be in an insolvency proceeding (known as an insolvency proceeding adjudication).

The LCM is the law providing for the general insolvency procedures available to wind up and rescue companies. The Corporations Law also provides for private out-of-court corporate dissolution and liquidation of a company. In essence these are very similar, again effecting the liquidation of assets to pay creditors, and if there is any balance remaining it goes to shareholders. Corporate liquidation does not, however, provide court orders to stay payments and executions. Liquidators may apply for a voluntary insolvency proceeding seeking a stay.

The debtor remains in possession, as judicial depositary, of the assets during a conciliation proceeding and may continue in its ordinary course of business as a going concern. Assets may be used for such ends, but the conciliator oversees the management of the debtor.

Creditors that supply goods and services may continue to do so. Post-petition creditors may be paid and have priority against estate assets as well as post-financing. Creditors may supervise the debtor by means of a receiver (interventor), who represents and protects creditors' rights and has the authority to be given debtor's information and supervise the debtor and report to the court accordingly. The court has full authority to supervise debtors.

From this point, upon concurso mercantil adjudication, the procedural steps of the insolvency proceedings are as follows:

  1. pre-debt payment is stayed. No interest is borne on unsecured debt. Secured debt bears interest up to the security's value and the deficiency becomes unsecured debt. Debts shall be converted to unidades de inversión (UDI) value. The UDI is a unit subject to inflation adjustments, and its value is announced daily and published in the Daily Gazette of the Federation and major national newspapers;
  2. the debtor is ordered to surrender its financial statements and accounts;
  3. the debtor is ordered to cooperate and allow an auditor (visitor) and conciliator to perform their duties;
  4. executions and attachments are stayed, except for labour credits (salaries of the past two years);
  5. a suspect period is set (see Section I.i);
  6. a summary of the order for relief is published;
  7. the order for relief is recorded in public registries;
  8. notice is given to creditors to file their claim (proof of claims);
  9. the proof of claims process begins; and
  10. a certified copy of the order of relief is issued upon request.

As previously mentioned, the LCM favours rehabilitation of the enterprise and liquidation only takes place when rehabilitation is impossible. A reorganisation plan requires approval from 51 per cent of the creditors holding approved claims.

The conciliation phase is intended to create the best conditions for a reorganisation plan. The LCM does not regulate terms or conditions for the plan, but only sets out minimum rules to ensure its legality. The LCM, however, now provides mandatory notices and access to information to enable interested parties to exercise and protect their rights. Accordingly, the conciliator may recommend that appraisals and studies be conducted when they are necessary to achieve a reorganisation plan, which would be given to creditors through the court. When the conciliator considers that there is an agreement of 51 per cent of the recognised creditors in the plan, he or she will give the plan to the other recognised creditors to give their opinions thereon or to execute the plan.

To approve a viable reorganisation plan that favours all or most creditors under the circumstances, the LCM provides mechanisms to protect the rights of minority creditors by giving them the most favourable terms possible under the plan. This thereby avoids unnecessary or burdensome objections by minorities that, in fact, will benefit from the plan.

Only those creditors with accepted claims may agree on the plan. Labour and tax creditors do not participate in the plan (see Section I.vi). To facilitate approval of the plan, both unsecured and participating secured creditors must be taken into account to determine the necessary majority.

The reorganisation plan, regarding non-participating creditors holding recognised debt, may only provide extension of time to pay the debt or debt discount or combination of both, provided that terms and conditions are equal to those agreed by at least 30 per cent of creditors holding unsecured allowed claims.

The plan may provide for an increase of capital, and shareholders must be notified in order to exercise rights of first refusal. If shareholders do not exercise their rights, the court may simply approve the capital increase.

Dissenting recognised unsecured creditors holding a simple majority or recognised unsecured creditors holding 50 per cent of the debt may veto the plan proposal. If there are no objections, the plan may be approved by the court. Since the approved plan is binding upon absent and dissenting creditors, the most favourable terms and conditions of the plan will be allocated to them.

Upon the court's approval of the plan, the insolvency process terminates and parties cease to perform their functions.

The plan must provide payment for:

  1. labour creditors – up to one year's wages (the highest priority);
  2. consumer creditors;
  3. creditors (administration costs and fees of the insolvency estate) whose claims are secured by assets of the estate;
  4. claims for burial costs when death of the debtor occurs before the insolvency proceeding;
  5. claims for costs of sickness that caused the death of the debtor when the death occurs after the commencement of insolvency proceeding;
  6. secured creditors with mortgage or pledge;
  7. claims holding a special privilege in law;
  8. tax credits;
  9. fund for challenged claims and tax credits that have not been determined;
  10. unsecured creditors (common creditors);
  11. subordinated creditors; and
  12. stockholders.

Private agreements between the debtor and any creditor are null and void once relief is granted and the creditor will lose such rights against debtor.

The plan may not release non-debtor parties such as guarantors; it may only bind a debtor and its creditors, but the liabilities of officers, directors, advisers and lenders may be released in writing by the interested party or parties taking legal action against them.

At this stage, recognised creditors may only oppose the plan if due process has not been followed and if mandatory plan standards are not met (due process encompasses access to supporting information and plan viability, as well as full disclosure of the plan's terms and conditions).

A majority of unsecured creditors whose proofs of claim have been allowed may veto the plan. Unsecured creditors not signing the plan may not object to the plan if they are to be paid in full.

Court approval of a plan may be appealed, without a stay, up to the constitutional level of appeal. A successful appeal dismissing the plan on legal grounds is sent back to court. A new plan may be proposed if they are still at the conciliation stage. The plan is subject to approval of 50 per cent of allowed credits otherwise the case turns into a liquidation, where a reorganisation plan may still be approved, but by a requisite of more than 50 per cent of creditors holding allowed claims and that the plan provides for payment for all creditors holding allowed claims, including those not executing the plan. A default on the plan by the debtor also turns the case into a liquidation.

A pre-packaged reorganisation is allowed by agreement between the debtor and creditors holding simple majority of more than 50 per cent of the total debt. The debtor and creditors will execute the petition. It is required that the debtor states under oath that it is already in a state of insolvency and explains why, or states that such insolvency is imminent within 90 working days and that the creditors signing the petition hold at least a simple majority of more than 50 per cent of the total debt. The proposed reorganisation plan must be enclosed with the petition. A full insolvency proceeding will be followed without an audit. Protection measures and stays may be requested and granted upon filing of the petition. The court must approve the plan, whereupon the proceeding ends.

As a reaction to the well-known Vitro case, the 2014 amendments of the LCM now provide for 'intercreditors debt' (subordinated debt) providing for a new ranking of creditors holding subordinated debt, namely subordinated creditors, that may by created by:

  1. contractual agreement or provided by statute law;
  2. the unsecured intercompany and insiders debt; except for claims of a parent company and individuals that only have control over the debtor for claims ranking. This exception does not include, inter alia, casting votes for the reorganisation plan or fraudulent conveyances; and
  3. late-claim filings.

To prevent fraudulent conveyance of intercompany indebtedness and to give certainty to investors and creditors that their debt would be paid first before certain intercompany obligations, the 2014 amendment provides that where the debtor is a corporation, the following unsecured creditors (statutory insiders) shall be characterised as subordinated in ranking:

  1. subsidiaries and affiliates of the debtor;
  2. the director, members of the board of directors, and key officers of the debtor, as well as those of its subsidiaries and affiliates; and
  3. corporations with the same managers, members of the board of directors or key officers similar to those of the debtor (commonality of management).

In the event the insolvent company is put into liquidation, all of the aforementioned creditors shall receive payment only after senior debt claims are paid in full. Claims held by controlling individual shareholders and by the holding company of the debtor were excluded from subordination in payment as lawmakers considered that including such claims would impair their ability to obtain financing from lenders.

Voting of 'intercompany' claims

In an intercompany claim, there may be no cramdown of legitimate third-party claims on the basis of an intercompany or insider-debt casting vote. The plan must be agreed by the debtor; creditors representing more than 50 per cent of the sum of all the debtor's unsecured and subordinated claims; and creditors representing more than 50 per cent of the debtor's secured or priority creditors.

Further, if intercompany claim holders and insiders (including controlling individual shareholders and holding companies) as subordinated creditors, hold at least (jointly or severally) 25 per cent of the total amount of the credits of (a) and (b), above, then to become effective, the plan must be accepted by creditors representing at least 50 per cent of such credits, excluding from this amount the claims of the insiders.

This rule will not apply when intercompany claim holders and insiders accept the plan as agreed by the rest of the voting claim holders, in which case the simple majority rule applies.

Now, the voting of insider or intercompany claims together with third-party claims will only be sufficient to approve a reorganisation if at least half of the non-insiders vote in favour of the plan.

Subordinated debt and 'subordinated creditors'

Creditors' agreement may provide for the total or partial extinction of subordinated debt or other type of treatment thereto, including its subordination or another form of particular treatment.

Interaction before the Mexican courts of indenture trustees and bondholders

Proof of claims may be filed individually by a bondholder, which will be subtracted from the overall proof of claim filed by an indenture trustee representing bondholders. Each bondholder as well as the trustee is entitled to pursue allowed claims, rights, objections and voting rights.

Bondholders meetings shall be conducted as provided under the indenture agreement, the law governing the indenture or by the LCM; the decisions of bondholders' meetings will have a binding effect.

The extinction of debts

The restructuring plan and the judgment approving it shall be the only document governing the debtor's obligations towards allowed creditors.

Mandatory enforcement of the restructuring plan

Any allowed creditor may request the mandatory enforcement of the restructuring plan by means of a summary proceeding before the court that adjudicated the commercial insolvency.

Amendment of the plan

In the case of a change of circumstances that materially affects the fulfilment of the plan, it may be amended in order to satisfy the need to preserve the enterprise.

Recognition of foreign proceedings

Chapter 12 of the LCM incorporates the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, as discussed in Section I.vii. The LCM allows for ancillary (non-main) insolvency proceedings where main proceedings are pending in another country. There is no automatic recognition of foreign insolvency proceedings.

If the debtor has an establishment in Mexico, recognition follows a full insolvency proceeding that, in theory, may take up to approximately one year for conciliation and up to one further year in the case of liquidation in bankruptcy. If there are appeals up to the Supreme Court, final res judicata decisions may take a further year.

If the debtor lacks an establishment but has assets in Mexico, no full insolvency proceeding need be pursued. For a recognition proceeding there is a summary proceeding with the debtor that may last up to three months. Again, appeals up to the Supreme Court may take another year.

iv Starting proceedings

Plenary insolvency proceedings may be voluntary or involuntary. In a voluntary petition or pre-packaged insolvency, there is no initial visit; now the debtor may voluntarily and creditors may involuntarily request an insolvency proceeding in the event of bankruptcy. In an involuntary petition a full insolvency proceeding must be pursued if the debtor opposes. Bankruptcy allows for a reorganisation plan that may be approved by the same voting requirements as in conciliation, provided further that 100 per cent of creditors holding allowed claims are paid, including those not signing the plan.

The LCM provides for the use of standard forms issued by the Mexican Trustee's Office to speed petition filings and other motions during the proceedings.

The 2014 amendments provide for specialised courts and online proceedings, which are pending to be set up.

Liquidation may now be involuntary. Bankruptcy relief becomes available when the debtor (merchant) requests his or her bankruptcy. Voluntary bankruptcy is adjudicated without full insolvency proceedings; there is no conciliation phase. For a debtor to be placed in bankruptcy by a creditor (i.e., involuntarily) a full insolvency proceeding must be pursued – if the debtor opposes the involuntary proceeding, there is a conciliation phase. A debtor is declared bankrupt by the court if a plan is not agreed upon during the conciliation proceeding or if the debtor does not cooperate with the plan and the conciliator requests a declaration of bankruptcy.

The conditions for initiating an insolvency proceeding are that the debtor must be a merchant, individual or legal entity and that there has generally been a failure to make payments when due. The criteria (insolvency standard) for establishing a general default on payment obligations are that:

  1. there is a failure to meet payment obligations to at least two creditors;
  2. the obligations are more than 30 days overdue;
  3. such overdue obligations represent 35 per cent or more of the total amount of the debtor's obligations as of the petition filing date; and
  4. the debtor lacks the cash assets, as defined by the law, to pay at least 80 per cent of the total debts due as of the petition filing date. Cash assets are:
    • cash to hand and deposits on site;
    • deposits and investments due within 90 days of the date of the petition being filed;
    • accounts receivable due within 90 days of the date of the petition being filed; and
    • securities that regularly registered sell-or-buy operations in relevant markets, saleable within 30 banking business days.

Once a declaration of an insolvency proceeding has been made, the conciliation phase is opened (unless the debtor has itself requested the bankruptcy or a creditor has requested it without debtor's opposition), the substantive effects of which are as follows:

  1. payments are stayed, except those necessary during the ordinary course of business;
  2. pre-existing contractual obligations must be performed as agreed by the parties, except for those to which special provisions apply under the LCM;
  3. all pre-existing obligations become due and have to be fixed in UDIs3 to determine their amount; and
  4. matured debts stop accruing interest (all obligations of the debtor are considered matured and interest stops accruing on obligations, but interest will continue to accrue on obligations secured by a mortgage or a pledge, even after the insolvency declarations to the extent of the collateral).

The adjudication of a commercial insolvency is not binding and lacks effect towards third-party debtors, such as guarantors.

The 2014 amendments make clear that assets that are settled under business trust (fiedicomiso) are not comprised within the estate and may be separated while in possession of debtor, including when debtor is settlor.

Adjudication against a debtor in an insolvency proceeding may be subject to appeal. A petitioner-creditor is entitled to appeal without stay and, as a general rule, such adjudication may not be stayed. The reasoning behind the 'no stay in proceedings' rule is based upon the criteria that continued prosecution of insolvency proceedings follows public policy. The appeal is decided by a court of appeals. The decision of the court of appeals may be further challenged by means of a constitutional action (amparo). Under certain circumstances, the amparo decision may be challenged even further before the Supreme Court of Justice. The insolvency proceeding adjudication may be revoked as of the petition filing date, after all these levels of appeal are exhausted.

Commercial insolvency adjudications may be revoked, based upon the finding of violations of law contemporaneous to the adjudication, with effect as of the petition filing date, even if a full insolvency proceeding has been prosecuted and is virtually finished.

On the other hand, if there is a bankruptcy adjudication based upon voluntary petition seeking insolvency proceeding at the stage of bankruptcy, creditors holding allowed claims may appeal the bankruptcy adjudication without stay. Further levels of appeal asserted by such creditors may not stay proceedings. As in the plenary insolvency proceeding, the bankruptcy proceeding may get up to its termination and be revoked with effects as of the voluntary petition filing date.

Upon the dismissal of a commercial insolvency, management acts as well as bona fide third-party acquisition rights shall be preserved.

Upon dismissal of a commercial insolvency, legal costs and fees may be awarded against the petitioner.

No main foreign insolvency proceeding may be commenced by a foreign representative. If the debtor has an establishment in Mexico, a full insolvency proceeding must be pursued. Upon concurso mercantil adjudication, main foreign proceeding may be recognised, in case recognition petition meets legal requirements. If the debtor lacks an establishment in Mexico, a summary proceeding will be pursued between the foreign representative and the debtor (see Section I.vii).

v Control of insolvency proceedings

Plenary insolvency proceedings are directed and controlled by the court. The court interacts in an insolvency judicial proceeding with all parties with an interest: debtor, creditors, conciliator (while in conciliation stage), trustee (while in liquidation in bankruptcy stage) and interventor. The court provides and approves orders and judgments as well as enforcement thereto. The conciliator and trustee should conduct management functions and provide support to the court to pursue and finish the respective stages of the insolvency proceeding.

Upon filing of a petition for commercial insolvency, the board of directors must assist and cooperate with inspectors, conciliators and trustees with the performance of their duties, and must disclose all relevant information related to the insolvency estate. The board of directors in this situation is the debtor-in-possession, namely judicial depositary, and may continue to run the company as a going concern under the supervision of the conciliator.

vi Special regimes

Workers who are owed wages are excluded; such workers are governed by the Federal Labour Law.4 Tax claims and claims equivalent to tax claims by the tax authorities (federal, state and municipal), the Mexican Institute of Social Security (IMSS) and the National Workers' Housing Fund Institute (INFONAVIT) are excluded from general bankruptcy proceedings. 'Claims equivalent to taxes' includes the IMSS and INFONAVIT tax quotas employers must pay, which are considered equivalent to taxes. Federal tax credits are governed by the Federal Tax Code and state and municipal tax credits are governed by state tax laws. Labour creditors and tax creditors do not join bankruptcy proceedings and are paid and liquidated by their labour chambers and tax authorities, respectively.

Tax credits and labour credits are included within the total liabilities of the debtor. Tax credits have priority over unsecured credits and over credits secured by a pledge or mortgage, even if these secured credits were perfected and recorded after the notice to the debtor of the tax credits. Tax credits have no priority over labour credits or over alimony for which a lawsuit has been filed before a court.

By law, tax creditors do not join general bankruptcy proceedings. The tax law provides that if a debtor is adjudicated against in an insolvency proceeding, the court must notify tax creditors of such adjudication. Enforcement of tax creditors may be stayed by this adjudication, provided tax creditors had been notified of the filing of the insolvency proceeding petition.

Some assets are excluded from execution, attachment and liquidation in bankruptcy such as alimony, child support, family patrimony, common land, and life insurance in the case of an irrevocable appointment of a beneficiary.

Labour credits are included within the total liabilities of the debtor. However, labour creditors are not obliged to join the insolvency proceeding. Labour credits are, instead, considered under the jurisdiction of the labour courts and are enforced and paid before the labour courts rather than joined to federal or state insolvency courts. The same applies to tax credits, which are considered under the jurisdiction of the tax courts.

Insolvency for companies performing a federal, estate or municipal public service may be adjudicated in insolvency proceedings pursuant to special laws and the provisions of the LCM that do not conflict with such laws. The authority granting the concession may appoint the conciliator and trustee and overview the performance of the company. This authority may gain from the court the removal of debtor in possession and have the court appoint a person to take possession of and manage the situation. Reorganisation plans may also be vetoed by such authority, and in the event of a sale that includes the concession, this authority must approve it.

Under the new financial regime, the banking law provides for an autonomous, independent and special insolvency regime called 'judicial banking liquidation', in addition to the administrative control regulations. Such proceedings will be the federal district court-directed liquidation of a bank, and the trustee will be appointed by the Banking Commission. Accordingly, the amendments to the banking law, in the administrative regulation, give greater powers to the financial regulators and provide additional tools for the control, investigation, overview, preventive and protective measures, requirements and sanctions over banks and financial institutions, aimed at more efficiently preventing and remedying situations of financial distress.

Insolvency for insurance, bonds and reinsurance companies is also governed by separate special laws.

Corporate groups

The LCM now regulates groups of companies, and there is no piercing of the corporate veil. The LCM provides that the insolvency proceeding of holding and subsidiary companies will be joint in the same commercial insolvency proceeding, but each company's insolvency will be conducted in a separate court docket file. The LCM does not provide for these to be combined or consolidated for administrative purposes, nor may their assets or liabilities be pooled for distribution. However, creditors or debtors of the same group of companies may file for joint commercial insolvency as long as one or more of the enterprises of the same group meet the insolvency standard. The court may appoint the same auditor, conciliator or trustee, should it benefit the proceedings.

Mexican corporate law does not provide for the insolvency of corporate groups. Corporate groups consolidate for tax purposes, and labour law recognises a substitute employer among a group of companies. The Law on Financial Groups provides for financial groups of companies, with joint and several liabilities without consolidation. Regarding groups of companies, assets may not be transferred from administration in Mexico to another country.

Based upon case law, jurisprudence, corporate veil may be lifted under certain circumstances of fraud.

vii Cross-border issues

Mexico has incorporated the UNCITRAL Model Law, and accordingly provides recognition and full cooperation on cross-border insolvency. Foreign creditors are granted equal treatment with domestic creditors. The federal judiciary has granted relief sought in support of the Model Law.

Mexico was the first jurisdiction in the world to recognise foreign bankruptcy proceedings and grant international insolvency cooperation thereto, in the Xacur case and the IFS case filed and prosecuted by Oscós Abogados, on behalf of the foreign representative.

Outbound Mexican cases have sought US Chapter 15 ancillary recognition (secondary proceedings) to stay executions, as in Aeromexico, and recognition of reorganisation plan as in Satmex, Metrofinanciera, Corporación Durango, Grupo Iusacel and Vitro. Oro Negro is being prosecuted.

Mexico is not party to any international treaties on insolvency, bankruptcy or reorganisation matters, but has executed two treaties on the recognition of foreign judgments that expressly exclude insolvency, reorganisation, bankruptcy and liquidation.

The LCM incorporates the UNCITRAL Model Law in Chapter 12. The law defines the following terms:

  1. foreign proceedings: collective judicial or administrative proceedings in a foreign country, including interim proceedings, under a law relating to insolvency, or adjustment of debt proceedings in which the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purposes of reorganisation or liquidation;
  2. main foreign proceedings: foreign proceedings pursued in the jurisdiction where the debtor's centre of main interests (COMI) is located;
  3. no main foreign proceedings: foreign proceedings pursued in the jurisdiction where the debtor has an establishment as described below;
  4. foreign representative: a person or body, including provisional persons or bodies, empowered in foreign proceedings to administer the reorganisation or liquidation of the debtor's assets and affairs or to act as a representative of foreign proceedings;
  5. foreign court: a judicial authority or other body with jurisdiction over the control or supervision of foreign proceedings; and
  6. establishment: any place of operations where the debtor carries out a non-transitory economic activity with employees and goods and services.

Reciprocity is mandatory. International cooperation may be conducted through Mexican courts and Mexican representatives. Foreign courts and foreign representatives may only act through a Mexican court or Mexican representative, but recognition is not automatic. If a debtor has an establishment in Mexico, full insolvency proceedings under the LCM must be conducted, otherwise, foreign proceedings may be recognised in summary proceedings. In interpreting and applying Chapter 12, consideration must be given to avoiding any violation of the LCM and public policy – Chapter 12 allows the rejection of recognition when there is any violation whatsoever of the LCM or of any principles of public policy. Protection measures (stay of payments or execution) may be granted following a request being filed for recognition. Upon recognition, additional protective measures may be granted. Foreign proceedings will be recognised as main or non-main proceedings, subject to the debtor's COMI. Chapter 12 must be interpreted considering its international origin and the need to promote uniformity in its application and the observance of good faith. Chapter 12 may be applied, unless otherwise provided for under international treaties executed by Mexico, except where there is no international reciprocity. Mexico has not executed any international treaties regarding liquidations or reorganisations.

Chapter 12 aims to provide effective mechanisms for dealing with cases of cross-border insolvency with the following objectives: cooperation between Mexican and foreign courts, the increase of legal certainty for trade and investment, fair and efficient administration of cross-border insolvency cases, protection and maximisation of a debtor's assets, and facilitation of the rescue of financially troubled businesses, thereby protecting investments and preserving employment.

Chapter 12 applies where:

  1. assistance is sought in Mexico by a foreign court or a foreign representative in connection with foreign proceedings;
  2. assistance is sought in a foreign country in connection with a case under Mexican insolvency law;
  3. both foreign proceedings and a case under Mexican insolvency law with the same debtor are concurrently pending (parallel proceedings); or
  4. creditors, or other interested parties, in a foreign country want to commence or participate in a case under Mexican insolvency law.

Cooperation and communication between Mexican courts and foreign courts and between Mexican representatives and foreign representatives may be direct, without the need for letters rogatory or any other formality.

In the Xacur and IFS cases simplified written requests from the US bankruptcy courts were fully enforced by the Mexican courts.


The real economy is strongly tied to the US markets. Between 1994 and 2017 NAFTA grew 450 per cent with a US$1,600 million daily trade between Mexico and US. Mexico is the third commercial partner of the United States, Canada being first and China second. Mexico is the second export market for the United States. The United States recommends investing in Mexico for great opportunities, including in the amended energy and telecom industries. Mexico is ranked as the 16th world economy. It is the most open market worldwide with the potential to trade with 46 countries under free trade agreements. However, there is some uncertainty about the future owing to the current NAFTA renegotiation and the 1 July 2018 presidential elections where the winning president is of a left–socialist leaning position and owns Morena, the political party that won the majority vote in federal congress, which will enable Andres Manuel Lopez Obrador to control federal congress generally when he takes office on 1 December 2018. In recent years, the level of GDP growth has slowed, and by the end of 2018 GDP may only be up by 2.3 per cent, which falls short of the level of growth that was expected. Inflation in 2018 is 4 per cent and the international reserves of the central bank, Banxico, were US$173,279 billion as of 26 July 2018. Chinese and global GDP have decreased in recent years, and the global fall in oil prices, the stronger US dollar and China's yuan devaluations have generally affected exchange rates throughout the world, especially those of undeveloped countries including Mexico, where the peso is expected to be 19.50 to the US dollar by the end of 2018.

Mexico's investment ranking has increased with a positive tendency. Public deficit has increased to levels that are still sustainable but it must be prevented from increasing further. The state of the country's capital markets following global capital markets also has an impact, increasing most stock prices. The new stock exchange created in 2017, Bolsa Institucional de Valores BIVA, to provide a more flexible, stronger and open competition with the current Mexican Stock Exchange, started operations July 2018. The markets are still very volatile. Financial forecasts are uncertain, even in the short term. As expected, the US Federal Reserve increased interest rates again, and, given the world's financial distress, inflation is becoming a major concern of the central bank. Major structural amendments (in education, energy, oil and gas, tax and finance, telecoms, tourism, as well as the rule of law, security and anti-corruption) have been implemented. This year's economy indexes have also been less favourable than in previous years. However, it is hoped that the structural amendments will stimulate a fast-growing economy and an increase in economic performance from 2019 to 202, notwithstanding the world's financial distress. The Mexican government urgently needs to create effective internal incentives to increase domestic growth, as well as additional vehicles to reduce the deep poverty of 43.6 per cent (extreme poverty 7.6 per cent) of the population as well as the public deficit. The Brexit vote has shocked the EU economy and, if implemented, after a new possible voting, may have unpredictable effects in the EU and on a global scale. Trump's commercial war by imposing tax on Canadian, Mexican, Chinese and EU imports into the US is rolling back globalisation, destabilising the financial system, weakening US public finances and threatening trust in the US dollar and may perhaps cause a major international financial distress in the economy and growth or even a US recession. Many industries, businesses and enterprises holding derivatives, bonds and foreign currency debt were affected by the 2006 subprime mortgage crisis and the financial crisis of 2008–2009, and were ultimately forced to restructure their debt, mostly by out-of-court settlements and for a small number by a reorganisation plan approved within an insolvency proceeding. Most of these enterprises have been in the process of recovery.

In the first half of 2018, the economy was generally weak, a situation that is expected to continue in the second half of 2018. The economy has not only experienced a contraction but also a strong devaluation and lower oil production and oil prices. The oil sector has been materially hurt generally, and most businesses have had to shut down. By contrast, the tourism industry in Mexico has grown significantly (9.6 per cent), with the number of foreign visitors at 28.6 million people in 2017 (January–September 2017).

In the short term, the financial scenario looks unfavourable, and businesses may face actual or imminent insolvency distress situations (mostly those that carry heavily debts in foreign currency). They will require reshaping and reorganisation of businesses, in out-of-court or insolvency proceedings. The Mexican insolvency regime is now better equipped to provide effective tools for convenient restructurings that distressed businesses should take advantage of in a timely manner, for a fresh start, preventing further financial distress.

In August 2017, ICA, a major Mexican construction company worldwide, with a 65,151 million peso debt until March 2017, filed for pre-package concurso mercantil. ICA timely reached a reorganisation plan with its creditors and was approved by the court.

In the first quarter of 2013, large housing construction companies such as Corporación Geo, SAB de CV, Desarrolladora Homex, SAB de CV and Urbi Desarrollos Urbanos SAB de CV defaulted on payment of interest under bond issuances and their stock listings in the stock exchange were suspended. Related businesses and enterprises in the construction industry have been strongly affected by the fall in the construction market and are in deep financial distress. They have already completed reorganisation plans with creditors in a concurso mercantil proceeding. Other cases, such as Iusacell, have been successfully reorganised in a concurso mercantil proceeding. The Vitro case was settled (2013) after the Mexican reorganisation plan was rejected by a US court because of a violation, inter alia, of US public policy, since it included release of a third-party debtor and its corporate and financial restructuring was not fully disclosed to creditors.

Oceanografia, a large Mexican company supplier of Pemex (a state-owned oil company) was charged for fraudulent transactions on a number of accounts receivable owed allegedly by Pemex assigned towards Citi Bank Mexico and was involuntarily placed in concurso mercantil upon by a petition filed for the first time by the federal attorney general. Oceanografia reached a reorganisation plan approved by the court.

Insolvency statistics are provided every six months by the Federal Institute of Specialists in Bankruptcy Proceedings (IFECOM), the trustee's office created under the LCM.

IFECOM's statistics relate only to commercial insolvency.5 Since the enactment of the LCM (May 2000 until 15 May 2018), the statistics show 717 filings to have been prosecuted, 57 per cent voluntary (410) and 43 per cent involuntary (307). The number of terminated insolvency proceedings was 435.6

Many feel that the LCM has proved so inadequate that debtors and creditors strive to avoid having to involve themselves with it, and opt to settle out of court instead or face long and costly litigation. There is a tradition in Mexico of out-of-court settlement of insolvency cases, closure of businesses, hide and convey assets, runaway and long and costly litigation because the nationwide aversion to taking insolvency actions through the courts is a symptom of a serious lack of faith in the Mexican insolvency system.7 The 2014 amendments to the LCM are still being tested, and begin to show that this phobia may be overcome rather than allowed to worsen. Labour claims (super-priority) by constitutional provision do not join the insolvency proceedings. Tax claims also do not join the concurso mercantil.


Vitro's concurso mercantil has been the most representative case that led to the highest number of amendments made to the LCM as of January 2014. Mutatis mutandis, Vitro had a major impact on the Altos Hornos de Mexico case, which led the abrogation of the former Bankruptcy and Suspension of Payments Act and the enactment of the LCM. Vitro SAB is a Mexican holding that conducts international operations through many subsidiaries, including in the United States, and whose manufacturing facilities and distribution centres extend throughout the Americas and Europe. It has annual net sales approaching US$2 billion, maintains a workforce of about 17,000 (mostly concentrated in Mexico) and exports its products to more than 50 countries.8

In early 2009, Vitro failed to pay US$293 million in derivative contracts as well as interest payments on bonds maturing in 2012, 2013 and 2017, triggering a default on approximately US$1.5 billion in debt held by banks and unrelated bondholders around the world. Subsequently, Vitro filed for voluntary bankruptcy in mid-December of 2010 hoping to gain court approval for a restructuring plan.

To gain majority support for such restructuring plan, which would be much more favourable to shareholders than creditors, Vitro created, post-default, US$1.9 billion of intra-company loans from various subsidiaries, an amount greater than their obligations to the company's bona fide creditors. The company's intention was to enable the subsidiary creditors that had lent virtual money to the holding company to cast votes in support of Vitro's restructuring plan, thereby imposing a majority in the reorganisation plan on dissenting creditors. Moreover, its affiliates had also entered into a lock-up agreement with the holding company that required them to vote in favour of a restructuring that would release them from payment guarantees they had extended to outside creditors.

Despite strong opposition from genuine creditors, Vitro's intercompany debts were recognised as unsecured claims by the Monterrey District Court.9 The decision was appealed and the Court of Appeals confirmed it (Second Unitary Court Fourth Circuit, appeal dockets 5/2012 and 45/2012). An amparo action (constitutional action – further appeal) was filed by dissident genuine creditors, but was not ultimately necessary as a settlement was reached between Vitro and the genuine opposing creditors. Being pending without stay, first an appeal and then an amparo action challenging the intercompany allowed claims judgment and the reorganisation plan was submitted for court approval. The reorganisation plan was objected to by dissenting genuine creditors for a number of violations, including release of third-party guarantors' obligations, lack of complete and correct information thereto and the intercompany debt casting. The plan was imposed using the casting votes of the intercompany debt held by Vitro's subsidiaries. The district court approved the reorganisation plan. This court approval was challenged by an appeal, which was not decided because the parties reached a subsequent settlement.

It was very likely that an amparo action would have revoked the order of the district court recognising the intercompany debt subordination, and the reorganisation plan was only approved by a majority based on these allowed intercompany claims.

Upon adjudication of the insolvency proceeding, Vitro sought its recognition under the US Chapter 15 as a non-main proceeding, and such recognition was granted. The approval of the Monterrey court of the reorganisation plan was at the time subject to a pending decision by the Mexican court of appeals, when Vitro also sought recognition before the US Bankruptcy Court, which the district court rejected. Vitro appealed before the Fifth Circuit Court of Appeals,10 which, in turn, confirmed the original rejection of recognition of the reorganisation plan. The court of appeals determined, in essence, that the reorganisation plan was contrary to US public policy since the plan extinguished third-party obligations without their having been adjudicated on in any insolvency proceeding whatsoever.

The Vitro insolvency case highlighted many of the deficiencies and possible abuses of the LCM and may be underlined as the most notable insolvency case in recent years, owing to the serious cross-border insolvency dispute between the Mexican and US courts on intercompany debt issues as to recognition of and voting rights of intercompany debt for approval reorganisation plan and enforcement thereto. The Vitro case by itself has led to most of the new amendments to the LCM discussed in Section V.

The bankruptcy in Mexico of Mexicana de Aviaciòn (2014), one of the biggest airline companies, led to a number of 2014 LCM amendments, notably that the conciliation phase of a concurso mercantil under no circumstances may last more than a non-extendable period of time of 365 calendar days. If a reorganisation plan is not reached in a timely manner, the proceedings turn automatically by law into liquidation in bankruptcy.


There is no record as to the commencement of ancillary (or non-main) insolvency proceedings in Mexico during the past 12 months. Two prior ancilliary insolvency proceedings, the Xacur case11 and the IFS Financial Corporation (Interamericas) case,12 were US bankruptcy adjudications, main proceedings, which were recognised in Mexico under Chapter 12 as non-main proceedings. Recognition was granted based upon the estate assets located in Mexico, as the debtors lack establishment thereunder. These cases have both been fully enforced in Mexico. The Xacur case has established several precedents in Mexican jurisprudence, regarding the UNCITRAL Model Law on Cross-Border Insolvency, which is also applicable worldwide in foreign jurisdictions.13 The IFS case has also led to case law jurisprudence regarding the interpretation and enforcement of the Insolvency Model Law worldwide. These cases have proved the effectiveness in general of cross-border insolvency cooperation under the Insolvency Model Law regime. There is the case of Perforadora Oro Negro, SRL de CV; and Integradora de Servicios Petroleros Oro Negro, SAPI de CV concurso mercantil, which as main proceedings have been recognised in US Chapter 15.


i New legislation

As expected, in order to improve the domestic economy, important amendments of more than 34 financial laws, including the commercial insolvency regulations, were enacted by federal congress and published in the Daily Gazette of the Federation, dated 10 January 2014.

Amendments have taken some of the experiences of the 2008–2009 financial crisis, as well as domestic experience, to equip the country to better face and overcome situations of systemic financial distress.

The amendments, in essence, aim to greatly increase credit availability and make it cheaper, especially for small and medium-sized business. Amendments provide legal tools for the efficient and prompt enforcement of the financial regulators' powers, and optimise estate asset liquidation and distributions and creditors' collection rights in a swift and efficient manner.

These legislative amendments are made in the context of several major structural amendments already approved in Congress and in effect, concerning labour, education, finance, gas, oil and energy, communications and tax.

The most important amendments to the LCM, as enacted on 10 January 2014, include the mandatory protection of creditors' rights in addition to the preservation of enterprises and the estate, and equipping the LCM with the legal tools it previously lacked that are necessary to conduct orderly, effective and efficient insolvency proceedings.

ii LCM

After 17 years in effect, the experience of the LCM showed that Mexico was in urgent need of a 21st-century insolvency system. The legislator recognised this situation and made major amendments to the LCM.

The amendments implemented are not all of those that were originally proposed or expected, but at least they aim to improve the commercial insolvency regime. Many of the amendments were forced through by high-profile cases that exposed the LCM's weaknesses, deficiencies and openness to abuse; notably the Vitro and Mexicana Airlines cases, which have given rise to most of the amendments. They also adopt some of the tools used in the financial crisis of 2008–2009 to assist in overcoming situations of domestic and cross-border financial distress.

The amendments being implemented are mainly aimed at protecting creditors and the bankruptcy estate, and making the entire insolvency process more transparent. Such amendments concern, inter alia, filing of petitions when insolvency is imminent; involuntary bankruptcy; post-financing; provisions for managers and directors' liability; joint petitions for groups of companies; subordination debt as a new claim ranking; limited allowance of voting on reorganisation plans of intercompany debt, as subordination debt; full access to information and documents related to the reorganisation plan, voidance actions and clawback period; insolvency damages claim; the strictness of the deadline for the conciliation phase; criminal and the treatment of fraudulent transactions performed by related parties.

Experience still shows that very few insolvency cases are brought as formal insolvency proceedings (a total of 717 filed cases in 18 years of the LCM in force), which make clear the need of a deep and structural new system or at least a major change. The new system should encompass automatic stay as immediate bankruptcy protection, without the standard of being insolvent, discharge, join labour and tax creditors to a unitary universal insolvency proceeding, among other issues that go beyond the scope of this chapter.


1 Darío U Oscós Coria is a senior partner and Darío A Oscós Rueda is a partner at Oscós Abogados.

2 The FICORCA (Foreign Exchange Risk Coverage Trust Fund) programme was instigated in 1982, and the FOBAPROA and UCABE programmes in 1995.

3 The UDI is a unit subject to inflation adjustments, whose value is announced daily and published in the Daily Gazette of the Federation and major national newspapers.

4 Labour credits are claims by employees and may include unpaid wages and employment indemnity.

5 There are no statistics whatsoever regarding consumers' and non-traders' insolvency (civil insolvencies).

6 www.ifecom.cjf.gob.mex IFECOM Report 16 November 2014 to 31 May 2018.

7 When U Oscós, 'Mexican Law Firm Calls for Creditor Protection', World Finance Magazine, November–December 2012, pp. 206–207.

8 Arturo C Porzecanski, 'Mexico's Retrogressions of a Bankruptcy Reorganization Gone Wrong'. Centre for Strategic & International Studies. Americas Programme, 14 November 2011.

9 Fourth District Court in Civil and Labour Matters in the city of Monterrey, Nuevo Leon, docket 38/2010 Vitro Sociedad Anonima Bursatil de CV.

10 US Court of Appeals for the Fifth Circuit. No. 12-10542. Vitro SAB de CV. Debtor. Apelle. Ad Hoc Group of Vitro Noteholders. Appellant.

11 US Bankruptcy Court for the Southern District of Texas Houston Division. Steve Smith, US Trustee of the Estates of Jacobo Xacur et al. Case No. 96-48538-H5-7. Main proceeding. Mex Fourth District Court for Civil Matters in the Federal District. Steve Smith, US Trustee of the Estates of Jacobo Xacur et al. Incidente de Reconocimiento de Procedimiento Extranjero de Quiebra y Solicitud de Cooperacion Internacional. Docket No. 29/2001. Recognition Court. Secondary Proceeding.

12 US Bankruptcy Court for the Southern District of Texas Houston Division. Steve Smith, US Trustee of the Estate of IFS Financial Corporation. Case No. 02-39553-HI-7. Main proceeding. Mex Fourth District Court for Civil Matters in the Federal District. Steve Smith, US Trustee. Incidente de Reconocimiento de Procedimiento Extranjero de Quiebra y Solicitud de Cooperacion Internacional, Docket No. 206/2004, Recognition Court.

13 The most significant of these precedents, which may be found in the Semanario Judicial de la Federación, are the following:

a Direct amparo 98/2003, Direct amparo 97/2003 and Direct amparo 96/2003 of 13 March 2003, regarding a foreign bankruptcy proceeding and the recognition and declaration of international cooperation. A judgment that recognises and grants international cooperation may be revoked;

b Amparo in revisión 282/2003, amparo in revisión 283/2003 and amparo in revisión 289/2003 of 5 September 2003, regarding a foreign bankruptcy proceeding and the recognition and declaration of international cooperation. Indirect amparo may not be allowed against an order that decides a revocation remedy, derived from a decision entered in a judgment enforcement that recognises it, since it is not the last decision in this stage;

c Amparo in revisión 1588/2005 of 26 October 2005, regarding a commercial insolvency. Chapter 12 of the LCM is constitutional because it grants equal treatment to foreign and domestic creditors;

d Amparo in revisión 361/2004 of 27 October 2006, regarding the LCM. Standards for the recognition of foreign proceedings in Mexico; and

e Amparo in revisión 361/2004 of 27 October 2006. International treaties only bind the states that are a party to the treaty.