I INSOLVENCY LAW, POLICY AND PROCEDURE
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 that 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. Instead, special federal district courts are 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 a 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 review period, counting backwards from the date on which 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 an extension of the suspicious period without the 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 related to fraudulent transactions (voidance actions) may be brought by:
- one-fifth or more of the allowed creditors;
- allowed creditors that jointly represent 20 per cent of the total allowed credits;
- receivers (interventors);
- the debtor; and
- 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 damage 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 sanctioned by imprisonment for between three and 12 years.
As a matter of public policy, the LCM favours maximising the value of an insolvent estate's assets, and 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
Pre-packaged reorganisation is allowed by an agreement between a debtor and those of its creditors holding a 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 a simple majority of the total debt. A proposal for a reorganisation plan must be enclosed with the petition, with 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 the 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-day time limit, counted from 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 a debtor's premises and accounts to confirm that the standard for insolvency is met and to report 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; any remaining balance goes to shareholders. However, corporate liquidation does not provide court orders to stay payments and executions. Liquidators may apply for a voluntary insolvency proceeding seeking a stay.
During a conciliation proceeding, the debtor remains in possession of the assets, as judicial depositary, and may continue in its ordinary course of business as a going concern. Assets may be used for such purposes, 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 and 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 the debtor's information, 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:
- 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 unit of investment (UDI) value. The UDI is a unit subject to inflation adjustments. Its value is announced daily and published in the Daily Gazette of the federation and major national newspapers;
- the debtor is ordered to surrender its financial statements and accounts;
- the debtor is ordered to cooperate and allow an auditor (visitor) and conciliator to perform their duties;
- executions and attachments are stayed, except for labour credits (salaries of the past two years);
- a review period is set (see Section I.i);
- a summary of the order for relief is published;
- the order for relief is recorded in public registries;
- notice is given to creditors to file their claim (proof of claims);
- the proof of claims process begins; and
- a certified copy of the order of relief is issued upon request.
As has already been 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 purpose of the conciliation phase is to create the best conditions for a reorganisation plan. The LCM does not regulate terms or conditions for the plan, but sets out minimum rules to ensure its legality. The LCM also 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 avoids unnecessary or burdensome objections by minorities that will actually 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 an extension of time to pay the debt or debt discount, or a combination of both, provided that terms and conditions are equal to those agreed by at least 30 per cent of creditors holding unsecured permitted claims.
The plan may provide for an increase of capital, and shareholders must be notified so that they may exercise their 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 proposed plan. If there are no objections, the plan may be approved by the court. Since the approved plan is binding upon absent and dissenting creditors, they will be allocated the most favourable terms and conditions of the plan.
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:
- labour creditors – up to one year's wages (the highest priority);
- consumer creditors;
- creditors (administration costs and fees of the insolvency estate) whose claims are secured by assets of the estate;
- claims for burial costs in the event that the debtor dies before the commencement of the insolvency proceeding;
- claims for costs of the sickness that caused the death of the debtor, when death occurs after the commencement of the insolvency proceeding;
- secured creditors with a mortgage or pledge;
- claims holding a special privilege in law;
- tax credits;
- funds for challenged claims and tax credits that have not been determined;
- unsecured creditors (common creditors);
- subordinated creditors; and
Private agreements between a debtor and any creditor are null and void once relief is granted and the creditor will lose such rights against the debtor.
The plan may not release non-debtor parties, such as guarantors; it may only bind a debtor and its creditors. However, 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, and 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. In this situation, a reorganisation plan may still be approved, but by a requisite of more than 50 per cent of creditors holding allowed claims and if 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 a debtor and creditors holding a 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 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:
- contractual agreement or provided by statute law;
- the unsecured intercompany and insider 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
- 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:
- subsidiaries and affiliates of the debtor;
- the director, members of the board of directors and key officers of the debtor, as well as those of its subsidiaries and affiliates; and
- 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 that the insolvent company is put into liquidation, all 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 are excluded from subordination in payment as law makers 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 held by those listed in points (a) and (b), above, 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.
The voting of insider or intercompany claims, with third-party claims, will only be sufficient to approve a reorganisation if at least half the noninsiders 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, and 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 made at 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 a debtor's obligations towards allowed creditors.
Mandatory enforcement of a restructuring plan
Any allowed creditor may request the mandatory enforcement of a 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 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 (the Model Law), as discussed in Section I.vii. The LCM allows for ancillary (non-main) insolvency proceedings if main proceedings are pending in another country. There is no automatic recognition of foreign insolvency proceedings.
If a debtor has an establishment in Mexico, recognition follows a full insolvency proceeding that, in theory, may take up to 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 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; 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 have yet 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:
- there is a failure to meet payment obligations to at least two creditors;
- the obligations are more than 30 days overdue;
- overdue obligations represent 35 per cent or more of the total amount of the debtor's obligations as of the petition filing date; and
- 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 are 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 commences (unless the debtor has itself requested the bankruptcy or a creditor has requested it without the debtor's opposition), the substantive effects of which are as follows:
- payments are stayed, except those necessary during the ordinary course of business;
- pre-existing contractual obligations must be performed as agreed by the parties, except for those to which special provisions apply under the LCM;
- all pre-existing obligations become due and have to be fixed in UDIs3 to determine their amount; and
- 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 state clearly that assets settled under a business trust (fiedicomiso) are not comprised within the estate and may be separated while in possession of debtor, including when the 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, the 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.
However, 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, the acts of management and 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 proceedings may be recognised, if the 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 at the conciliation stage), trustee (while in liquidation at the bankruptcy stage) and interventor. The court provides and approves orders and judgments, and enforcement thereof. 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 the filing of a petition for commercial insolvency, the board of directors must assist and cooperate with inspectors, conciliators and trustees in the performance of their duties, and must disclose all relevant information relating to the insolvency estate. The board of directors in this situation is the debtor-in-possession, namely the 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. The term 'claims equivalent to taxes' includes the IMSS and INFONAVIT tax quotas that 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 notice is given 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 the 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. Instead, labour credits are 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 those laws. The authority granting the concession may appoint the conciliator and trustee, and oversee 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 known as judicial banking liquidation, in addition to the administrative control regulations. These proceedings will be the federal district court-directed liquidation of a bank, and the trustee will be appointed by the Banking Commission. Accordingly, amendments to banking legislation, relating to administrative regulation, give greater powers to the financial regulators and provide additional tools for 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.
The LCM now regulates groups of companies, and there is no piercing of the corporate veil. The LCM provides that insolvency proceedings involving holding and subsidiary companies will be combined under 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, the corporate veil may be lifted under certain circumstances of fraud.
vii Cross-border issues
Mexico has incorporated the 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 plans, as in Satmex, Metrofinanciera, Corporación Durango, Grupo Iusacel and Vitro. The drilling company 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 Model Law in Chapter 12, and defines the following terms:
- 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;
- main foreign proceedings: foreign proceedings pursued in the jurisdiction where the debtor's centre of main interests (COMI) is located;
- no main foreign proceedings: foreign proceedings pursued in the jurisdiction where the debtor has an establishment, as described in point (f);
- foreign representative: a person or body, including provisional persons or bodies, empowered in foreign proceedings to administer the reorganisation or liquidation of a debtor's assets and affairs or to act as a representative of foreign proceedings;
- foreign court: a judicial authority or other body with jurisdiction over the control or supervision of foreign proceedings; and
- establishment: any place of operations where a debtor carries out a nontransitory 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:
- assistance is sought in Mexico by a foreign court or a foreign representative in connection with foreign proceedings;
- assistance is sought in a foreign country in connection with a case under Mexican insolvency law;
- both foreign proceedings and a case under Mexican insolvency law with the same debtor are concurrently pending (parallel proceedings); or
- 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.
II INSOLVENCY METRICS
The real economy is strongly tied to the US markets. Trade between the United States and Mexico grew by 6.9 per cent in the first five months of 2019. During that period, the amount traded was US$257.7 million dollars. Mexico is the first commercial partner of the United States, Canada being second and China third. 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 telecommunications industries. Mexico is ranked as the 15th 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 outcome of 1 July 2018 presidential elections. Andrés Manuel López Obrador owns Morena, the political party that won the majority vote in Congress, which has enabled him to control Congress, in general terms, since he took office on 1 December 2018. This president intends to change the country under what is being called the Fourth Transformation (the first being the conquest of Mexico by Spain, the second, independence and the third, revolution), within which, inter alia, there is a severe austerity budget programme, a strong fight against corruption in all levels of the government, including the closing of construction of the new international airport in Mexico City.
The gross domestic product (GDP) in Mexico fell 0.2 per cent in the three months to March 2019, which is in line with the preliminary figure and there having been no growth in the prior quarter. Services and industry shrank and the primary sector lost steam. Inflation in July 2019 was at 3.78 per cent and the international reserves of the central bank, Banxico, were US$175.236 billion as at June 2019. 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 such as Mexico.5
Mexico's investment ranking has increased and is showing a positive tendency. Public deficit has increased to levels that are still sustainable but it must be prevented from increasing any 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 Mexican Stock Exchange, started operations in July 2018. The markets are still very volatile and financial forecasts are uncertain, even in the short term. As expected, the US Federal Reserve has continued to increase interest rates and, given the world's financial distress, inflation is becoming a major concern of the central bank. Major structural amendments have been implemented (in education, energy, oil and gas, tax and finance, telecommunications, tourism, and to the rule of law, security and anti-corruption). However, it is hoped that the structural amendments will stimulate a fast-growing economy and an increase in economic performance from 2019 to 2020, notwithstanding the world's financial distress. The Mexican government urgently needs to create effective internal incentives to increase domestic growth, and additional vehicles to reduce the deep poverty of 41.9 per cent (extreme poverty of 7.4 per cent) of the population, and the public deficit. If President Trump imposes tax on Mexican imports, it will have a lose dynamic, but for Mexico that negative effect will be much worse. Currently most of the commercial trade between the United States and Mexico is free of tariffs. 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 2018 and the first five months of 2019, Mexico reached historic levels of maximum exports with the United States and the United States has increased its sales with Mexico. The economy was generally weak during 2018, which has continued in the first half of 2019. 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.
There has been a decrease in the tourism industry, which represents 8.5 per cent of Mexico's GDP. During the first trimester of 2019, the domestic industry was down by 0.6 per cent, unlike tourism involving foreign visitors, which increased by 3.2 per cent.
In the short term, the financial situation looks unfavourable, and businesses may face actual or imminent insolvency distress (mostly those that carry heavy debts in foreign currency). These businesses will require reshaping and reorganisation 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 agreed a reorganisation plan with its creditors in a timely manner, which was approved by the court.
In the first quarter of 2013, large housing construction companies such as Corporación Geo, SAB de CV (2014), Desarrolladora Homex, SAB de CV( 2014), Obras y Desarrollos Urbi, SA de CV (2014), Promoción y Desarrollos Urbi, SA de CV, Urbi Constructora del Pacifico, SA de CV 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 completed reorganisation plans with creditors in a concurso mercantil proceeding. However, the reorganisation plans have been challenged and are still in concurso mercantil. Corporación Geo, SAB de CV, affiliated and its subsidiaries' reorganisation plan was found not to be financially viable and failed in bankruptcy. 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 of US public policy, inter alia, since it included the release of a third-party debtor, and its corporate and financial restructuring was not fully disclosed to creditors.
Oceanografía, a large Mexican supplier of Pemex (a state-owned oil company), was charged for fraudulent transactions on a number of accounts receivable, owed allegedly by Pemex and assigned to Citi Bank Mexico, and was involuntarily placed in concurso mercantil upon by a petition filed for the first time by the federal attorney general. Oceanografía agreed a reorganisation plan, which was approved by the court. However, that plan was challenged and revoked. Consequently, Oceanografía is in bankruptcy.
Other relevant concurso mercantil cases are Ficrea, SA de CV, Sociedad Financiera Popular (2015), Abengoa México, SA de CV (2016), Integradora de Servicios Petroleros Oro Negro, SAPI de CV (2017) Perforadora Oro Negro, SRL de CV (2017) and Isolux de México, SA de CV (2018).
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.6 Since the enactment of the LCM (May 2000 until 15 May 2019), statistics show that 751 filings have been prosecuted, of which 57.25 per cent were voluntary (430) and 42.75 per cent involuntary (321). The total number of proceedings being prosecuted are 198: 20 (10 per cent) in the verification subphase, 32 (36 per cent) in the conciliation phase and 142 (72 per cent) in the bankruptcy phase. The number of terminated insolvency proceedings in this period is 15.7
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.8 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.
III PLENARY INSOLVENCY PROCEEDINGS
Vitro's concurso mercantil is the case that has led to the highest number of amendments made to the LCM as of January 2014 (see Section V). Mutatis mutandis, Vitro had a major impact on the Altos Hornos de Mexico case, which led to 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.9
In early 2009, Vitro failed to pay US$293 million in derivative contracts, and 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 2010 hoping to gain court approval for a restructuring plan.
To gain majority support for the 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 over dissenting creditors. Moreover, its affiliates had 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.10 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 (i.e., 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 allowed intercompany claims judgment and the reorganisation plan was submitted for court approval. Dissenting genuine creditors objected to the reorganisation plan 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 US Chapter 15 as a non-main proceeding, which 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,11 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 them having been adjudicated on in any insolvency proceeding whatsoever.
The Vitro 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 of a reorganisation plan and enforcement thereof.
The bankruptcy of Mexicana de Aviación (2014), one of Mexico's biggest airline companies, led to a number of the 2014 amendments to the LCM, notably that the conciliation phase of a concurso mercantil may not, under any circumstances, last more than a non-extendable period of 365 calendar days. If a reorganisation plan is not agreed in a timely manner, the proceedings turn automatically by law into liquidation in bankruptcy.
IV ANCILLARY INSOLVENCY PROCEEDINGS
There is no record of the commencement of any ancillary (main or non-main) insolvency proceedings in Mexico during the past 12 months. Two prior ancillary insolvency proceedings, the Xacur case12 and the IFS Financial Corporation (Interamericas) case,13 were US bankruptcy adjudications, main proceedings, which were recognised in Mexico under Chapter 12 as 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 Model Law, which is also applicable worldwide in foreign jurisdictions. The most significant of these precedents, which may be found in the Semanario Judicial de la Federación, are the following:
- 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;
- 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;
- 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;
- Amparo in revisión 361/2004 of 27 October 2006, regarding the LCM. Standards for the recognition of foreign proceedings in Mexico; and
- Amparo in revisión 361/2004 of 27 October 2006. International treaties only bind the states that are a party to the treaty.
The IFS case has also led to case law jurisprudence regarding the interpretation and enforcement of the Model Law worldwide. These cases have proved the effectiveness in general of cross-border insolvency cooperation under the Model Law regime. There are also the cases 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 under US Chapter 15.
i New legislation
As expected, to improve the domestic economy, important amendments of more than 34 financial laws, including the Commercial Insolvency Regulations, were enacted by Congress and published in the Daily Gazette of the Federation, dated 10 January 2014.
Amendments have taken into account some of the experiences of the global 2008–2009 financial crisis, and domestic experience, to equip the country better to 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 businesses. The 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, 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.
After 19 years in effect, the legislator should recognise that Mexico is still in urgent need of a 21st-century insolvency system and should introduce major amendments to the LCM or, even better, enact a new insolvency statute.
The amendments implemented are not all 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 and deficiencies and the fact that it was open to abuse – notably the Vitro and Mexicana de Aviación 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 main aim of the amendments being implemented is to protect creditors and the bankruptcy estate, and to make the entire insolvency process more transparent. These amendments concern, inter alia:
- filing of petitions when insolvency is imminent;
- involuntary bankruptcy;
- 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 relating to a reorganisation plan, voidance actions and clawback period;
- insolvency damages claims;
- the strictness of the deadline for the conciliation phase; 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 751 filed cases in the 19 years that the LCM has been in force), which clearly showed the need for a new, comprehensive and structured system – or at least a major change. The new system should encompass automatic stay as an immediate bankruptcy protection, without the standard of being insolvent, discharge, joint 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. The information in this chapter was accurate as at September 2019.
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 The peso was at 19.46 to the US dollar as at 14 August 2019.
6 There are no statistics whatsoever regarding consumers' and non-traders' insolvency (civil insolvencies).
8 Darío U Oscós, 'Mexican Law Firm Calls for Creditor Protection', World Finance Magazine, November–December 2012, pp. 206 and 207.
9 Arturo C Porzecanski, 'Mexico's Retrogressions: Implications of a Bankruptcy Reorganization Gone Wrong', Centre for Strategic and International Studies, Americas Programme, 14 November 2011.
10 Fourth District Court in Civil and Labour Matters in the city of Monterrey, Nuevo Leon, Docket No. 38/2010, Vitro Sociedad Anonima Bursatil de CV.
11 US Court of Appeals for the Fifth Circuit, No. 12-10542, Vitro SAB de CV (debtor and appellee) v. ad hoc group of Vitro noteholders (appellant).
12 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.
13 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.