I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
The past 18 months have witnessed a flurry of litigation in the Mexican courts, which pursuant to the terms of the law of Commercial Insolvency of 2000, as amended in 2007 and 2014 (the Concurso Law), have exclusive jurisdiction in insolvency matters. While the actual number of filings – mostly voluntary – for relief under concurso mercantil remains modest with respect to major corporations experiencing liquidity issues, the continuing widespread use of pre-admission 'precautionary' or pre-emptive measures upon the filing of voluntary requests by debtors for concurso relief have generated complex litigation cases. The end result for the time being has been a constant and significant delay in concurso proceedings, and what appears to be a demise in the reliability of formal insolvency processes in Mexico.
Indeed, a prime example is the much publicised battle between the many parties involved in the cross-border proceeding of Mexican driller Oro Negro and the deterioration of the five state of-the-art oil rigs sitting in Mexican waters formerly in its possession. There were well over 200 motions filed in the course of one year arising from controversies as to the extent and legality of precautionary measures issued by a federal court, which delayed the declaration of insolvency and thus the start of its concurso proceeding for over a year. Parallel filings were made in Singapore and in the Southern District of New York. In an interesting and unusual development, especially since the main proceeding is in a Mexican court, the judge overseeing the Chapter 15 case in New York ordered a 60-day mandatory mediation, which was conducted by an outstanding former US bankruptcy judge with the active participation of the Mexican conciliator. While the mediation failed to produce the basis for a restructuring agreement, it was in a way a success in establishing the realities of the case and its potential remedies. This US$1 billion-dollar case may well end in the liquidation of Oro Negro and ongoing litigation in the United States and Mexico.
Most other notable cases seem stalled in an overloaded court system – there are no special bankruptcy courts – with rotating judges in many instances. Delays of months are not uncommon and adherence to the 'strict' one-year statutory schedule for an orderly restructuring or conciliation is not complied with. A few cases, such as that of Empresas ICA, the largest restructuring to date, were resolved in record time. Nevertheless, they are the exception and most cases take a substantial time to be completed. It is clear that the Supreme Court lacks interest in overseeing the positive development of better practices in insolvency, given the many legal issues it is currently addressing, and, in addition the administrative body of the judiciary entrusted with the supervision of concurso proceedings, the Federal Institute of Specialists for Insolvency Procedures (IFECOM) has done very little to support the efficiency of concursos. Moreover, the federal judiciary, at the level of circuit courts, has continued to issue inconsistent and controversial decisions, which have added to the unreliability of the procedure.
A notable case involving a Spanish contractor's Mexican subsidiary, ISOLUX, resulted in a successful restructuring using concurso as a tool, thanks to the tenacity of the Federal Electricity Commission, the creditor banks and the suppliers involved. This was even after the initial rulings of the court came dangerously close to derailing an orderly process that allowed for the rescue of certain strategic key infrastructure projects in power transmission.
In a further development, the policies implemented by the federal tax authorities to provide substantial relief consistent with court-approved plans, relief supported by specific provisions found in the Federal Tax Code, have come under fierce attack from the new administration of President López Obrador. If the provisions of the Federal Tax Code are repealed or policies overturned, there will be one less key incentive to using concurso mercantil as a restructuring tool.
In general, however, restructuring practices in Mexico continue to focus on out-of-court settlements with a very high rate of success. Making use of concurso mercantil as a means to implement solutions is the exception.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
As previously mentioned, the Concurso Law was published in May of 2000 and has been amended twice, in December 2007, with the introduction of the Mexican version of a pre-pack, and in January 2014, with the more significant amendments summarised in Section III.
The Concurso Law is a complex statute, which will require continued and hopefully, a careful application and interpretation by the Federal courts.
The following subsections present the principal aspects of the Concurso Law.
i One proceeding
The Concurso Law provides for one sole insolvency proceeding (concurso mercantil), encompassing two successive phases: a conciliatory phase of mediation among creditors and debtor (known as the conciliation stage), and a second stage of bankruptcy or liquidation. The objective of the conciliatory phase is to conserve the business enterprise as an ongoing concern through a restructuring agreement. On the other hand, the stated purpose of bankruptcy is to liquidate the business. Prior to a debtor being placed in concurso, the process includes a preliminary examination proceeding to verify whether the commencement standards have been met, unless a pre-pack is filed. Unfortunately, while the IFECOM formats are quite simple in their structure, the examination proceeding seems to be misunderstood as an audit of the company, leading to unexpected delays and confusion. It is noted that the initial preliminary proceeding lacks in transparency, and the examination proceeding reports are not made public.
ii Procedural terms
An important part of the Concurso Law involves measures that were designed to expedite the handling of mechanical aspects of insolvency. Procedural terms in legal proceedings are relatively short, yet it is a fact that most courts fail to abide by them, although in the Empresas ICA case, the presiding judge did apply the terms strictly.
Provisions in the law as to procedural exceptions in legal proceedings were designed to avoid the automatic suspension of the conciliatory proceeding, as was the case under the prior Law of 1943, yet Federal judges continue to apply measures that have, in fact, halted concurso proceedings.
The conciliatory stage is designed to be completed in 185 calendar days in the best of cases, although two 90-day extensions may be granted if a qualified majority of creditors so approves. The Concurso Law clearly underlines that in no event may the conciliatory stage be extended beyond 365 days, whereupon bankruptcy and liquidation of assets are, in theory, to begin immediately. In practice, this is not the case.
iii Petition for commercial insolvency
A business enterprise that is generally in default with respect to its payment obligations will be declared commercially insolvent. The debtor, any creditor or the Office of the Attorney General may file for insolvency.
The Concurso Law establishes precise rules that determine when a debtor is 'generally in default'. The principal indications or presumptions are the failure by a debtor to comply with its payment obligations in respect of two or more creditors, and the existence of the following two conditions: 35 per cent or more of its liabilities outstanding are 30 days past due; and the debtor fails to have liquid assets and receivables, which are specifically defined, to support at least 80 per cent of its obligations, which are due and payable.
Specific instances, such as insufficiency of assets available for attachment or a payment default with respect to two or more creditors, are considered by the Concurso Law to be facts that by themselves will result in a presumption of insolvency.
In theory, the 2014 amendments allow the debtor to file for concurso if it can be anticipated that it will be generally be in default with respect to its payment obligations or falling within either of the conditions leading to a presumption of insolvency, as mentioned above, within 90 days of the petition filing. On the other hand, involuntary filings have been largely unsuccessful because of the many formalities that must be met.
The federal courts have jurisdiction over concursos, notwithstanding that even this basic principle has been – unsuccessfully – challenged. While it is a fact that district judges are overburdened with constitutional challenges (amparos) and have little practice in regard to mercantile matters, the selection process, supervision, continued education and preparation of federal judges have been substantially improved in the recent past. Salaries have been materially increased, and there has been a greater impartiality. Nevertheless, the courts have been reluctant to accept insolvency cases given their considerable workload, among other reasons, and when they have accepted a major matter, the mere size and thousands, if not millions, of pages involved have made it a huge task to address and preside over these proceedings efficiently.
The Concurso Law provides for the use and training of experts in the field of insolvency with IFECOM as an entity to coordinate their efforts and provide continuing education.
The specialists who have a role in proceedings under the Concurso Law are:
- the examiner, whose duties are to determine whether the debtor complies with the commencement standards and who participates in the proceeding up to the judge's declaration of insolvency;2
- the conciliator, who is appointed in such declaration and who has broad powers to mediate, to take steps to protect the enterprise as an ongoing concern or to immediately begin bankruptcy and who takes on significant responsibilities in a concurso; and
- the receiver, who may or may not be the conciliator and whose principal function is to proceed with the sale of assets and payment of claims.
The judge also has a principal role, although the function of the mediator or conciliator is considerable (including the authority to approve DIP financing).
Those who wish to act as examiner, conciliator or receiver must request IFECOM to register them in the special registry maintained by IFECOM. It is unfortunate that the registry, especially for complex cases, has not been opened for the large accounting or insolvency advisory firms, but only to individuals.
There are numerous restrictions prohibiting conflict-of-interest relationships. The appointment procedure is supposedly based on a random, electronic selection from the classes and ranges of experience pertaining to the experts registered with IFECOM, classes that vary in accordance with the complexity and asset size of the business enterprise in question.
It is relevant to note that a qualified majority of creditors may replace or appoint a professional as conciliator or receiver even if the professional is not registered with IFECOM. In cases involving the insolvency of a company operating under a federal concession, the conciliator may be appointed at the request of the corresponding authority, such as the Ministry of Communications in regard to corporations in the telecommunications industry, as was the case with the successful restructurings of Satélites Mexicanos SA de CV.
vi Related companies
Insolvency proceedings of two or more entities are not joined, although controlling and controlled companies' proceedings will be joined, but will be handled in separate records. A petition must be filed individually by each group member; nevertheless, the 2014 amendments introduced provisions to allow for the joint petition by multiple group members. This technique was efficiently applied in the Empresas ICA case. Mexican courts do not, however, recognise substantive consolidation.
vii Identification of creditors and declaration of insolvency
The debtor that requests a judgment of declaration of concurso mercantil must furnish detailed lists of creditors and debtors, with a description of the nature of the debts. The amendments of 2014 introduced a number of relevant additions to the petition request: a copy of the corporate resolutions that approved the filing, a proposed reorganisation plan and an enterprise conservation plan, which were intended to include DIP financing terms.
Absent a pre-pack, the day after the judge admits the petition, which in practice may take weeks or months, he or she must send a copy to IFECOM, ordering it to designate an examiner within five days. The judge will order the visit and immediately notify the debtor. The examiner will review the books and records of the debtor and will prepare minutes of the visit, which must also include a list of all creditors in IFECOM formats. The examiner may request that the judge issue precautionary measures needed to preserve the assets of the debtor, although the debtor's counsel usually addresses them upon filing. The examiner will render a report to the judge that will be sent to the debtor and the creditors for their respective comments, if any.
Within a maximum term of 83 days as of the termination of the examination proceeding, the Law provides that the judge must render a judgment of mercantile insolvency, which, among other things, must contain:
- an order to IFECOM to appoint a conciliator;
- a declaration of the opening of the conciliatory stage unless the debtor has requested bankruptcy;
- an order to the debtor to deliver all books and records to the conciliator;
- an order to the debtor to suspend the payment of its pre-petition indebtedness, other than those that are deemed to be essential for the continuation of the business enterprise;
- an order to freeze all asset foreclosure and attachment proceedings; and
- an order to publish a notice to all creditors, so that they may appear in the proceeding, although this requirement (a filing proof of claim) is no longer mandatory.
The extensive participation of the conciliator in the proceedings should also be noted. The conciliator is also responsible for proposing the creditors who should be recognised and is mandated to proceed with notices and publications pursuant to provisions that are very specific as to terms. Formalities are always a major issue and creditors must be aware of tactics delaying the publications that may lead to material postponements and ambiguities.
viii Effects of a declaration of insolvency
Once the initial judgment declares the debtor in a stage of insolvency or concurso mercantil, attachment or foreclosure of assets is suspended during the conciliatory stage, with the sole exception of labour-related obligations. Tax-related attachments or liquidations under specific provisions of the Concurso Law are specifically stayed.
The debtor maintains the administration during the conciliatory stage, although the conciliator may request the court removal of the administration. With the express purpose of conserving the enterprise as a going concern within the conciliatory stage, the conciliator is given broad powers to decide on the acceptance or rejection of contracts (within certain parameters), the contracting of new loans – although most litigators insist that the judge must approve – and the sale of non-essential assets. In all cases, the conciliator must constantly report to the court every 72 hours – which is obviously burdensome in major filings – of each and every payment to any supplier or person.
ix Debts in foreign currency
The Concurso Law attempts to correct prior judicial practice, which converted foreign currency debt to pesos early on in the proceeding. The Law establishes provisions that are designed to protect the monetary value of creditor loans. All peso-denominated obligations are converted into inflation-linked units known as UDIs; foreign currency-denominated obligations are converted into pesos at the prevailing rate of exchange on the date the insolvency judgment is rendered and then converted into UDIs. Only claims with a perfected security interest (mortgages or pledges – but not in regard to guarantee trusts) will be maintained in their original currency or unit of account, and will continue to accrue interest, but only to the extent of the value of the collateral.
x Fraudulent conveyances
The Concurso Law provides for a general rule as to the period when insolvency is presumed to have begun, which is of 270 calendar days prior to the judgment declaring insolvency (the 'retroactive period'). Nevertheless, upon the reasoned request of the conciliator, the interventors, who may be appointed by the creditors to oversee the process, or any creditor, the judge may determine a longer period (at most, three years). Conveyances that are not arm's-length or commercially sound, and the creation or increase of security interests within the retroactive period will be presumed fraudulent to creditors and will not be recognised.
The general concept of netting is recognised by the Concurso Law, which specifies that netting is mandatory for parties to a transaction recognised by the Law, pursuant to terms agreed upon in the relevant contract, on the date of the declaration of insolvency, in respect of liabilities and rights arising from master or specific agreements entered into in connection with financial derivative transactions, reportos (Mexican law-governed repurchase transactions), securities lending transactions and other equivalent transactions.
Mandatory netting is also recognised by the Law as an exception to the 'cherry-picking' powers given to the conciliator (i.e., mandatory netting applies, regardless of whether the conciliator decides to assume or reject the relevant executory contract).
Under the Concurso Law, the effects of a netted transaction are deemed to survive, even if the transaction was netted during the insolvency retroactivity period (as mentioned previously, generally 270 days). This provision constitutes another development that has given financial institutions certainty when netting, on a bona fide basis, financial derivative transactions.
Obviously, as a prerequisite to netting, the Concurso Law accepts the principle of early termination. It establishes that financial derivative transactions and reportos transactions, maturing after the date of the declaration of insolvency, shall be deemed terminated precisely on that date.
In connection with financial derivative transactions, the Concurso Law provides that, if the relevant agreement does not specify the terms pursuant to which a transaction is to be closed-out and netted, the value of the underlying assets and liabilities is to be determined on the basis of their market value on the date of the declaration of insolvency; if such market value is not available or cannot be demonstrated, the conciliator may request an experienced third party to determine such value.
The general concept of netting reflected in the Concurso Law should be broad enough to encompass transactions such as New York or English law-governed repurchase transactions, securities loan agreements and any other transactions that may be expressed in other currencies. However, the broad terms of the relevant provisions in the Concurso Law, may result in abuses that would seem to go beyond the intent of the drafters of the Law (i.e., creditors claiming that transactions that are not financial derivative transactions, and, therefore, not benefiting from netting provisions, be considered as derivatives, by virtue of the manner through which such transactions were documented). It is also expected that complex derivatives will be challenged as invalid, based on arguments of ultra vires, lack of authority, disproportional elements and the like, specifically in times of unforeseen volatility. While such issues have been addressed by US courts (principally in New York) in favour of creditor banks in matters where Mexican companies were plaintiffs, the subject of complex derivatives is far from settled in Mexico.
xii Restructuring plan; pre-packaged insolvency
To become effective, a restructuring plan must be subscribed to by the debtor and recognised creditors representing more than 50 per cent of the sum of the total recognised amount corresponding to unsecured creditors and the total recognised amount corresponding to secured or privileged creditors subscribing the plan. For acceptance, the favourable vote of 75 per cent of third-party unsecured claims if unsecured inter-company claims account for more than 25 per cent of unsecured claims must be obtained. Any such plan, with the validation of the court, would become binding on all creditors and the insolvency proceeding will be considered as final and concluded.
One significant problem with the statute is that there are no provisions allowing qualified majorities to impose a plan on any recalcitrant participant in regard to secured creditors, although there are different largely untested theories as to how such imposition may be accomplished.
xiii Key procedural events
The key procedural events, in summary – and in theory – are as follows (approximate terms for their completion are in parentheses).
- acceptance of filing (by day 10);
- appointment of an examiner (by day 21);
- judgment declaring insolvency (by day 80);
- appointment of conciliator (by day 85);
- judgment recognising creditors and establishing preferences (by day 145); and
- restructuring agreement (by day 365); if not, bankruptcy is declared (on day 365, at the latest).
The bankruptcy or liquidation stage may begin earlier, if requested at any time by the debtor or if the conciliator determines that it will be impossible to reach agreement in respect of a restructuring agreement. Creditors may demand that the concurso begin at the bankruptcy stage, but it is extremely unlikely any such demand will actually prevail. Once the bankruptcy stage is declared, a receiver is appointed, which may be the same person who acted as conciliator (by day five of the declaration); the receiver takes over possession of the enterprise and its management (by day 20); the receiver prepares and delivers liquidation balance sheets and inventories (by day 75); the individual assets or the enterprise as a whole are slated for the sale and notices are sent out to potential bidders (by day 135); asset sales begin (the general rule is to conclude liquidation by day 180); and payment to recognised creditors, subject to the preference of labour and, thereafter, secured creditors and taxing authorities, will begin as soon as practicable. In practice, very few cases have reached this stage, and save for only one case, they have all failed to adhere to the time frames set forth by the Law, missing the mark by many years.
xiv Other provisions
The 2014 amendments overhauled the whole bank resolution regime, and expunged it from the Concurso Law so that it is governed solely by the Credit Institutions Law. It also includes a chapter that refers to international cooperation in insolvency proceedings (in a similar fashion as Chapter 15 in the US but with substantial changes that make it inoperative). Finally, it also refers to conducts and liabilities that will be considered criminal in nature, and refers to specific prison terms that may be applied to administrators and directors committing criminal conduct.
xv Duties of directors
The Concurso Law includes a regime for director liability for all business entities, which could have an impact on the manner in which directors behave in the imminence of insolvency and the way in which these issues are addressed by the courts.
Disinterested directors are protected from liability under 'business judgement' provisions, based on the presumption that directors have acted on an informed, good faith basis, on the belief that the action taken was an adequate alternative, if based upon reliance on management and the advice of the corporation's external auditors or legal and financial advisers.
It is the view of the author that as a legal matter, directors and officers must manage an insolvent company and maximise its value for the benefit of all of its stakeholders. The focus should be maximising the value of the enterprise, rather than attempting to maximise recoveries for any particular constituency.
III RECENT LEGAL DEVELOPMENTS
The latest amendments to the Concurso Law were enacted by Congress in 2014. The principal objectives of the reform focused on the goals of a more expedient and efficient procedure, greater transparency and a reasoned intent to formally introduce DIP financing – certainly bold intentions.
The most relevant provisions introduced by Congress were:
- prohibiting the judge from extending the periods set forth in the Concurso Law;
- the consolidation of concurso mercantil proceedings of companies that are part of the same corporate group, the concept of which now includes companies that have the capability to make decisions with respect to another company, regardless of the actual shareholdings;
- the ability of a debtor to request the concurso mercantil status prior to being generally in default with respect to its payment obligations, when such situation is expected to occur inevitably within the following 90 days;
- the possibility of requesting a concurso mercantil directly in the stage of bankruptcy (liquidation);
- permitting common representatives to file credit recognition claims on behalf of a group of creditors and the addition of certain rules for the subscription of the debt restructuring agreement in the case of collective credits through their individualisation;
- allowing for the use of standardised forms to voluntary request or involuntary demand concurso mercantil;
- the prospect of filing petitions and other communications electronically;
- an emphasis on transparency;
- provisions permitting debtors to obtain DIP financing as necessary to maintain the ongoing business of the company and the essential liquidity during the concurso, the financing of which will be considered privileged in ranking (with a preference over all secured creditors) for purposes of the preference of the payment thereof in the event of a liquidation;
- the recognition of subordinated creditors, including inter-company creditors in accordance with certain rules, which, among others, establish that such inter-company creditors will not be allowed to vote for the approval of the debt restructuring agreement when such inter-company creditors represent 25 per cent or more of the total amount of recognised credits, unless such creditors consent to the agreement adopted by the rest of the recognised creditors of the same class; and
- the broadening of the retroactivity period applicable for the review of fraudulent conveyances with respect to transactions entered into with inter-company or related creditors.
With respect to the concurso mercantil proceeding with pre-packaged plan, the Concurso Law permits the appointment of a conciliator who is not registered with the IFECOM by the agreement of the debtor and creditors representing at least the majority of the total amount of debt. Likewise, the percentage required for filing a petition for concurso mercantil with a pre-pack plan was increased to provide that creditors representing at least a majority of the total amount of the abilities of the company must subscribe to the pre-pack plan.
To avoid abuses in respect of an insolvent debtor, the amendments to the Concurso Law also included a new set of provisions that refer to the potential liability of the debtor's management and relevant employees for damage caused to the debtor company if:
- acting with a conflict of interest;
- favouring one or more shareholders and causing damage to other shareholders;
- obtaining economic benefits for themselves or for others;
- knowingly making, providing, disseminating, publishing or ordering false information;
- ordering or causing the accounting registries, related documentation or conditions in a contract to be altered, modified or destroyed;
- failing to register transactions or causing false information to be registered, or causing non-existent transactions or expenses to be registered, or real transactions or expenses are exaggerated, or otherwise carrying out any act or transaction that is illegal or prohibited by law, causing a damage to the bankrupt debtor and obtaining an economic benefit, directly or indirectly; and
- in general carrying out any wilful or illegal act or acting with bad faith pursuant to the Concurso Law or other laws.
Although the Concurso Law adopted the business judgment rule contained in the Securities Law applicable to the members of the board of publicly traded companies and allows such directors and relevant employees to obtain insurance, guaranty or bonds to cover the amount of the indemnification for losses and damages caused, except for wilful misconduct, acts of bad faith, the Concurso Law expressly prohibits any agreement, or provisions in the by-laws with respect to any type of consideration, benefit or exemption that may limit, release, substitute or redeem the liabilities of such members of the board and relevant employees of a bankrupt debtor in the event of wilful misconduct or bad faith.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
Recent cases have continued to underline material limitations in regard to concurso proceedings, the Empresas ICA matter being the exception.
Although the Law allows creditors and debtor companies in a pre-pack concurso to appoint a conciliator who is not a member of IFECOM, understandably IFECOM has been a zealous protector of its oversight responsibility, placing a stringent scrutiny on any such conciliator – and perhaps, acts of harassment – especially with respect to formalities that seem to go well beyond the Law. There continues to be a marked emphasis on the use of cumbersome IFECOM formats and computer programs, which are not designed for large corporations, causing many delays at all stages of the procedure. The procedure and requirements that have been imposed by IFECOM in regard to the recognition of creditors stress the physical delivery of original documents, which in practice has meant that the conciliator may not rely on the audited financial statements of the company but on empirical evidence of debt, which may lead to months of otherwise inexplicable interruption, notwithstanding that the Law provides otherwise. The author continues to strongly disagree with such policies and impositions. In addition, in regard to individual bondholder recognitions, the compulsory IFECOM formats have referred to 'assignment of credits' where in legal terms there are none, as the applicable concept is the individualisation of a collective claim – the bond issue – and not an assignment.
Substantial formalities imposed on the judicial procedure have led to little transparency. The Federal Judiciary has failed to implement electronic filings of any sort, which leads to a considerable administrative burden on the courts themselves, not to mention a colossal waste of paper and natural resources. As a consequence, reviewing all the documents actually filed in any major process is a task of gargantuan proportions, which of course affects the timing of the concurso – the 'strict' time periods in the Law have been extended more often than not – and moreover, create a perfect setting for many appalling delaying tactics, which do not merit a serious comment, although their existence is undeniable.
As to DIP financing, Mexican companies have not been aided by debtor-in-possession financing from Mexican banks or institutional sources, and foreign entities have failed to be persuaded to fund any such facilities until now, given continuing procedural uncertainties resulting in questions as to preference. In any event, the demands by lenders once a concurso is in process for security over and above the statutory priority have severely limited DIP financing. Notwithstanding this, in exceptional circumstances DIP financing has been provided successfully and without challenge.
As to the ranking of claims, only registered mortgages and pledges have been given statutory preference on a clearly reliable basis, given a literal reading of the Concurso Law. Creditors holding security rights under trusts or escrows have been recognised in most cases as common creditors only, although they are given the 'privilege' of separating assets in trust from those of the company in question, a concept that makes little sense in view of the stated objective of the Law: to keep the corporation as an ongoing concern during the workout or conciliatory stage of the concurso. Breaking up operating assets is inconsistent with this objective. A better view is that such creditors should be recognised as creditors with a stated contractual privilege to specific assets or flow of funds, irrespective of any procedure of separation – a view that is supported by a correct reading of the Law and by the author.
As to expenses, formal cases have brought about a debate both at IFECOM and among a number of judges, as to which concepts will actually be recognised as reimbursable expenses in a concurso proceeding. Professional fees, legal and those of financial advisers, have often been considered as substantially onerous and have thus been reduced significantly. In the extreme, the professional fees of a conciliator in a major case, were turned down by the judge as unnecessary.
Among the more alarming points of view generally shared by the litigation bar, is that, to the extent a capitalisation of debt becomes part of an exit plan, even if voted upon and approved by overwhelming majorities of every class of creditor, shareholders do in fact have a veto power over a plan if they disagree. The author, even though his view is by no means widely accepted, does not share this perspective as it is contrary to the notion of absolute priority, and because the Concurso Law empowers the judge to impose the capitalisation, although most judges are and will be reluctant to do so.
The Concurso Law embraces, in form, the UNCITRAL Model Law on cross-border insolvency and international judicial cooperation. Mexican courts have sporadically recognised and given limited judicial assistance to foreign insolvency proceedings (provided that such proceedings do not contradict Mexican law or general principles of law), although there have been very few such cases. The Concurso Law includes substantial changes to the UNCITRAL Model Law that make the process defective as it focuses on channelling procedures through a conciliator, and thus effectively imposes the need to file a full concurso proceeding in regard to any significant assets in Mexico.
Related to this topic, Mexican companies have more frequently filed for protection in the bankruptcy courts of the US (mainly in the Southern District of New York and in Delaware) under Chapter 15, after a company is declared in concurso in Mexico, and certainly such courts have responded efficiently, recognising the concurso as the main proceeding. Unless the conciliator implements an indirect channel of communication between the Mexican judge presiding over the main proceeding and courts outside Mexico, cross-border communication is practically non-existent.
VI FUTURE DEVELOPMENTS
Concurso mercantil as a formal insolvency procedure under Mexican law has fallen into greater ambiguity in recent years and its reliability is highly questionable. There have been decisions by the Mexican federal judiciary that have undoubtedly contributed to this. Courts have resolved, for example: (1) trust structures (fideicomisos) related to the capture of monetary flows from contracts entered into by a debtor and used as a source of repayment in structured finance transactions, will not be honoured upon a declaration of concurso, despite a 'true sale' (but will be channelled to the bankruptcy state); (2) the conciliator is to be the sole representative of the interests of creditors in regard to any post-concurso appeal, even though the conciliator is statutorily impartial; (3) no creditor can be forced to capitalise its loan under an approved plan; (4) consumers are protected by human rights and are a privileged class above secured creditors; and (5) a conciliator may be found to have a conflict of interest if, even four years after the conclusion of a concurso mercantil, he or she carries out a professional activity for a former creditor in the case in which a plan was approved. While these baffling precedents are not yet mandatory, they are highly disconcerting.
The IFECOM is now headed by a lawyer who does not come from the judiciary, a fact many practitioners see as a positive development. The IFECOM must become more involved in a positive, transparent and efficient way in concursos mercantils. The expectations are high.
It would be reassuring to return to the rule of law through a more effective insolvency regime aimed at ensuring the reasonable protection of debtors and creditors, and in general, of all stakeholders in economic enterprises, which will lead to prosperity and progress.
1 Thomas S Heather is a partner at Ritch, Mueller, Heather y Nicolau, SC. This chapter reflects the opinions of the author and not of the firm.
2 Although the 2014 amendments introduced the possibility of avoiding the 'visitation stage' in pre-packed filings, thus saving weeks of bureaucracy, the author is of the view that there could be a benefit of having an examiner complete the many IFECOM formats that may prove to be advantageous in the ongoing proceeding.