The Insolvency Review: Mexico

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 22 January 2020, governs commercial insolvency (see Section It is a federal law that applies to merchants and traders, individuals and legal entities, including probate estate of a deceased merchant, commercial companies, trusts engaged in business activities, financial institutions, foreign enterprise branches, groups of companies (holding and subsidiaries, without debt-asset pooling and in separate proceedings for each), state-owned commercial companies and the new state productive enterprises (PEMEX and CFE), and in connection with small businesses (with debt of up to US$137,160) 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, executory contracts 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. Fraudulent transactions are void. 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 as the ordinary period, counting backwards from the date on which the order for relief was made. This term is automatically doubled in the case of related subordinated creditors or a related person (intercompany or insiders' debt or when the managers, CEO, CFO, members of the board of directors and key officers of the counterparty to a voidable transaction are the same as the debtor's – i.e., commonality of management). A request for a longer review period of up to three years, for the ordinary period, must be filed before the judgment on recognition, ranking and priority is entered. The burden of proof is more flexible in relation to obtaining an extension of the period under suspicion 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:

  1. one-fifth or more of the allowed creditors;
  2. allowed creditors that jointly represent 20 per cent of the total allowed credits;
  3. receivers;
  4. the debtor; and
  5. shareholders holding 25 per cent of the debtor's shares. The time bar on damages actions is five years.

In the context of an insolvency proceeding, the LCM now provides a regime of strict civil and criminal liability for the debtor, debtor's general director, sole administrator, board of directors, legal representatives and key employees, including insiders and relatives when causing 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 of between three and 12 years.

ii Policy

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 insolvency regime's priorities of the preservation of jobs and of businesses as going concerns as a matter of public policy. During previous periods of systemic financial distress, the government has set up rescue programmes to assist companies and debtors to recover or start afresh, but these programmes have mainly applied instead of insolvency proceedings.2

Expedited reorganisations

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, legal entities, 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 automatically 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). There is no inspection in voluntary insolvency petitions.

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 and does not provide restrictions on executory contracts. Liquidators may apply for a voluntary insolvency proceeding seeking a stay.

During a conciliation proceeding, the debtor remains in possession of the assets (debtor in possession), 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, 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:

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

As 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 To facilitate approval of the plan, both unsecured and participating secured creditors must be taken into account in determining 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:

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

Private agreements between a debtor and any creditor are null and void once relief is granted, and the creditor will lose rights of this kind in relation to the debtor. Consideration shall be taken of voidable private agreements executed in the suspicious period.

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 the parties 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 automatically. In this situation, a reorganisation plan may still be approved but only by a requisite of more than 50 per cent of creditors holding allowed claims and provided that the plan provides for payment for all creditors holding allowed claims, including those not executing the plan. A default on the plan by the debtor also turns the case into a liquidation.

A pre-packaged reorganisation is allowed by agreement between 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 and with a preservation plan for the business as an ongoing concern. A full insolvency proceeding will be followed without an audit. Protection measures and stays may be requested and granted upon filing 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, which may by created by:

  1. contractual agreement or provided by statute law;
  2. 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
  3. late-claim filings.

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

  1. subsidiaries and affiliates of the debtor;
  2. the director, members of the board of directors and key officers of the debtor, as well as those of its subsidiaries and affiliates; and
  3. corporations with the same managers, members of the board of directors or key officers similar to those of the debtor (related person – 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 the 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 non-insiders vote in favour of the plan.

Subordinated debt and subordinated creditors

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

Interaction before the Mexican courts of indenture trustees and bondholders

Proof of claims may be filed individually by a bondholder, which will be subtracted from the overall proof of claim filed by an indenture trustee representing bondholders. Each bondholder, and the trustee, are 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 its fulfilment, the plan 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 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:

  1. there is a failure to meet payment obligations to at least two creditors;
  2. the obligations are more than 30 days overdue;
  3. overdue obligations represent 35 per cent or more of the total amount of the debtor's obligations as at the petition filing date; and
  4. the debtor lacks the cash assets, as defined by the law, to pay at least 80 per cent of the total debts due as at 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:

  1. payments are stayed, except those necessary during the ordinary course of business;
  2. pre-existing contractual obligations must be performed as agreed by the parties, except for those to which special provisions apply under the LCM or are terminated by conciliator or trustee;
  3. all pre-existing obligations become due and have to be fixed in UDIs3 to determine their amount; and
  4. matured debts stop accruing interest (all obligations of the debtor are considered matured and interest stops accruing on obligations, but interest will continue to accrue on obligations secured by a mortgage, pledge or other in rem collateral, 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 are not included within the estate and may be separated while in possession of the debtor, including when the debtor is the settlor. In a concurso mercantil scenario, assignment of collection rights on floating account receivables (with undetermined amount) transferred by the debtor to a trust as collateral for debtor obligations may not be enforceable against the insolvency estate due to the mandatory suspension of payments order that prevents actual payment being made by the debtor. Accordingly, the future actual amount to be determined belongs to the insolvency estate since it remains in the estate. If assigned in the retroactive period, it may be null and void.

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 an amparo action (a constitutional action). 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, any creditor may challenge the bankruptcy adjudication by means of a legal remedy, revocation, to be decided by the same court granting relief. Note that, creditors once holding allowed claims may appeal the bankruptcy adjudication with stay by placing a bond or guarantee. 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 and calculated as being of an undetermined amount. No damages are awarded upon insolvency adjudication dismissal.

The petitioner, debtor, creditor or attorney general, may withdraw the petition upon the agreement of all of them.

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 receiver. The court provides and approves orders and judgments, and enforcement thereof. Most notices are made through the court channels. 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 debtor, sole administrator, directors, key officers and 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 debtor-in-possession (i.e., one of the debtor, sole administrator, directors, key officers or board of directors), namely the judicial depositary, may continue to run the company as a going concern in the conciliation phase under the supervision of the conciliator.

vi Special regimes

Workers who are owed wages are excluded from insolvency proceedings; 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 courts and tax courts and 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 that 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 through 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 the 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 the 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. The petitioner and trustee shall be the Institute for the Protection of Bank Savings (IPAB). 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.

Corporate groups

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 statutory law (domain property extinction) and case law jurisprudence, the corporate veil may be lifted under certain circumstances, including fraud.

vii Cross-border issues

Mexico has incorporated the UNCITRAL Model Law on Cross Border Insolvency, 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 inbound main 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 (first bankruptcy 1983), and recognition of reorganisation plans, as in Satmex, Metrofinanciera, Corporación Durango, Grupo Iusacel and Vitro. The drilling company Oro Negro is being prosecuted for insolvency-related actions in cross-border jurisdictions of Mexico as a main proceeding, involving New York and Singapore.

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:

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

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

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

Chapter 12 applies where:

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

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

In the Xacur and IFS US–Mexico cross-border cases, simplified written requests from the US bankruptcy courts were fully enforced by the Mexican courts. Both cases tested whether the UNCITRAL Model Law on Cross Border Insolvency is efficient and a time- and cost-effective legal tool. Both cases have gained the status of international judicial precedents and of UNCITRAL Case Law on UNCITRAL Texts on a variety of insolvency cross-border issues. These are, inter alia, notably recognition and enforcement of insolvency-related judgments under the umbrella of US bankruptcy recognition in Mexico as main proceedings, estate voidance actions, collection of estate insolvency assets and transfer to the US bankruptcy estate for distribution and payment to creditors, international procedural cooperation, service of process, taking of evidence, subpoena, witness testimony and production of documents.

Insolvency metrics

Mexico, with a population of 129 million people and the second-largest economy in Latin America and being the third-largest country in Latin America, is the country with the most Spanish speakers in the world. The real economy is strongly tied to the US markets. In 2021, Mexico was the United States' largest merchandise trade partner, with China the second-largest. The United States is by far Mexico's most important export market for goods, with 80 per cent of Mexican exports destined for the United States. In 2020, the economic slowdown due to the covid-19 pandemic resulted in a 12 per cent decrease in total bilateral merchandise trade from US$614.5 billion to US$538.1 billion. The merchandise trade balance went from a surplus of US$1.7 billion in 1993 (the year before NAFTA entered into force) to a widening deficit that reached US$112.7 billion in 2020. US merchandise exports to Mexico increased from US$41.6 billion in 1993 to a peak of US$265.9 billion in 2018, and then decreased to US$212.7 billion in 2020. US merchandise imports from Mexico increased from US$39.9 billion in 1993 to US$358 billion in 2019, and then decreased to US$325.4 billion in 2020.

Several US policymakers are concerned over Mexico's implementation of the US–Mexico Supply Chains (USMCA) worker rights provisions and the ability of the Mexican government to implement required labour reforms. Other concerns include the scaling back of investor–state dispute settlement (ISDS) provisions and the effect on US investors in Mexico, especially in the energy sector.

The United States shares strong economic ties with Mexico, and any disruption to the economic relationship could have adverse effects on investment, employment, productivity and North American competitiveness. The covid-19 pandemic has raised new issues regarding the US–Mexico supply chain and North American manufacturing.

US Trade Representative Katherine Tai met with her Canadian and Mexican counterparts in March 2021 and discussed USMCA implementation efforts, reportedly committing to holding a USMCA Free Trade Commission meeting soon.5

As a result of covid-19, the National Institute of Statistics and Geography reported that in 2020 out of the 4.9 million micro, small and medium-sized establishments, 3.9 million survived (79.2 per cent) and 1,010,857 (20.8 per cent) closed for good. In the 17 months after the census was undertaken, 619,443 new establishments were opened (12.8 per cent of the total number). If we compare the total economic units in 2019 with the ones in 2020, there is a decrease of 8.1 per cent.6

Mexico's gross domestic product (GDP) was an estimated US$1.1 trillion in 2020, equal to an estimated 5 per cent of the US gross domestic product (GDP) of US$21.1 trillion. In terms of purchasing power parity, Mexican GDP was higher, US$2.4 trillion, or about 11 per cent of US GDP. Mexico's per capita GDP is relatively high by global standards, and falls within the World Bank's upper-middle income category. Trends in Mexico's GDP growth generally follow US economic trends, but with higher fluctuations.

Inflation in June 2021 was at 5.88 per cent, pressured by the increase of costs of air transportation, domestic LP gas, gasoline and chicken. The international reserves of the central bank, Banxico, were US$193.02 billion dollars as at 2 July 2021.

According to the National Council for the Evaluation of Social Development Politics (Coneval), it is estimated that there has been an increase of between 8.9 and 9.8 million in the number of Mexicans with a wage below the poverty line income level because of the covid-19 crisis.

On February 2021, Coneval, the public entity that measures poverty in the country, presented information regarding the evaluation of social development policies (IEPDS) in 2020. This pessimistic scenario estimates 70.9 million people are in poverty according to income, amounting to 56.7 per cent of the population in Mexico.

During the third quarter of 2020, 11.4 million international visitors arrived in Mexico, a 50.7 per cent decrease compared to the same period in 2019, as a result of the ongoing pandemic. During the first quarter of 2020, 5.8 million international tourists arrived in Mexico, a 43.9 per cent decrease compared to the same period in 2019 as a result of the ongoing pandemic. In the first quarter of 2021, US nationals represented 75 per cent of all passengers arriving in Mexico by air. Of all arrivals, Canadians represented 1.6 per cent, Europeans 7.1 per cent and South Americans 11.6 per cent (mainly from Colombia 2.8 per cent and Brazil 2.2 per cent). In the first quarter of 2021, the three airports with the highest international arrivals according to nationality were: Cancun (1,025,268), Mexico City (345,324) and Los Cabos (261,453). In the month of March, the average hotel occupancy was 33.7 per cent, a drop of 7.5 per cent compared to the same period in 2020, as a result of the covid-19 pandemic.7

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.8 Since the enactment of the LCM (May 2000 until 30 November 2020), statistics show that 805 filings have been prosecuted, of which 57 per cent were voluntary and 43 per cent involuntary. Of the 805 insolvency proceedings, 769 (95 per cent) are companies, 30 (4 per cent) are individual merchants and 19 are not specified.

Of the 805 insolvency proceedings, 217 proceedings are being prosecuted, 38 (18 per cent) are in the verification subphase, 33 (15 per cent) in the conciliation phase and 146 (67 per cent) in the bankruptcy phase. The number of terminated insolvency proceedings is 588.9 The number of terminated insolvency proceedings in this period is seven.10

In the period of 1 January to 15 September 2020, the Pizarra Concursal (the online concursos mercantiles registry) recorded only 27 new cases, 12 voluntary and 15 involuntary.11 The year 2020 has been characterised as the worst systemic financial crisis ever worldwide due to the covid-19 pandemic (from SARS-CoV-2). This is the worst recession since the Great Depression. It is expected that the financial crisis will worsen and recovery will take years. Even under this most devastating financial crisis, access to the formal insolvency system in Mexico is extremely limited. Why?

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 or through government systemic rescue plans or international systemic financial institution rescue plans. The Mexican insolvency regime was not designed to overcome systemic financial distress. The economy, battered by the 12 The 2014 amendments to the LCM are still being tested, and have shown that this phobia has not been overcome and has in fact worsened. For instance, the largest Mexican airline, Aeromexico, notably financially affected by the covid-19 bankruptcy, sought bankruptcy protection under US Chapter 11, rather than in Mexico. Labour claims (super-priority) by constitutional provision do not join the insolvency proceedings. Tax claims also do not join the concurso mercantil.

Plenary insolvency proceedings

Vitro's concurso mercantil is the case that has led to the highest number of amendments made to the LCM as at 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.13

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.14 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., 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. As the case was pending without stay, first an appeal and then an amparo action challenging the allowed intercompany claims judgment and the reorganisation plan were submitted for court approval. Dissenting genuine creditors objected to the reorganisation plan on account of a number of violations, including release of third-party guarantors' obligations, lack of complete and correct information in relation 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, as debtor in possession, sought its recognition under US Chapter 15 as a 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,15 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. Similarly, the lack of information on Vitro's intercompany corporate and financial restructuring agreements was considered a violation of fundamental creditors' rights.

The Vitro case highlighted many of the deficiencies and possible abuses of the LCM and may be highlighted 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 over recognition, 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.

Oceanografía, a large Mexican supplier of state-owned oil company Pemex, was charged for fraudulent transactions on a number of accounts receivable (to the value of US400 million), allegedly owed by Pemex and assigned to Citi-Banamex Mexico. Oceanografía was seized by the federal attorney general at the criminal stage. In turn, its assets and management were assigned by operation of law to an official agency, namely Sistema de Administración y Enajenación de Bienes (SAE). It was involuntarily placed in concurso mercantil by a petition filed for the first time ever by the federal attorney general. Oceanografía was debtor in possession at the conciliation phase. SAE, by law, acted as conciliator and later as trustee. Oceanografía agreed a reorganisation plan, which was approved by the court. However, that plan was challenged and revoked. Consequently, Oceanografía is in bankruptcy and still being prosecuted, in the course of which it is likely a reorganisation plan will be reached (Third District Court in Civil Matters, Mexico City, docket 265/2014). The seizure was lifted. Notably, upon filing involuntary petition, the federal court granted protective measures ordering Pemex to deliver to SAE, as seizure manager of Oceanografía, the actual payments from floating accounts receivable that had been assigned to an irrevocable guarantee and means of payment trust. The court based its decision upon statutory public policy that aims to preserve the debtor as an ongoing concern and employer, as well as to provide liquidity, since the floating receivables assigned to several trusts represented more than 90 per cent of the debtor's revenue from the vessels it leased to Pemex. The bank, acting as trustee under the guarantee trust, challenged the protective measure by means of an amparo action, whereby, at the final level of constitutional appeal, the federal appellate court affirmed and confirmed the protective measure as legal and constitutional. This decision led to important jurisprudence case law in determining that assignment of rights on floating receivables towards a guarantee trust is ineffective and unenforceable against the insolvency estate. The assignments of rights were characterised as having been executed by related persons – insiders – in the clawback period, and therefore voidable by law and null, in addition to being executed by the debtor for free without consideration.

Also of note are Perforadora Oro Negro, SRL de CV (2017) and Integradora de Servicios Petroleros de Oro Negro, SAPI de CV (Oro Negro).16

Oro Negro's core business is the lease of five jack-up offshore drilling rigs (platforms) to Pemex. Lease contracts are worth 9 billion pesos. The platforms were owned by five third-party contractors (foreign companies) from whom Oro Negro leased the platforms and, in turn, Oro Negro leased them to Pemex. The platform owners hold as collateral an irrevocable guarantee, management and source of payment trust (a trust settled with a Mexican bank) (the Guarantee Trust). An assignment of collection rights on the Pemex leases were made to the Guarantee Trust. Proceedings have been characterised as vigorous, time-consuming and costly litigation. As a protective measure, the debtor sought an order commanding Pemex to transfer the proceeds from the Pemex leases to Oro Negro's estate towards the trust bank instead. The protective measure was finally rejected on the grounds that the business structure under the bonds indenture, the Guarantee Trust and the assignment of collection rights provide for the payment towards platform owners, as trust beneficiaries, who in turn made large investments in acquiring the platforms and Oro Negro was only entitled to a minimum percentage for wages and operation costs to operate and maintain the platforms. Other grounds were the lack of jurisdiction of the Mexican court since the bonds indenture, related contracts, pledges and lease contracts are governed by Norwegian law and subject to the exclusive jurisdiction of the Oslo district court and there is no international reciprocity between Norway and Mexico. Oro Negro estate assets are being liquidated in bankruptcy since no reorganisation plan was reached. Oro Negro's main assets are litigation rights against Pemex for breach of contracts (contingent debt), funds in the trust, Pemex accounts receivable and inventory.

In parallel, there is a voluntary concurso mercantil before the Fifth Civil Federal District Court in Mexico City, 395/2017-II. This 395/2017-II was withdrawn by the debtor while under the control of the bondholders. Bondholders enforced a pledge on the debtor's stock that led them to take corporate and management control over the debtor. This was challenged and is pending a court decision as to its legal validity and enforceability. Bondholders, in turn, tried to recognise the Singapore court order, preventing Oro Negro from filing for concurso mercantil based upon a contract agreement barring it. This order was rejected by the Mexican court since such an agreement is null and void automatically by operation of statutory law, without need of a court decision declaring it void.

A Mexican court denied a petition to appoint Oro Negro or its legal representative (debtor in possession) as a foreign representative to seek international insolvency cooperation under the UNCITRAL Model Law on Cross-Border Insolvency on the grounds that there is no link with the insolvency proceeding in Singapore.

Oro Negro brought legal action in New York against the bondholders seeking damages under fraudulent interference regarding the 395/2017-II voluntary proceedings that were allegedly withdrawn illegally.

Actions in Mexico, Singapore and New York are still being prosecuted.

The Banking Law (as amended in 2014) provides for the judicial liquidation of banks. There are two liquidations in process:

  1. Banco Ahorro Famsa, SA Institución de Banca Multiple (Seventh Civil Federal District Court in Mexico City 227/2020): the petitioner and liquidator by virtue of law is an official banking agency, the IPAB. In the 10 November 2020 judgment, judicial liquidation was adjudicated, based upon its insolvency standard confirmed by the IPAB. The retroactive period set is 12 October 2019 (270 days before the IPAB as liquidator started performance). A 2 July 2020 judgment on recognition, ranking and priority of credits was entered; and
  2. Banco Bicentenario, SA, Institucion de Banca Multiple (9th Civil Federal District Court in México City 5/2015): this is still pending judgment adjudication for its judicial liquidation.

Note that, in contrast, Banca Mifel, SA Institución de Banca Múltiple, Grupo Financiero Mifel, as Fiduciaria del Fideicomiso 568/2005 (8th Civil Federal District Court in Mexico City 37/2020 ) on 31 August 2020 was adjudicated in concurso mercantil in the liquidation in bankruptcy phase. The retroactive period was set from 270 calendar days prior to adjudication. For subordinated creditors, a double-length period was set by mandatory statutory law provision.

Ancillary insolvency proceedings

Under the covid-19 pandemic, the largest Mexican airline, Aeromexico, on 1 July 2020,17 filed for US Chapter 11. Aeromexico is incorporated in Mexico and has establishments in Mexico (COMI). For US adjudication, foreign representatives, Chapter 11 court orders, debtor financing and a reorganisation plan thereunder to have legal effect in Mexico (legal power, authority, validity and binding force), it must first be recognised in Mexico following a plenary full concurso mercantil. Aeromexico holds a temporary official authorisation (concession) to operate a passenger and cargo public service. Airline regulators may request under some circumstances that Chapter 11 adjudication, orders and reorganisation plans be recognised in Mexico to have legal effect. The same applies to the tax authorities. This is in addition to the mandatory duty to give notice of the US Chapter 11 to regulators and applicable Mexican official entities. From a Mexican legal perspective, the Aeromexico US Chapter 11 reorganisation plan may not be recognised due to lack of jurisdiction of the US court and Mexican public policy not being met under Mexican statutory law. With creditors' interests (employees, union, suppliers, etc.) having been met in a practical, effective and efficient resolution, at present the most likely outcome is that there will be no need to seek recognition and enforcement of the US foreign insolvency proceeding. Debtors by now may have already overcome the insolvency situation, by having post-financing and a reorganisation plan approved by the Chapter 11 court presided over by Hon Shelly C Chapman.

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 case18 and the IFS Financial Corporation (Interamericas) case,19 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. Notably, the Mexican Supreme Court of Justice held the Model Law to be constitutional. The most significant of these precedents, which may be found in the Mexican Federal Judicial Weekly, are the following:

  1. Registration: 171137, Ninth Epoch, Collegiate Circuit Courts, Volume XXVI, October 2007, Civil, Court precedent: I.11o.C.176 C, Page: 3210. Commercial Insolvency Act. Conditions for recognition of foreign proceedings in Mexico;
  2. Registration: 174122, Ninth Epoch, First Chamber, Volume XXIV, October 2006, Constitutional, Civil, Court precedent: 1a CLXIII/2006, Page: 276. Commercial insolvency. Title Twelve of the law on this matter is constitutional in granting equal treatment to domestic and foreign creditors;
  3. Registration: 177531, Ninth Epoch, Collegiate Circuit Courts, Volume XXII, August 2005, Civil, Court precedent: I.12o.C.14 C, Page: 1974. Foreign commercial insolvency proceedings, recognition and declaration of international cooperation. Ruling recognising and declaring international cooperation is revocable;
  4. Registration: 177532, Ninth Epoch, Collegiate Circuit Courts, Volume XXII, August 2005, Civil, Court precedent: I.12o.C.15 C, Page: 1973. Foreign commercial insolvency proceedings, recognition and declaration of international cooperation. Indirect amparo action is inadmissible when brought against a ruling on a motion for revocation of a determination of the court enforcing the judgment recognising those proceedings, because this is not the final ruling in this period; and
  5. Registration: 171137, Ninth Epoch, Collegiate Circuit Courts, Volume XXVI, October 2007, Civil, Court precedent: I.11o.C.176 C, Page: 3210. Commercial Insolvency Act. Conditions for recognition of foreign proceedings in Mexico.

The IFS case has also led to international case law regarding the interpretation and enforcement of the UNCITRAL Cross Border Model Law worldwide. These cases are:

  1. Registration: 2006429 Tenth Epoch, First Chamber, Book 6, May 2014, Volume 1, Constitutional, Court precedent: 1st CLXXXII/2014 (10th), Page: 551. Foreign commercial insolvency proceedings. Article 295, second paragraph, of the Commercial Insolvency Act does not violate due process;
  2. Amparo en revisión 40/2018, María Cristina, Margarita Isabel y Guillermo de la Peña. Amparo en revisión 630/2017. Judgments dated 28 April 2019, María de la Paz. Tribunal Colegiado del Trigésimo Segundo Circuito, regarding constitutionality of recognition and enforcement of foreign insolvency-related judgments under the umbrella of the recognition in Mexico of foreign bankruptcy proceeding based on the Model Law;
  3. Amparo en revision 630/2017. Judgments dated 29 March 2019 Luis de la Peña. Tribunal Colegiado del Tercer Circuito, regarding constitutionality of recognition and enforcement of foreign insolvency-related judgment under the umbrella of the recognition in Mexico of foreign bankruptcy proceeding based on the Model Law; and
  4. Amparo en revisión D-691/2019, Aceitera el Paraíso, SA de CV judgment dated 8 April 2020. Primer Tribunal Colegiado del Sexto Circuito regarding constitutionality of voidance decisions on the fraudulent transfer of estate assets under the umbrella of the recognition in Mexico of foreign bankruptcy proceeding based on the Model Law.

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

The most recent amendments of the LCM were published in the Daily Gazette of the Federation, dated 9 August 2019 and 22 January 2020. The amendments are described below.

The term 'debtor' now includes a majority state participation company, when it initiates divestiture or winding up proceedings and it is administered by the Administration of Goods and Assets Institute (IABA). IABA's name changed recently to the Institute for the Return of Stolen Goods to the People (INDEP). INDEP is an official agency of the federal government that takes possession of, administers and sells assets that have been seized, attached and the like, including in criminal investigations. In a concurso mercantil situation by virtue of law, the INDEP must be appointed visitor, conciliator or trustee, as the case may be.

PEMEX and CFE are notably examples of majority state participation companies, among others.

INDEP is banned from using public funds unless it is for the protection of state assets, and provided that it has funds to that end and previous court approval granting priority payment as management expenses of the estate.

Regarding the insolvency standard:

  1. the debtor may file for voluntary concurso mercantil when the general default on payments of due obligations meets any of the insolvency criteria, namely:
    • debt towards more than two creditors, debt overdue by more than 30 days representing 35 per cent or more of total debt at the time of the filing; and
    • lack of cash assets to pay at least 80 per cent of the total debts due at the time of the filing;
  2. involuntary concurso mercantil filed by a creditor or the attorney general must meet both elements;
  3. state-owned companies shall be adjudicated to be in concurso mercantil when a decision has been taken by means of a divestiture or official winding up decision as provided for under the Law on State-Owned Entities;
  4. INDEP is vested with the power and authority to file concurso mercantil;
  5. INDEP shall be given service of process when the debtor is a majority state participation company; and
  6. when the debtor is a majority state participation company, INDEP shall assume the functions of visitor, conciliator and trustee.

Following the covid-19 pandemic crisis, a bill on the emergency insolvency regime has been filed in the federal Congress. The bill introduces a new chapter (Title 15a) into the LCM on a simplified, easy, fast and cost-efficient insolvency protection under emergency circumstances. It is uncertain whether this bill will be approved as is or will be further amended. The federal government has not supported or aided the private sector whatsoever; there were no tax incentives or tax aid. The 2021 federal budget does not increase taxes. The government, for political and electoral reasons, has given monetary aid and scholarship aid to a massive number of poor people. This was done in view of the recent 6 June 2021 elections, which were the largest ever in Mexico.

ii LCM

Given that the LCM has been in effect for 21 years, legislature and insolvency practitioners 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. Mexico is in urgent need of a new insolvency regime.

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 resulted in the adoption of 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 Aeromexico Chapter 11 is further clear evidence of the failure of the Mexican insolvency regime, forcing the debtor to seek insolvency protection in a more friendly and efficient foreign jurisdiction, without even the possibility of legal recognition in Mexico. Rather, the current insolvency regime favours, in practice, the financial convenience of the debtor and stakeholders, sustaining the debtor as a going concern and preserving at least indirectly the Mexican statutory legal policy of preserving enterprises and protecting employment.

Experience shows that still very, very few insolvency cases are brought as formal insolvency proceedings (a total of 805 cases filed in the 21 years that the LCM has been in force), showing clearly the need for a new, comprehensive and structured system – or at least a major change. Along with other measures that are beyond the scope of this chapter, the new system should provide: (1) simplified and expedited insolvency proceedings for both merchants and non-merchants, with mandatory filing when insolvent; the use of automatic stay as an immediate bankruptcy protection, without the standard of being insolvent; (2) insolvency proceedings for small and medium enterprises with mandatory filing when insolvent, the use of automatic stay as an immediate bankruptcy protection, without the standard of being insolvent; (3) discharge; (4) legal tools for expedited sale of assets; and (5) a unitary universal insolvency proceeding for joint labour and tax creditors.


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

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

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

4 Labour credits are claims by employees and may include unpaid wages and employment indemnity. The Mexican federal constitution provides that labour credits have priority in insolvency and bankruptcy proceedings, Article 123, A., XXIII.

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

9 IFECOM Report, 1 June to 30 November 2020 https://www.ifecom.cjf.gob.mex.

10 IFECOM Report, 1 June to 30 November 2020 https://www.ifecom.cjf.gob.mex.

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

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

14 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.

15 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).

16 Voluntary concurso mercantil 2nd Civil Federal District Court in México City 345/2017-I –Debt 1MMUSD.

17 Grupo Aeroméxico, S.AB de CV, US Bankruptcy Court for the Southern District of New York, case No. 20-11563 (SCC). The debtor's headquarters are in Mexico City.

18 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. Darío Oscós legal representative. Incidente de Reconocimiento de Procedimiento Extranjero de Quiebra y Solicitud de Cooperacion Internacional. Docket No. 29/2001. Recognition Court. Recognition Proceeding.

19 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 (Darío Oscós as legal representative). Incidente de Reconocimiento de Procedimiento Extranjero de Quiebra y Solicitud de Cooperacion Internacional. Docket No. 206/2004. Recognition Court. Recognition Proceeding.

The Law Reviews content