A Glimpse of Mexican Insolvency System: Part I

I.  Governing Law            
 
The Commercial Insolvency Law (the LCM), namely Ley de Concursos Mercantiles governs commercial insolvency.  It is a federal law.  It applies to merchants and traders, individual and legal entities, including commercial companies, trusts engaged in business activities, financial institutions, state-owned commercial companies, the estates of deceased merchants, partners of a liability partnership and small merchant debts lower than 400,000 unidades de inversion (UDIs, see paragraph 9), subject to written agreement.
 
The insolvency of non-merchants (individuals, consumers), namely concurso civil, is governed by the state civil codes and state codes of civil procedure.  Insolvency for insurance, bonding, reinsurance and re-bonding companies is governed by their special laws.  Filing for insolvency is not mandatory. 
 
The conditions for initiating a concurso mercantil are that there must be a debtor who is a merchant, individual or legal entity and there has been a failure to make payments generally when due.
 
Criteria (Insolvency standard) for establishing a general default on payment obligations are:

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

II. Courts
 
Federal district courts are the only courts with jurisdiction over commercial insolvency proceedings for merchants.  Non-merchants are subject to state and local civil jurisdiction.
 
Labour credits are included within the total liabilities of the debtor.  However, labour creditors are not obliged to join the concurso mercantil proceedings.  Labour credits are, instead, considered under the jurisdiction of the labour courts and are enforced and paid before 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.
 
It should be noted that the Federal Constitution (article 1) was amended on 10 June 2011, to recognise and guarantee human rights granted by the Constitution and international treaties.  This amendment commands all authorities to recognise, respect, protect and guarantee human rights.  Thus, pursuant to constitutional articles 1 and 133, all authorities, including the judiciary in all levels (first instance, appeal and constitutional) must enforce human rights through the operation of law, even without the party’s petition and even if there is another conflicting provision.  Human rights include, inter alia, not only life, liberty and freedom from discrimination, but also ownership, property, rights and obligations under contracts, due process, effective administration of justice, equal treatment and the enforcement of the rule of law.
 
III. Excluded Entities & Excluded Assets
 
Workers owed labour credits are excluded; such workers are governed by the Federal Labour Law.  (Labour credits are claims by employees and may include unpaid wages and employment indemnity.)
 
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 the general bankruptcy proceedings (concurso mercantil).  ‘Claims equivalent to taxes’ includes the IMSS and INFONAVIT tax quotas employers must pay that 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 the bankruptcy proceedings and are paid and liquidated by their labour chambers and tax authorities, respectively.
 
Tax credits and labour credits are included within the total liabilities of the debtor.  Tax credits have priority over unsecured credits and over credits secured by a pledge or mortgage, provided these secured credits were perfected and recorded before the notice to 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 the general bankruptcy proceedings.  The law provides that if a debtor is adjudicated in concurso mercantil, the court shall notify tax creditors of such adjudication.  Enforcement of tax creditors may be stayed by this adjudication, provided tax creditors had been notified of the filing of the concurso mercantil petition.
 
There are assets excluded from execution, attachment and liquidation in bankruptcy such as alimony, child support, recorded homestead (family patrimony), tierras ejidales (communal real estate land) and life insurance in the case of an irrevocable appointment of a beneficiary.
 
IV. Insolvency Proceedings
 
LCM overview:
The LCM provides one form of insolvency proceedings, concurso mercantil, which has two major phases:

• conciliation (reorganisation) with the debtor in possession; and
• bankruptcy (liquidation) under the possession and administration of a trustee.

The conciliation phase may last up to 185 calendar days, with two extensions of 90 calendar days each upon the approval of a special majority of the recognised creditors (first extension: two-thirds of the total debt creditors; second extension: 90 per cent of recognised creditors).
 
If no reorganisation plan is reached during the conciliation, the procedure turns into a bankruptcy (liquidation).  Upon declaration of bankruptcy, assets shall be sold at public auction through a bid process.  Before conciliation, there is an audit to confirm whether or not the standard for insolvency is met.
 
The Federal Institute of Commercial Insolvency Specialists (IFECOM) is the trustee office and appoints:

• for the audit, an auditor who reports his or her findings accordingly to the district court;
• for the conciliation, a conciliator who seeks to establish a reorganisation plan and oversees the debtor-in-possession’s administration and follows the allowance claims process.  The conciliator receives proof of claims and makes an allowance or disallowance proposal to court in order for it to enter a judgment on the recognition, ranking and preference of claims; and
• in bankruptcy, a trustee who possesses, administers and liquidates the estate’s assets and distributes the proceeds.  A trustee shall have the same powers as a conciliator in a reorganisation.

Concurso mercantilmay be voluntary or involuntary; however, there is no direct involuntary bankruptcy (liquidation).  Full insolvency proceedings shall be conducted to place the debtor in involuntary bankruptcy.  Voluntary bankruptcy (liquidation) is initiated directly upon the debtor’s request.
 
The conditions for initiation (insolvency standard) are that there must be a debtor who is a merchant, individual or legal entity; there are two or more creditors; and there has been a failure to make payments generally when due.
 
Criteria for establishing a general default on payment obligations are:

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

In the voluntary or involuntary petition of concurso mercantil there is a sub-stage namely the visit (inspection) conducted by the visitador to confirm the insolvency standard is met.
 
Injunctions that may be granted before order for relief enters into effect are:

• attachment of the debtor’s assets;
• order of ne exeat;
• stay of executions by creditors, seizure and attachments;
• orders restraining the debtor from making payments or selling, conveying or encumbering assets; and
• transferring proceeds or securities to third parties.

Concurso mercantil starts when relief is entered, that is to say, when concurso mercantil is adjudicated, which creates the bankruptcy estate.  Insolvency adjudication creates a special legal situation for the debtor, subject to the LCM.
 
The procedural effects of the concurso mercantil adjudication are as follows:

• opening the conciliation phase, unless the debtor has requested the bankruptcy itself;
• debtor is ordered to surrender its financial statements;
• debtor is ordered to cooperate and allow an auditor (visitor) and conciliator to perform their duties;
• payments are stayed, except those necessary for the ordinary course of business;
• executions and attachments are stayed, except for labour credits (salaries of the past two years);
• suspect period is set;
• summary of the order for relief is published;
• order for relief is recorded in public registries;
• notice is given to creditors to file their claim credits (proof of claims);
• proof of claims process begins; and
• a certified copy of the order of relief is issued upon request.

The substantive effects following declaration of concurso mercantil are as follows:

• pre-existing contractual obligations shall be performed as agreed by the parties, except for special provisions under the LCM;
• all pre-existing obligations become due and have to be fixed in UDIs (see below) to determine their amount; and
• matured debts stop accruing interest.  All obligations of the debtor are considered matured and interest stops accruing on obligations.  However, interest will continue to accrue on obligations secured by a mortgage or a pledge even after the insolvency declarations to the extent of the collateral.

The 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.
 
The LCM regulates the specific pre-existing contractual obligations that may be amended when the order for relief is filed.
 
Performance of executory, preliminary or final contracts shall be complied with by the debtor, unless there is opposition by the conciliator, as long as it benefits the estate.  The conciliator may accept or reject the contract.  The other party to the contract may ask the conciliator to reject the contract.  If the contract is not rejected, the debtor shall perform or guarantee the contract.  If the contract is rejected, or the conciliator does not answer within 20 working days, the other party to the contract may terminate the contract at any time by giving notice to the conciliator.
 
V.  Stays of Proceedings & Moratoria
 
Claims being pursued by the debtor and claims against the debtor before the concurso mercantil adjudication shall not be joined to the insolvency proceedings, including arbitration.
 
Post-insolvency declaration claims, including post arbitration claims, must join the concurso mercantil.  Executions are stayed.
 
The final judgment on pre-insolvency actions shall be recognised by the insolvency court, without review, as to the amount of the claim and its priority.  Claims are fixed in UDIs.  Credits stop accruing interest, except secured credits up to the value of their collateral.  In liquidation, secured creditors may obtain a writ of execution and be paid from the collateral.
 
VI. Set-off and Netting
 
Upon issuance of the concurso mercantil adjudication, as a general rule, set-off rights no longer exist for creditors, although there are specific exceptions for some financial transactions on securities (Securities repurchase agreements, loans on securities, differential, future, derivatives financial transactions).
 
VII. Reorganisations
 
The LCM favours rehabilitation of the enterprise, and liquidation only takes place when rehabilitation is impossible.  A reorganisation plan requires 51 per cent approval of the creditors holding approved claims.
 
VIII. Expedited Reorganisations
 
Pre-packaged reorganisation is allowed by an agreement of the debtor and creditors holding 40 per cent of the total debt.  The debtor and creditors shall execute the petition.  In addition to the ordinary requirements for initiating insolvency, it is also required that the debtor states under oath that it is already in a state of insolvency and explains why, or states that such insolvency is imminent within 30 working days and states that the creditors signing the petition hold at least 40 per cent of the total debt.  A reorganisation plan proposal shall be enclosed with the petition.  Full insolvency proceedings shall be followed (concurso mercantil) without an audit.  In conciliation, a pre-packaged plan may be approved by 51 per cent of recognised unsecured creditors and 51 per cent of recognised secured creditors joining the plan.  The court must approve the plan whereupon the proceedings end.  Protection measures and stays may be requested and granted upon filing of the petition.
 
IX. Unsuccessful Reorganisations
 
No executing recognised creditors may defeat the plan if due process for the plan is not met and if mandatory plan standards are not met.  Due process includes access to supporting information and plan viability as well as full knowledge of the plan 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 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 there is still the conciliation stage.  Plan is subject to approval of 51% of allowed credits.  Otherwise, the case turns into a liquidation, where reorganisation plan may be approved but with 100% of creditors holding allowed claims.
A default on the plan by the debtor turns the case into a liquidation.
 
X.  Notices. Meetings. Access to Estate Information. Trustee’s Report. Estate’s Remedies Against Third Parties. 
 
Domestic and foreign creditors with known addresses are notified personally of the insolvency opening.  All creditors are notified by publication of a notice in the Daily Federal Gazette and a major newspaper.  There are no mandatory meetings, although meetings may be held.  There are no mandatory committees.
               
 
Dario U Oscós Coria is a legal counsel and practitioner specialising in insolvency, restructuring, creditor rights, litigation, arbitration and mergers & acquisitions.
 
Oscós Abogados is a high-profile boutique practice that specialises in both domestic and international litigation. The firm has rich experience and technical expertise in handling insolvency, restructuring, creditor's rights, litigation, arbitration, product liability and bankruptcy within a wide variety of industries that range from banking, energy, oil, gas, construction, industrial property, copyright, torts and financial services to telecommunications.
 
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