Legal Briefing

A general view of bankruptcy in Mexico

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Global Outlook: Disputes | 02 October 2018

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When companies face financial difficulties in Mexico, our legislation provides a formal procedure known as concurso mercantil (insolvency) to restructure its finances and provide legal security to their creditors. This procedure is divided into two phases: i) conciliation and ii) bankruptcy or liquidation. The purpose of the conciliation phase is to achieve the continuation of the company, that is, to allow the company to restructure through an agreement with its creditors; whereas the purpose of the liquidation phase is to sell all the assets to try to pay all the recognised creditors, once the conciliation phase failed.

In these legal proceedings the debtor may file for a voluntary insolvency, with or without a preliminary plan to restructure its debts. Also any creditor, or the district attorney’s office may file for an involuntary insolvency. Once the petition is filed, the judge has to analyse if the debtor meets the requirements before declaring its insolvency. For that matter, pursuant to the Commercial Bankruptcy Law (Ley de Concursos Mercantiles), to be declared in concurso mercantil, the debtor has to be in a ‘generalised default’ or breach of payment of its obligations, which consists of being in default of payment with two or more different creditors and the fulfilment of two conditions: i) that the due obligations are at least 30 days overdue and represent 35% or more of the obligations of the debtor on the date on which the petition for declaration of concurso mercantil is filed; and ii) that debtor is unable to cover at least 80% of its due and payable obligations on the date on which the petition is filed.

Now, if the debtor files for insolvency without a plan to restructure, once the claim is admitted, the judge will consult the opinion of experts known as inspectors (visitador), which are designated by the Federal Institute of Commercial Bankruptcy Specialists (Instituto Federal de Especialistas de Concursos Mercantiles, IFECOM), that act as the consulting body of the courts, to determine if the debtor is in a ‘generalised default’ of payment state. This expert must appear before the debtor, to determine, based on accounting books, and other documents, whether it has met the conditions to be declared in concurso mercantil. Once the judge receives the inspector’s opinion, it will be made available to the debtor so that it may argue and, thereafter, the judge will issue a judgment declaring or denying the insolvency of the company.

On the other hand, if the debtor files with a restructuring plan, the judge issues a judgment declaring the insolvency, without the need to appoint an inspector or to make a visit to the debtor. This proceeding shall be treated as an ordinary concurso mercantil, with the only exception that the conciliator, which is an expert designated by the IFECOM in the first phase of the legal proceeding, should consider the restructuring plan presented with the petition for insolvency when proposing any plan or agreement among the creditors.

Similarly, if a concurso mercantil is filed against the debtor, the same process shall be followed as in a voluntary concurso mercantil without a preliminary restructuring plan, except that in addition, a term of nine days shall be granted to answer the complaint and offer the corresponding evidence.

Once the conditions to enter into insolvency are fulfilled, the judge will issue a judgment declaring the concurso mercantil, which has the following effects, among others:

  1. The opening of the conciliation phase, unless the complaint was filed to declare the company in bankruptcy.
  2. The order to the IFECOM to appoint a conciliator.
  3. The order to the company to give access to the conciliator to their accounting, meaning all the books and documents they need to determine if the company meets the requirements to declare its insolvency.
  4. The order to suspend any warrant of injunction (embargo) or execution against the debtor’s assets, except those of a labour-related nature.
  5. The establishment of the retroaction date – this is the period of suspicion, in which it is determined if there are acts in fraud of creditors.
  6. The order to the conciliator to publish the insolvency judgment and to record the sentence in the public records of the company before the Public Registry of Commerce.
  7. The initiation of the credit acknowledgement procedure.
  8. The order to suspend payment of the debts incurred before the date the commercial insolvency sentence enters into effect.
  9. The ne exeat order against the debtor or company. In the case of legal entities, against the people responsible for their management, solely for the purpose of preventing them from leaving the domicile.

The day after the judgment is issued, the judge must personally notify the debtor, the IFECOM, the inspector, the creditors whose addresses are known, the competent tax authorities, the district attorney’s office, the union representative if one exists and, failing this, a labour rights attorney. Additionally, within the following five days of their designation, the conciliator shall proceed to request the registration of the commercial insolvency judgment in the corresponding Public Registry of Commerce and shall have a summary or extract of it published in the Mexican Official Gazette and in one of the major circulation journals in the location where the legal proceedings take place. That way all creditors can appear before the judge and file a petition to acknowledge their credit.

The concurso mercantil is a legal procedure that all companies and corporations can enter into, to try to restructure financially and possibly enter into an agreement with their creditors.

If requested by the debtor, the conciliator, or if the conciliation phase ends without the agreement of a restructuring plan or an agreement among the creditors, a bankruptcy or liquidation judgment shall be issued in which the trustee will administrate the goods and assets of the debtor and will proceed to its disposal, seeking to obtain a high auction value, except when the trustee considers that a different proceeding will obtain a better recovery or when the goods and assets require an immediate liquidation as they can no be longer conserved without deterioration etc. After the liquidation judgment, at least every two months, the trustee shall submit to the judge a report of all sales executed, the status of the assets, and a list of the creditors that will receive payments by means of the bankruptcy.

In conclusion, the concurso mercantil is a legal procedure that all companies and corporations can enter into, to try to restructure financially and possibly enter into an agreement with their creditors. Failing that, the company enters into a liquidation phase where all the remaining assets are disposed to pay all their recognised creditors.