Legal Briefing

Special commercial proceedings: in-court reorganisation and cross-border insolvency in Mexico

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Disputes | 15 October 2019

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The main methods of resolving commercial disputes in Mexico are: ordinary commercial trial, executive commercial trial, special proceedings, oral commercial trial, bankruptcy proceedings (concurso mercantil), arbitration, and mediation.

In this article we will focus on bankruptcy proceedings. The United Mexican States’ Ley de Concursos Mercantiles (LCM or Mexican Business Reorganisation Act) expressly recognises that it is ‘in the public interest to preserve companies and to prevent a general default in payment to propitiate their failure and the failure of other companies with which they have dealings’. To that end, the LCM establishes a governing process for concursos mercantiles (business reorganisation proceedings) similar in some respects to what exists under Chapter 11 of the United States Bankruptcy Code.

A business reorganisation proceeding in Mexico is commenced by the filing of a solicitud de declaración de concurso mercantil (petition) either by a debtor, a creditor or a federal prosecutor in a Mexican federal district court, and after preliminary review, it is admitted for further proceedings so long as it contains the information and disclosure required by law.

A business reorganisation proceeding progresses in phases:

i) the ‘analysis and declaration or rejection phase’, reviews the financial condition of the debtor to determine whether it fulfils or not the proper requirements for the concurso to be declared;

ii) la etapa de conciliación (the ‘conciliation phase’) – during which reorganisation is attempted, initially for 185 days – begins when the Mexican district court issues a declaración de concurso mercantil (a business reorganisation judgment) declaring that the debtor meets the requirements for being the subject of this proceeding. Once issued, la masa (an estate) consisting of all of the debtor’s assets and liabilities is automatically created, and all actions by creditors to enforce judgments or otherwise seize the debtor’s assets can be stayed. During this phase, a conciliador (a conciliator) is appointed by the IFECOM (a federal judiciary branch) to facilitate an agreement between the debtor and its creditors on the terms of a reorganisation. The conciliation phase may be extended by 90 days if it is requested by the conciliator or more than half of the recognised creditors; a third additional period of 90 days can be granted if it is agreed by the debtor and more than 75% of the recognised creditors; and

iii) the ‘liquidation phase’, if conciliation fails.

Once the conciliation phase has begun, creditors (including foreign creditors) have the opportunity to submit proof of claim. Afterwards, the conciliator submits a list of creditors to the Mexican district court (at first a preliminary list subject to objections by interested parties, and then a definitive list), which prior to examination, issues an order recognising the amount and priority of all claims against the estate (the recognised creditors).

The LCM provides for the recognition and prioritising of creditor claims in accordance with such ranking. Apart from the sui generis category of ‘singularly privileged creditors’, creditor classes are categorised and ranked as creditors with collateral (secured creditors), creditors with special privileges, common creditors (unsecured creditors) and subordinated creditors.

The goal of the conciliation phase is for the formation of a convenio concursal (a reorganisation plan) that is agreed to by the requisite majority of recognised creditors (more than 50% of the sum of (i) the amounts recognised to all common and subordinated creditors, plus (ii) the amount recognised to creditors with collateral or special privilege who agree to the reorganisation plan) and approved by the Mexican district court.

Thereafter, assuming it is approved by the requisite majority, the conciliator will submit the reorganisation plan to the Mexican district court for its own review and approval. The conciliation phase (and, indeed, the entire business reorganisation proceeding) will terminate once the reorganisation plan is approved by the court. Alternatively, the conciliation phase can expire or be terminated for reasons which, in either case, results in the commencement of a new phase in the proceeding, la etapa de quiebra (the liquidation phase), the purpose of which is the liquidation of the debtor by the sale of all its assets.

Today, cross-border insolvencies between the US and Mexico are more common. Given the amount of commerce that these countries perform on daily basis (Mexico is the US’ third-largest commercial partner while the US is Mexico’s biggest commercial partner) and the number of investments in each other, in the event that a company enters into financial distress, reorganisation efforts must be conducted in both countries.

Mexico has incorporated in general the UNCITRAL Model Law on Cross-Border Insolvency in Chapter 12 of the LCM. Accordingly, Mexico provides recognition and full co-operation on cross-border insolvency.

The whole reason for Chapter 12 of the LCM is to provide effective mechanisms for dealing with cross-border insolvency. The underlying principles are international cooperation, increasing legal certainty for trade and investment, and providing a correct vehicle for the reorganisation of financially distressed entities.

Recognition of a foreign reorganisation proceeding and reorganisation plan is not automatic. The LCM provides in general for two ways in which a foreign reorganisation proceeding may be recognised: (i) a main foreign reorganisation proceeding if the foreign jurisdiction in which it is being handled is where the debtor has its centre of main interests (COMI); or (ii) a non-main foreign proceeding if the foreign jurisdiction in which it is being handled is a place where the debtor only has a commercial establishment (as described in the LCM: any place of operations in which the debtor executes economic activity in a non-transitory manner with human capital and assets or services).

Additionally, the LCM foresees the existence of parallel reorganisation proceedings when there exists a Mexican reorganisation proceeding and a foreign proceeding, cases in which the Mexican court will procure collaboration and co-ordination with the court overseeing the foreign proceeding.

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