Mexico: Restructuring & Insolvency (3rd edition)

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This country-specific Q&A provides an overview to restructuring and insolvency laws and regulations that may occur in Mexico.

This Q&A is part of the global guide to Restructuring & Insolvency (3rd edition). For a full list of jurisdictional Q&As visit

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    Security interest may come in the form of in rem rights on collateral (mortgages or pledges), or other devices that are the functional equivalent thereof (eg, guaranty trusts).

    Secured claims are those covered by an in rem security interest. Only mortgages and pledges qualify as in rem security interests for purposes of bankruptcy ranking. These claims are paid out of the proceeds of the property that have been collateralized against the mortgage or pledge, and generally in the order that the pledges or mortgages have been registered in accordance with applicable law. Other security devices do not qualify as an in rem security interest.

    Priority claims are those from creditors with a privilege or a retention right (e.g., a mechanics lien). These claims are paid out of the proceeds of the retained property and are generally paid in the order of privilege that has been registered in accordance with applicable law or by the date of the claims.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    Enforcing collateral can be a painful exercise in Mexico. Excess formalities and indifference or incompetence from the judiciary make it a hard endeavor.

    Once a judgment that declares the debtor en concurso is entered, attachment and foreclosure on the debtor’s assets are generally stayed during the reorganization stage. Secured creditor may begin or continue foreclosing on assets that, in the opinion of the judge and the conciliator, are not essential for the ordinary course of debtor’s business.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    A debtor will be declared en concurso if it has ceased (or is imminent that it will cease), in general, paying its debts as they become due.

    The debtor, any creditor or the Office of the Attorney General, may file an insolvency petition.

    The principal indications to establish when a debtor has “generally ceased paying debts when due” are the failure of a debtor to comply with its payment obligations in respect of two or more creditors, and the existence of the following two conditions: (i) 35 percent or more of the debtor’s outstanding liabilities are 30 days past due; and (ii) the debtor has insufficient liquid assets, which are specifically defined, to support at least 80 percent of its obligations which are due and payable. A debtor can petition for concurso if any of the two tests are met or if it declares under oath that it will inevitably fall in any of these two tests within the next ninety days. A creditor or the Office of the Attorney General can demand the concurso if both tests are met.

    Specific instances such as insufficiency of assets available for attachment or a payment default with respect to two or more creditors are facts which by themselves result in a rebuttable presumption of insolvency.

    Directors or officers of the debtor do not have an obligation to open insolvency procedures upon the debtor becoming distressed or insolvent and, therefore, there are no consequences for failing to do so.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    Concurso consists of a single insolvency procedure, encompassing two successive stages. The first is the reorganization stage (conciliación). The second is the liquidation stage (quiebra). Prior to a debtor being placed en concurso, the process includes a preliminary visit stage (visita) to verify whether the commencement standards have been met.

    During reorganization, the debtor shall conduct the ordinary operations of the enterprise, including making any essential expenses, while the conciliator oversees the books and records and each transaction carried out by the debtor. The conciliator shall resolve issues pertaining to the assumption or rejection of contracts, any post-commencement financing, implementation or substitution of collateral, and the disposition of assets out of the ordinary course of business.

    The conciliator may petition to court to exercise the exceptional remedy of removal (desapoderamiento) in the event in cases where the conciliator considers it to be for the benefit of the estate.

    The declaration of liquidation results in the removal of management and management of the debtor’s enterprise would then be vested on the receiver (síndico).

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    Creditors are ranked according to the following priority:

    1. Privileged labor claims (i.e., labor obligations for the previous year’s salary, benefits and severance).
    2. Administrative claims.
    3. Claims incurred to attend to the regular expenses in connection with the security, repair, conservation and management of the estate assets.
    4. Claims for judicial or extrajudicial procedures for the benefit of the estate.
    5. Burial expenses.
    6. Terminal illness expenses.
    7. Secured claims.
    8. Labor (other than privileged labor claims) and unsecured tax claims.
    9. Priority claims.
    10. Unsecured claims.
    11. Subordinated claims (ie, claims of those who have contractually agreed to subordinate their claims to unsecured claims, and unsecured claims held by related-parties other than parents of the debtor).
    12. Creditors of unlimited partners of the debtor, if their claims arose after the partner became an unlimited partner.
  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    Transactions entered into before the insolvency declaration knowingly defrauding creditors can be set aside if the transaction is gratuitous or, not being gratuitous, the third party shares the defrauding purpose.

    Further, certain transactions carried out within the retroactive period will be presumed to be fraudulent as to creditors and will also be set aside. The retroactive period is the period that begins 270 days prior to the concurso declaration. This period is doubled (ie, to 540 days) with respect to related-party transactions. The judge may extend such period upon the reasoned request of the conciliator or any creditor but up to a maximum of three years.

    Avoidable transactions carried out within the retroactive period include granting of collateral or additional collateral if not contemplated in the transaction documents; payments-in-kind if such method of payment was not agreed in the transaction documents; certain related-party transactions; gratuitous transactions; transactions under which the debtor pays a consideration whose value is notoriously excessive or receives a consideration whose value is notoriously lower than the consideration of its counterpart; transactions in conditions or terms that significantly different from prevailing market conditions; any debt remission made by the debtor; and payment of unmatured obligations. All of these transactions are presumed to be fraudulent; however, some of them allow for the presumption to be rebutted.

  7. What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?

    From the concurso declaration, attachment and foreclosure on assets are generally stayed during the reorganization stage. Secured creditors may begin or continue foreclosing on assets that, in the opinion of the judge and the conciliator, are not essential for the ordinary course of debtor’s business.

    The effects of concurso should apply broadly, worldwide (Mexico has adopted the universalism approach to insolvency or, as some treatises put it, puts it, a mitigated universalism approach). However, the nature of judiciary’s geographical reach makes it impossible to effectively protect assets outside of the bankruptcy court’s jurisdiction in the absence of judicial cooperation abroad. Whether the foreign court will grant comity or otherwise recognize and cooperate with the Mexican bankruptcy court is a matter of local law in the place where comity or recognition is sought.

  8. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    Out-of-court restructuring is governed by scattered substantive and procedural rules, but mostly by internationally recognized principles of conduct and professional practice in the field. Court-assisted reorganization and liquidation are governed by the Insolvency Law.

    The Insolvency Law regulates business reorganization and bankruptcy in Mexico. The stated purpose of the business reorganization procedure is to preserve companies and prevent that the generalized default of payment obligations jeopardizes the continuation of the companies themselves and the businesses with which they have dealings, as well as ensuring an adequate protection of creditors in light of the deterioration of the estate.

    The stated purpose of the reorganization stage is to conserve or save the business enterprise through a restructuring agreement.

    The reorganization stage is designed to be completed within 185 calendar days; although one 90-day extension may be granted if the conciliator or creditors representing more than half of all recognized claims so request. An additional 90-day extension may be granted if the debtor and creditors representing at least 75% of all recognized claims so request. The Insolvency Law clearly provides that in no event may the reorganization stage be extended beyond 365 days, whereupon, if there is no restructuring agreement, the liquidation stage immediately begins.

    To become effective, a restructuring agreement must be accepted by the debtor and creditors representing more than 50 percent of the sum of all of the debtor’s allowed unsecured and subordinated claims (regardless whether the holders of such claims have accepted the reorganization plan) plus all of the debtor’s allowed secured or privileged claims accepting the reorganization plan.

    After receiving approval of a reorganization agreement from the debtor’s creditors, the conciliator must then submit the reorganization plan to the court for its own review and approval. Unsecured holdout creditors representing more than 50% of all unsecured claims are entitled to veto the reorganization plan for a set period of time. Following such period, the court may then approve the reorganization plan if it finds that the proposed plan meets all of the statutory requirements and is not inconsistent with public policy.

    The reorganization plan, with the validation of the court, would become binding on the debtor and on all accepting secured and privileged creditors and on all unsecured and subordinated creditors, whether or not they accepted the reorganization plan.

  9. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    In its voluntary petition, a debtor may petition the judge to authorize interim financing (including the posting of collateral) to maintain the ordinary course of business and provide necessary liquidity during the insolvency proceedings. Any such financing would be recognized super-priority and be treated as administrative expenses.

    After the declaration of concurso, DIP financing is subject to conciliator’s authorization.

  10. Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?

    The reorganization plan, with the validation of the court, would become binding on (1) the debtor; (2) all unsecured and subordinated creditors (regardless of whether or not they signed the reorganization plan); (3) all signing secured and priority creditors; and (4) all secured and priority creditors whose claims are stated to be paid in full, subject to certain legal rules concerning quantification.

    In the absence of specific consent, any discharge would benefit the debtor only and will not be extended to non-debtors.

  11. Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?

    Conservators are representatives of creditors’ interests and are entrusted with the surveillance of the conciliator and the receiver, and of actions carried out by the debtor in the management of its enterprise.

    Any creditor or group of creditors representing at least 10 percent of the claims shall be entitled to request that the judge appoint one conservator.

    Conservators do not need to be creditors, and their fees are payable by the creditors appointing them.

  12. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?

    As a general principle, the insolvency declaration does not affect the provisions of an executory contract, unless the conciliator rejects it on grounds that such rejection is in the best interest of the estate.

    Any provision of an agreement that sets modifications that worsen the contractual terms for a debtor derived from the filing of a petition or demand for, or the declaration of, concurso (ipso facto clauses), shall be void. That is, the courts would not recognize the validity of a clause in an agreement that would give a party the right to terminate it in the event of a demand or petition for, or declaration of, concurso of the other party.

    Any party to an executory contract with the debtor shall be entitled to require the conciliator to declare whether he will assume or reject the contract. If the conciliator decides for the assumption of the contract, the debtor must perform or guarantee performance thereunder. If the conciliator rejects the contract, or does not provide an answer within 20 days, the debtor’s counterpart may thereafter declare the termination of the contract. An unresolved issue is whether the conciliator has the authority to decide on a partial assumption of a contract. Prevailing opinion is that no such authority exists: the contract would be assumed or rejected in its entirety.

    In principle, from the insolvency declaration, no debts of the debtor can be netted out, except for rights in favor of, and obligations payable by, the debtor deriving from the same transaction, and those maturing prior to the insolvency declaration whose netting is foreseen by law; rights and obligations arising from repurchase, securities loan and derivative transactions, and their framework agreements; and tax refunds and claims.

  13. What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?

    Except for the application of avoidance powers, the Insolvency Law is unconcerned with M&A transactions in the vicinity of insolvency. However, a purchaser of a distressed asset may find itself in an area of risk if the seller becomes insolvent and is declared en concurso after the sale. The contract could be subject to special scrutiny and set aside or, if the sale is an executory contract (i.e., a contract which has not yet been fully performed), is still subject to rejection by the bankruptcy representative or conciliator.

    There are two levels of authority for disposing of assets during reorganization: (1) in the ordinary course of business; and (2) out of the ordinary course of business. The debtor is entitled to dispose of assets in the ordinary course of business, but will require the conciliator’s consent to dispose of assets out of the ordinary course of business. The determination as to what constitutes a transaction in the ordinary course of business is fact-specific and must be made on a case-by-case basis.

    Distressed M&A is an underdeveloped area of legal practice in Mexico. Aside from the overriding principles of value maximization and the preservation of a going concern, there are no clear rules on the permitted strategies for disposing of assets. Arguably, any “363 Sale” (ie, a sale during the pendency of the reorganization stage) would only require the conciliator’s consent (with the approval from the conservators), which is a more expedient procedure than seeking court approval, and no exceptions to the general principles of law would be available in a disposition of assets during reorganization. Mexico does not recognize theories of de facto merger, so the risk of successor liability in distressed M&A transactions is basically nonexistent. There are, however, some tax, labor and social security obligations that could follow the transfer of an enterprise as a going concern.

    During liquidation the receiver will sell off the assets of the estate, and shall attempt to receive the highest return on the sale. If the sale of productive units allows for receiving the highest proceeds from the sale, the receiver must consider the advisability of keeping the enterprise as a going concern.

    In principle, the sale must be carried out through public auction. The receiver may employ different means of sale in the case of perishable goods or, prior judicial authorization, if such alternative means of sale would yield a higher value for the asset in question.

    The receiver may oppose the foreclosure on estate assets if he deems it is beneficial to the estate to sell those assets together with other unencumbered assets. To oppose foreclosure, the receiver must adequately compensate the secured creditor in question.

    In liquidation, assets are sold “as is”, unless receiver specifically undertakes to provide representations and warranties.

  14. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?

    Prior to 2014, in the absence of an illicit action, directors and officers of a debtor were not liable to creditors. Mexico did not recognize doctrines of wrongful trading. The 2014 amendments provide for a new framework of directors and officers (D+O) liability poorly modeled on the regime applicable to publicly-traded companies.

    Pursuant to the 2014 amendments, D+O are liable for certain detrimental actions taken from the moment the debtor is found in general cessation of payment (the zone of insolvency). Unfortunately, the framework is modeled based on the liability regime applicable to publicly-traded companies, which results in certain punishable actions that make sense from an investor public perspective, but that are completely unrelated to solvency issues of the debtor. Actions that give raise to liability include:

    • Voting at directors’ meetings or making decisions with respect to the debtor’s assets with conflict of interest.
    • Knowingly favoring a shareholder or group of shareholders to the detriment of all other shareholders.
    • As a result of their position, obtaining an undue economic benefit for themselves or a third party, including a shareholder or group of shareholders.
    • Generating, disclosing, publishing, providing or ordering information knowing it is false information.
    • Ordering or causing the omission of recording debtor’s transactions.
    • Altering or ordering the alteration of accounts to hide the true nature of debtor’s transactions.
    • Ordering or accepting the registration of false data in debtor’s accounting.
    • Destroying, modifying or ordering the destruction or modification of accounting systems or entries.
    • Altering or ordering the alteration of accounts or contractual terms; registering or ordering the registration of inexistent expenses or exaggerating real ones.

    D+O are shielded from liability arising from good-faith decisions taken in compliance with statutory requirements; based on information provided by debtor’s officers, external auditors or expert opinion; have selected the most adequate course of action or the damage to the debtor could not have been foreseen; or have obeyed a licit shareholders’ meeting mandate.

  15. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    Restructuring or insolvency proceedings do not have the effect of releasing directors and other stakeholders from liability for previous actions and decisions. However, nothing prevents parties to the restructuring plan from inserting personal releases or other forms of indemnities.

  16. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?

    Mexico was one of the first countries to adopt the UNCITRAL Model Law on Cross-Border Insolvency. When incorporating the Model Law into the Insolvency Law, Mexico made some adjustments which substantially impair the Model Law’s benefits. For example, Mexico demands reciprocity in the granting of international cooperation; the foreign representative is not entitled to initiate avoidance actions; the recognition of a foreign proceeding of a foreign debtor having an establishment in Mexico, rather than being an expeditious process, is subject to the meeting of commencement standards and the visit stage; and the foreign representative is not entitled to request provisional relief directly to the Mexican bankruptcy courts.

    Mexico has not adopted the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments.

  17. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    Mexico would recognize a foreign main proceeding pursuant to rules modeled on the UNCITRAL Model Law on Cross-Border Insolvency.

    Main proceedings of a foreign debtor may be carried out in Mexico only if such foreign debtor has a branch in Mexico, and insolvency proceedings would only encompass tangible assets located, and intangible assets enforceable, in Mexico and with respect to claims held by creditors for operations with those branches.

    The natural consequence of this provision requires “ring fencing” the estate, which raises two distinct issues: one, concerning the location of assets (active estate), and another, concerning the claims for operations attributable to a branch (passive estate). Aside from the fact that in this case the Insolvency Law clearly strays from universalism and adopts a territorial approach, this provision requires carrying out an analysis of the estate for which the Insolvency Law is ill-equipped.

  18. How are groups of companies treated on the restructuring or insolvency of one or more members of that group? Is there scope for cooperation between office holders?

    The Insolvency Law has very little regulation concerning corporate groups. While Mexico does not recognize or give effect to the principles of substantive consolidation, it does provide for some level of procedural consolidation. The insolvency of affiliates will be jointly administered by the same courts, but under different dockets.

  19. Is it a debtor or creditor friendly jurisdiction?

    By international standards, Mexico is a creditor-friendly jurisdiction.

  20. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    Paternalistic view to supposedly disadvantaged constituencies -such as labor- have had significant impact in insolvency proceedings. From example, in the case of Mexicana de Aviación, an airline, the courts allowed the reorganization to last four years in hopes of securing financing to cover labor claims.

  21. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    The most significant barrier to effective reorganization is the lack of professional courts. The 2014 amendments provided for the creation of specialized courts. However these have not been implemented yet.