Covid-19-Mandated Court Closures and the Impact on Distressed Situations

This chapter explains how Mexico’s government has dealt with the covid-19 pandemic and outlines how the pandemic has affected the judicial system and distressed situations. This explanation requires an understanding of the situation prior to the pandemic. The chapter therefore provides a brief overview of the Mexican judicial system and civil and bankruptcy procedures.

Pre-pandemic status

The judicial system

Mexico is a federation comprised of 32 states with a republican regime. The federation and the states each have three branches of government: executive, legislative and judicial. The federal judicial system is divided into circuits, each of which comprises one state. Each circuit has district courts, federal courts of appeals and federal high constitutional trial courts (juicios de amparo). Depending on the number of cases and the population of each circuit, courts may be specialised according to particular matters (e.g., criminal, administrative, labour, civil, commercial and telecommunications) or they may be courts of general jurisdiction. The judicial branch, both federal and state, has a judiciary council, which is the administrative body of the courts, whose tasks include the determination of the days on which the courts are open for business.

Civil and commercial procedures

Civil and commercial procedures are mainly conducted in writing, rarely orally. Judicial records are comprised of written motions and judicial resolutions, which are sewn together with a cord. Justice in Mexico is tried by cord and paper. To file a motion and revise a judicial resolution, in general, the parties must physically appear before the court, have their motions stamped and receive the original of the judicial record from the court clerk. Lawyers generally spend most of the morning at the court, checking one or more cases. The courts are located in close proximity or in the same building, in an area known as a judicial city. For example, the federal judicial city of the third circuit in the state of Jalisco is the largest in Latin America; it contains 50 federal courts.^[2] The local judicial city of Jalisco has 51 courts of first instance and receives approximately 4,000 visitors daily.^[3] Crowd density is common in courts, especially when little to nothing can be done electronically.

Justice and technology

In January 2012, the Federal Advanced Electronic Signature Law was promulgated. This Law is based on the UNCITRAL Model Law on Electronic Signatures (2001). Upon its promulgation, each state promulgated similar laws. These regulations cleared the path to implement the digitalisation of justice, though not every state has done so. In the federal branch, the Federal Judicial Council adopted a digital judicial system in July 2013,^[4] through which parties may file motions electronically – signed by an advanced electronic signature – and revise the judicial record online. This system was exclusively for constitutional cases (juicios de amparo) and excluded civil, commercial and bankruptcy cases.

Local judiciaries differ by state. For example, the northern and industrialised state of Nuevo León implemented a digital judicial system in 2011. The state of Coahuila did so in 2015, and the state of Mexico followed suit in 2018. Various other states have not yet implemented technology in their judicial systems.

The bankruptcy procedure

Bankruptcies in Mexico are tried exclusively before the federal courts (i.e., district courts). Bankruptcy cases may commence through a voluntary or involuntary petition. Involuntary petitions are actual lawsuits that the creditor (i.e., plaintiff) files against the debtor (i.e., defendant). Involuntary petitions may be filed by a single creditor, by the fiscal attorney or by a foreign representative. If the case commences through a voluntary petition, the bankruptcy may be opened either at the reorganisation stage or directly at the liquidation stage. If the case commences through an involuntary petition, the bankruptcy necessarily opens at the reorganisation stage unless the debtor agrees to commencement at the liquidation stage. After the claims are definitively allowed, the case may be closed under the following conditions: (1) by approval of the reorganisation plan, at either the reorganisation or liquidation stage; (2) by a unanimous agreement at the liquidation stage; (3) by payment of the creditors; or (4) by a lack of sufficient assets.

Bankruptcy adjudication is not automatic; a pre-bankruptcy procedure must be initiated prior to the bankruptcy adjudication, even for voluntary petitions. At the pre-bankruptcy phase, the parties submit evidence to prove whether the debtor is in general default. It is not sufficient for the debtor merely to confess a general default to the court.^[5]

Judicial proceedings in Mexico are time-consuming; bankruptcies typically take at least four years. The processes are lengthy because the judicial proceeding is heavily contested in motions for reconsideration, appeals and the amparo trial. The reality in Mexico contradicts the World Bank’s estimated time for resolving a bankruptcy procedure of one and a half years.^[6]

There are few bankruptcy cases in Mexico. The average number since 2000 is 40 per year, in a country of 125 million inhabitants^[7] and approximately 5 million businesses, 99.8 per cent of which are mini-, small- and medium-sized; the small remainder are large businesses.^[8]

Although the World Bank has recommended that judges who handle bankruptcy cases ‘must be highly knowledgeable and develop particular skills (such as financial and accounting skills)’,^[9] since there are few bankruptcy cases in Mexico, the Federal Judicial Council has not created specialist bankruptcy courts. Certain federal judicial circuits only have federal courts of general jurisdiction and are not specialised in civil or commercial cases. The lack of specialisation may explain why federal courts have been unreasonably dismissing bankruptcy petitions. A petitioner could challenge a dismissal, but the challenge could take more time than to get the petition back and file it again. Common grounds for dismissal include:

• the debtor not submitting evidence to prove prima facie that they are in general default;^[10]
• the debtor not submitting financial statements;^[11] or, if they were submitted, they were not:
  • clear;^[12]
  • prepared according to international financial norms; or^[13]
  • signed by an accountant,^[14] or they were signed but the accountant:
    • did not submit a certified copy of their accounting licence;^[15] or
    • is not independent;^[16] or
• the shareholders’ resolution that adopted the decision to instruct the filing of the petition was not formalised in a public deed.^[17]

For instance, a debtor filed a petition in September 2013. It was not admitted for almost 10 months, until July 2014. The debtor had to file one motion of reconsideration and two amparo trials.^[18] Another debtor in the same court filed a petition in August 2017 which was not admitted until March 2018, nearly seven months later. The debtor had to file one motion of reconsideration and one amparo trial.^[19]

The pandemic in Mexico

On 28 February 2020, the epidemic czar of Mexico, Doctor Hugo López-Gatell, confirmed the first case of covid-19 in Mexico. On 11 March 2020, the World Health Organization declared a global pandemic. Mexico had been affected by the AH1N1 influenza in 2009, when courts were closed from 27 to 30 April 2009.

Lockdowns had not been required in 2009, but the covid-19 pandemic was different. In view of the situations in Wuhan, Italy, Spain and the United Kingdom, this new virus forced lockdowns of government offices and businesses. Hence, a health and economic crisis was foreseeable.

Executive response

On 31 March 2020, Mexico’s federal health secretary ordered the nationwide suspension of non-essential activities until 30 April 2020. Judicial and legislative activities were considered essential (but see below for the judiciary response).^[20] On 21 April 2020, the suspension of non-essential activities was extended until 30 May 2020.^[21] On 14 May 2020, a new decree was issued by which the suspension of activities would not be nationwide, but rather according to each state and depending on the category of the epidemic zone.^[22]

As lockdowns commenced and the definitive closure of companies was foreseeable, people expected a response from the executive branch. On 7 May 2020, the Mexican president clearly stated that he was not willing to bail out companies. He said that ‘if any company fails, it is up to its owner’.^[23]

However, on 25 March 2020, the National Banking and Securities Commission (CNBV), an independent agency of the Secretariat of Finance and Public Credit, amended the accounting criteria for Mexican banks, which enabled them to grant relief to those of their debtors affected by the crisis. The relief consisted of the partial or total deferral of principal and interest payments for up to four months, with the possibility of extending it for two additional months.

Subsequently, on 31 March 2020, the CNBV – following the example of the European Central Bank and the central banks of Sweden, Italy, Russia, Argentina, Canada, the United Kingdom, Belgium, Austria, Denmark and Japan, among others – recommended that Mexican banks refrain from distributing dividends to their shareholders and repurchasing their own stocks. This measure tended to channel these resources towards strengthening their banking institutions so that they would (1) be better positioned to absorb the potential losses that could occur as a result of the pandemic, and (2) have greater resources to support the economy. The CNBV reiterated this recommendation on 19 April 2021.

On 27 May 2020, the Organisation for Economic Co-operation and Development (OECD) recommended that the government should indirectly support businesses with a moratorium of tax or social security payments,^[24] but on 8 April 2020, the president had rejected any possibility of a moratorium on paying taxes. In fact, he stated that the tax authorities needed to act more aggressively in collecting taxes.

Legislative response

On 28 April 2020, in response to the covid-19 crisis and in collaboration with the Mexican Bar Association, Senator Claudia Edith Anaya Mota issued an initiative to amend bankruptcy law to implement ‘urgent bankruptcy cases’. This new bankruptcy legislation was exclusively for voluntary petitions and only applicable when fortuitous or in response to force majeure events. The features of this initiative are as follows:

• The debtor does not need to submit evidence to prove the general default: a declaration under oath suffices. This amendment was a response to the excessive and unsound dismissal of voluntary petitions (as witnessed by bankruptcy lawyers, the Mexican Bar Association and the Ibero-American Institute of Bankruptcy Law).
• The adjudication will be automatic, without the pre-bankruptcy procedure, and will be conclusive (i.e., non-appealable).
• The process will be conducted electronically.
• The period to submit a reorganisation plan and avoid converting to the liquidation stage will commence once the allowance of claims is concluded.^[25]
• Tax creditors will have the same rights as general unsecured creditors.
• There will be a legal discharge at the liquidation stage. Once the assets are reduced to cash, the unpaid debts will be discharged without the consent of the creditors.
• The stay will benefit not only the debtor but also the guarantors and joint obligators.
• The best interest principle is expressly mandated.

Finally, the Senator Mota’s initiative proposed the creation of specialist bankruptcy courts. Unfortunately, this idea was not echoed by legislators and did not progress at all. In other jurisdictions (such as Germany and Spain), there is an obligation to file for bankruptcy, and hence their governments issued a temporary suspension to fulfil that obligation. However, since Mexican bankruptcy law does not oblige the filing of a petition, there was no need for such a suspension.

Judiciary response

As mentioned previously, the courts are always very crowded and therefore pose a risk for the spread of covid-19 infections.

Court closures

Prior to the lockdowns ordered by the federal executive branch, the Federal Judicial Council ordered the closure of federal courts from 18 March to 3 August 2020 and again from 19 December 2020 to 10 January 2021. Certain federal courts could remain open during that time, with half of their personnel, to hear urgent cases. Once the federal courts opened, access to the courthouses was limited to appointments only.

State courts acted differently. State judiciaries that had invested in technology and digital justice (e.g., Nuevo León and Coahuila) could continue working despite the pandemic. Although the procedures were not the same as before the pandemic, justice did not stop at all as in the other states.

However, other state judiciaries did not invest in technology and their courts were closed from March to August 2020 and from December 2020 to February 2021. Once the local courts reopened, as in the federal courts, access to the courthouses was available exclusively by appointment.

Implementation of technologies

On 10 April 2020, the Inter-American Commission on Human Rights, of which Mexico is a Member State, adopted Resolution No. 1/2020: Pandemic and Human Rights in the Americas, in which it recommended the assurance of the operation of the judiciaries even in the context of the pandemic.

On 8 June 2020, the Chief Justice of the Mexican Supreme Court and the Federal Judicial Council, Mr Arturo Zaldívar, announced the adoption of General Resolution 12/2020,^[26] which, in his words, inaugurated a ‘new era of the Federal Judiciary, where digital justice is now a reality’^[27] because all cases before federal courts (not only amparo trials) could be tried electronically, including civil, commercial and bankruptcy cases.

The situation was different locally. When the pandemic began, certain state judicial councils issued administrative regulations to implement the digitalisation of justice, whereas others deemed that the legislative branch needed to amend the legal text to enable them to issue regulations on the digitalisation of justice. However, state legislatures have not issued laws regarding the digitalisation of the civil procedure since, according to the constitutional amendment of September 2017, civil procedure regulation pertains to the federation and not to the states. Furthermore, the federation has not issued a national code of civil procedure.

For instance, at present and notwithstanding the existence of the pandemic for more than a year, Jalisco has not taken any steps to digitalise its judicial system. It is not possible to file motions or receive judicial notifications electronically. Furthermore, its courts refuse to use email to send communications to parties. In Jalisco, the status remains the same as before the pandemic (i.e., justice by cord and paper) but now with restricted access to the court.

The procedure for civil and commercial cases in Mexico comprises a series of stages, each of which has a preclusive effect. Each party has a specific period to move in the procedure, and if any party fails to progress, it loses its right to do so. The period is counted from when the parties are notified of a court’s decree or resolution. Once the court closures ended, they reopened only partially, and there was a lack of instant access to judicial records for parties that needed to make an appointment to appear in court in person. By the time they were able to make an appointment, the time limit to move or file an appeal had already expired. Thus, parties suffered the frustration and uncertainty of not knowing what was happening at the court while their process continued.

Impact on distressed situations

While the courts remained closed, no collection action could be brought. Creditors could neither file a lawsuit nor seize a debtor’s assets. In the meantime, the Public Registration Agency was open, allowing many debtors to transfer their properties. When the courts resumed and the creditors filed lawsuits, there were no assets to attach.

When the federal courts were closed, only urgent cases could be heard. Provisional bankruptcy measures were deemed urgent on 27 April 2020. However, it is not possible to request a provisional measure independently from a bankruptcy petition under Mexican bankruptcy law. Hence, the courts were uncertain about whether they had to admit the provisional measures but not the bankruptcy petition.

New bankruptcy petitions and bankruptcy cases could be tried as of 8 June 2020. Nevertheless, at a time when debtors had a greater need to access a bankruptcy case, the federal courts continued to rejected petitions in bankruptcy based on the unsound arguments mentioned above.

In effect, according to the Federal Insolvency Institute, 48 petitions were dismissed in 2020 (the information does not distinguish between voluntary and involuntary).^[28] In one case, the same court dismissed the petition of the same debtor on two occasions and then admitted it on the third attempt.^[29] In another case, the debtor filed a petition in May 2020 which was not admitted until April 2021. The debtor had to file one motion of reconsideration and one amparo trial.^[30]

In 2020, approximately one million mini-, small-, and medium-sized businesses closed definitively yet only 31 cases were filed and admitted, of which 15 were voluntary petitions and the rest involuntary. Only one voluntary petition was filed before the pandemic and the rest during the second half of the year. Despite the pandemic, the number of cases in 2020 was below the average of 40 per year. During the first half of 2021, the courts admitted 11 petitions, both voluntary and involuntary.

The types of businesses most damaged by the covid-19 pandemic have been airlines and cinemas. Some decided not to file for bankruptcy in Mexico. Aeromexico, the country’s largest airline company, decided to file a Chapter 11 petition before a New York court, despite its principal place of business and corporate domicile being in Mexico. Moreover, Cinépolis, a major cinema company in Mexico and one of the largest worldwide, announced that it plans to enter negotiations with its creditors outside a bankruptcy procedure.^[31]

Conclusion

In a judicial system of cord and paper, the closure of the courts meant that justice stopped entirely. There was no system for filing motions or receiving notifications from the court electronically. The pandemic has revealed the obsolescence of the judicial system in Mexico. Debtors in distressed situations could not file new petitions because of the mandated closures. Even when the courts were open during the pandemic, bankruptcy petitions were not the first choice for debtors in Mexico despite the largest economic crisis in 80 years. Mexico is not well acquainted with bankruptcy cases.^[32] As an unknown and underused tool in Mexico, bankruptcy was indifferent to the effects of the pandemic and the mandated court closures.^[33]

Notes