Pre-Package in Mexico: Why It Does Not Work

The pre-package petition was introduced in Mexico as a result of the 2007 amendment to the Mexican Bankruptcy Law. The congressional intent was to expedite the bankruptcy procedure. However, as this chapter explains, because of the current regulations in Mexico, the pre-package petition is not a useful tool compared with a conventional bankruptcy petition.

Since 2007, 300 cases have been filed in Mexico (approximately 40 per year); only 13 were pre-package petitions.^[2]

We first give a brief overview of the reorganisation process in Mexico,^[3] then analyse the pre-package process. Finally, we identify the pitfalls of the law that makes the pre-package petition a futile tool.

The reorganisation procedure in Mexico

Introduction

Bankruptcy in Mexico is dealt with in one of two ways: reorganisation or liquidation. When reorganisation is not possible, bankruptcy is converted into liquidation. The purpose of reorganisation is to maintain the enterprise and pay the permitted creditors through a reorganisation plan. The purpose of liquidation is to sell the enterprise – as a going concern or in segments – and pay the permitted creditors. Since bankruptcies in Mexico are tried under a unitary proceeding, the effects of the bankruptcy adjudication are similar in both reorganisation and liquidation. However, although the debtor retains possession of the enterprise during a reorganisation, in a liquidation, the debtor is removed and the insolvency officer assumes possession of the enterprise.

Insolvency officers are assistants of the court and are appointed by the Insolvency Institute. During the pre-bankruptcy procedure, the insolvency officer is known as the visitor. Once the bankruptcy is adjudicated, the insolvency officer in a reorganisation is known as the conciliator, and in a liquidation, the officer is known as the syndic. For purposes of this chapter, we refer to the conciliator as the reorganisation officer and the syndic as the liquidation officer. The reorganisation officer’s principal task is to conciliate the interests of the debtor and its creditors to reach a reorganisation plan.

The court is the most powerful party in a bankruptcy proceeding and functions as the director of the proceeding. However, according to constitutional principles, any authority of the state must act within the limits of the law. Thus, the court’s power in a bankruptcy proceeding is limited to what is determined by statute.

Case commencement

The commencement of a bankruptcy proceeding can be either voluntary or involuntary. Bankruptcy adjudication is not automatic, and even in voluntary petitions, a pre-bankruptcy procedure needs to be initiated before the bankruptcy adjudication. At the pre-bankruptcy stage, the parties will submit evidence to show whether the debtor is in general default – it is not sufficient that the debtor merely confesses a general default to the court. The only option available for avoiding a pre-bankruptcy proceeding is by the submission of a pre-package petition, whereby the debtor and a certain number of creditors acknowledge the situation of general default.

Petition in bankruptcy

A debtor may file a petition to be adjudicated in bankruptcy in one of three ways: the ordinary (conventional) petition, the pre-package petition and the imminent general default petition.

An involuntary petition is, in essence, a lawsuit against the debtor. The petitioner is the plaintiff and the debtor is the defendant. If the defendant is not willing to be adjudicated as bankrupt, it may respond to the lawsuit in various ways. First, it may deny that the plaintiff is a creditor. Second, it may state that it is not in general default. Third, even though the plaintiff is a creditor, and the debtor may be in general default, if it is a small business debtor, it might state that it is not willing to submit to a bankruptcy proceeding.

Adjudication in bankruptcy

The debtor will be adjudicated in bankruptcy when the court deems that sufficient evidence proves that the debtor is in general default. General default is a term of art that comprises two events: a default by a certain time of a certain amount of debt and the lack of current assets. For voluntary petitions, either of the two events must be proved; for involuntary petitions, both events are required.

A summary of the adjudication resolution must be published in the Federal Official Gazette. The effects of this publication are twofold: to serve as a notice to the creditors and, if the bankruptcy was commenced as part of a reorganisation, to serve as the starting point of the time limit to submit and approve a reorganisation plan to avoid conversion to liquidation.

Claims allowance proceeding

For a bankruptcy proceeding to be closed, it is necessary to conclude the allowance of claims proceeding. Permitted creditors will vote on and sign the plan, and the plan’s approval will conclude the bankruptcy. Hence, the allowance of claims is one of the most important issues in bankruptcy.

The allowed claim results from multiparty litigation that consists of the following steps:

• The insolvency officer inspects the debtor’s accounting books and records, and uses both this information and the proof of claims submitted by the creditors to draw up a provisional list of claims.
• There may be objections to the provisional list. If there are objections, the insolvency officer will draw up a definitive list of claims.
• Based on the definitive list and objections, the judge issues a first-instance ruling on the allowance of claims.
• The ruling may be challenged through an appeal.

The allowance of claims proceeding is often the most time-consuming aspect of the overall bankruptcy proceeding. Only documentary evidence is admitted in the lower court but in an appeal, any type of evidence is permitted: documents, witnesses, debtor or creditor depositions, expert witnesses and court inspections.

All creditors must appear before the bankruptcy proceeding and submit proof of their claims, except tax and labour creditors.

Claims classification

All creditors must be treated equally, but justice demands that only the equals be treated equally and unequals be treated unequally. The classification of creditors is based on such inequalities. However, all creditors, irrespective of class, will have their claims met against the debtor’s estate. Some creditors will be paid against a specific good of the estate to the exclusion of the other creditors. These exclusions are based on a statutory lien (creditors with special privilege), a judicial lien (labour judgment creditors) or a contractual lien (secured creditors).

The classification of creditors determines the ranking of creditors and which creditors will be bound by the reorganisation plan. The creditors are statutorily classified; the debtor does not have the power to classify or group the claims.

By statute, the claims are classified as administrative claims, singularly privileged creditors, secured creditors, creditors with special privilege, labour creditors, tax creditors, general unsecured creditors and subordinated creditors.

Which claims count to determine the required majority?

The reorganisation plan, to be approvable, must be signed by the debtor and those of the general unsecured and subordinated creditors that represent a simple majority of the total amount of claims. Administrative claims, singularly privileged creditors, secured creditors, creditors with special privilege, labour creditors and tax creditors do not vote.

Mandatory content of the reorganisation plan

A debtor is not entirely free to propose any term it wants. By statute, the reorganisation plan must consider the payment of the claims against the estate, the singularly privileged credits and, where applicable, according to their respective guarantees and privileges, the secured and special privileged creditors that did not sign it and were not unimpaired or paid at the value of the debtor’s collateral.

The amount of the above claims is determined by the conclusive ruling on the allowance of claims. Hence the need to wait until the resolution on the allowance of claims is conclusive for the plan’s proposal.

Closing of a case by approval of the plan

A case may be closed when a reorganisation plan is approved. Bankruptcy has two successive stages: reorganisation and liquidation. If a plan is not submitted and approved within 185 calendar days following publication in the Federal Official Gazette of the summary of the adjudication, a reorganisation is converted to liquidation. Only the debtor or the reorganisation officer can submit the proposed reorganisation plan. Once submitted, the permitted creditors have a time limit of 15 days to comment on the plan or sign it. During this period, the debtor must disclose any information required by the reorganisation officer and creditors. Once the plan is signed, the reorganisation officer presents it to the court, duly executed by the debtor and at least the required majority of allowed creditors. The plan must be submitted in writing on pre-printed forms drawn up by the Federal Insolvency Institute.

The approval of plans is a heavily contested proceeding. Plans approved by the court can be challenged by appeal before an appeals collegiate tribunal, then through an amparo indirecto before a district court, and finally a review before a circuit collegiate tribunal.

The pre-package petition

A pre-package petition must be signed by the debtor and creditors that represent at least the simple majority of the total liabilities. If the pre-package petition is not dismissed, it produces the adjudication of the debtor as bankrupt without a pre-bankruptcy procedure. However, the procedure for a pre-package petition is the same as in a conventional petition.

There appear to be only two advantages of a pre-package petition: (1) there is no need to go through a pre-bankruptcy procedure since the adjudication in bankruptcy is produced upon the filing of the petition; and (2) in a pre-package case, the reorganisation officer’s fees are 80 per cent lower compared with the rates of a conventional case.

What fails

Pre-petition votes do not count

Votes cast before the case’s commencement cannot be counted for the confirmation of a plan. Although 11 US Code §1126(b) (Acceptance of plan) states that the holder of a claim or interest that has accepted a plan before the commencement of the case under this title is deemed to have accepted such a plan, in Mexico, there is no provision for a creditor to be deemed to accept the plan before the commencement of the case. Hence, the pre-petition votes have no value at all.

Pre-package plan differs from court-approved plan

The pre-package plan, signed and submitted by a debtor and its creditors, will not necessarily be the final plan submitted for approval. This is because the creditors that signed it might not be allowed as creditors or because they do not meet the required majority, whereas other creditors that did not sign the initial plan do.

As we have seen, only permitted creditors can sign the plan. Permitted creditors are those that acquire the status by the ruling on the allowance of claims. The allowance of claims is a structured process within the bankruptcy proceeding. The product of this process are the permitted creditors, which have the right to participate in the very essence of the goals of bankruptcy: to vote on the reorganisation plan or to receive the dividends following liquidation.

Since only the court can adjudicate on who is a permitted creditor or not, the pre-petition votes contained in the pre-package plan have no value at all because they were made by creditors who, at the time, did not have the status of permitted creditors.

Mandatory content

At the time of submission of the pre-package petition, there is still no information about the mandatory content of the reorganisation plan. This is because there is no ruling on the allowance of claims at the time of submission. If the mandatory content is proximately related to the ruling on allowance of claims, there is no means whereby the pre-package plan can be approved since it lacks the mandatory content.

Pre-package petition must be signed by a majority of creditors that cannot vote on the plan

Only unsecured and subordinated creditors may vote for the plan. The plan is only binding upon dissenting unsecured and subordinated creditors. The secured creditor is only bound by the plan if it signs the plan or if the plan disposes of the payment of the value of the collateral. Administrative claims, singularly privileged creditors, secured creditors (with exceptions), creditors with special privilege, labour creditors and tax creditors do not participate either actively or passively in the plan. Nevertheless, the pre-package petition must be signed by a simple majority of the total claims and not only a majority of unsecured and subordinated creditors.

Time limits are not shorter

In Mexico, the allowance of claims proceeding takes most of the time. The pre-bankruptcy procedure takes approximately three to four months. Pre-package petitions, at most, only save the time needed for the pre-bankruptcy procedure, but the rest is the same as in a conventional bankruptcy petition. Pre-package plans approved by the court can still be challenged by appeal before an appeals collegiate tribunal, then through an amparo indirecto before a district court, and then a review before a circuit collegiate tribunal.

The uncertainty remains the same

Whether a petition is pre-packaged or conventional, the uncertainty remains the same. There is no certainty that the creditors that signed the pre-package petition will be adjudicated as permitted creditors. Creditors on the balance sheet may not be allowed as valid claims and vice versa. The court will rule who is a permitted creditor through the allowance of claims proceedings.

The role of the court remains the same

Nothing is omitted from the supervision powers of the court, not even in a pre-package petition. It is solely the court that allows claims and only permitted claimants can sign the reorganisation plan. Only the pre-bankruptcy procedure is suppressed in the pre-package petition.

Pre-package plan does not prevent conversion to liquidation

A pre-package petition could end in a conversion to liquidation because, notwithstanding the pre-package plan, the only plan that could stop conversion to liquidation is the plan submitted by the reorganisation officer once there is a ruling on the allowance of claims.

Failed cases

It is presumed that a pre-package petition will end in the confirmation of a reorganisation plan since the petition was filed with an already negotiated plan. However, as we have seen, in Mexico, the votes cast in the pre-package are not valid until the allowance of claims ruling.

The following are cases that started with a pre-package petition but ended in liquidation because no valid plan was submitted on time to avoid the conversion to liquidation.

• Expral: The debtor submitted the pre-package petition and was adjudicated in bankruptcy in June 2011 without needing the pre-bankruptcy procedure, opening the procedure at the reorganisation stage. A plan was submitted on time, though not the pre-package petition. However, since only permitted creditors can sign the plan, and after a process of allowance of creditors that took 10 years, it was ruled that the creditors that signed the petition were not permitted creditors at all. The procedure was converted to a liquidation in August 2021.^[4]
• Corporación Geo: The debtor submitted the pre-package petition in March 2014 and was adjudicated in bankruptcy in April 2014, without the need for pre-bankruptcy, opening the procedure for reorganisation. A plan was submitted on time, though not the pre-package petition. The plan was approved in June 2015 and was not concluded until October 2018. This pre-package case took four years.^[5] However, in September 2018, a creditor filed an involuntary petition against Corporación Geo, and the bankruptcy was opened at the liquidation stage.^[6]
• Avalon Marine: The debtor submitted the pre-package petition in July 2016 and was adjudicated in bankruptcy in August 2016 without needing the pre-bankruptcy procedure, opening the procedure at the reorganisation stage. Since the pre-petition votes contained in the pre-package plan do not count at all, and owing to the lapse of the plan submission period without a plan being submitted, in October 2017, the court converted the case to a liquidation.^[7]

Successful cases

There are cases of success, however, such as the following, but it was the plan submitted by the reorganisation officer (as approved by the bankruptcy court) and not the plan submitted with the pre-package petition. The pre-package petition was immaterial to approving a reorganisation plan and the case’s conclusion.

• Metrofinanciera: The debtor submitted the pre-package petition in August 2009 and was adjudicated in bankruptcy in September 2009 without needing a pre-bankruptcy procedure, opening the procedure at the reorganisation stage. A plan was submitted on time, though not the pre-package petition. The plan was approved in June 2010 and was not concluded until December 2014. This pre-package case took five years.^[8]
• Grupo Iusacell: The debtor submitted the pre-package petition and was adjudicated in bankruptcy in December 2010 without needing a pre-bankruptcy procedure, opening the procedure at the reorganisation stage. A plan was submitted on time, though not the pre-package petition. The plan was approved in April 2011 and was concluded since no one challenged its approval. This pre-package case took four months.^[9]
• Urbi Desarrollos Urbanos: The debtor submitted the pre-package petition in December 2014 and was adjudicated in bankruptcy in January 2015 without needing a pre-bankruptcy procedure, opening the procedure at the reorganisation stage. A plan was submitted on time, though not the pre-package petition. The plan was approved in February 2016 and was not concluded until March 2020. This pre-package case took six years.^[10]
• Empresas ICA: The debtor submitted the pre-package petition in August 2017 and was adjudicated in bankruptcy in September 2017 without needing a pre-bankruptcy procedure, opening the procedure at the reorganisation stage. A plan was submitted on time, though not the pre-package petition. The plan was approved in March 2018 and was not concluded until February 2020. This pre-package case took three years.^[11]
• M&G Polímeros Mexico: The debtor submitted the pre-package petition in February 2019 and was adjudicated in bankruptcy in April 2019 without needing a pre-bankruptcy procedure, opening the procedure at the reorganisation stage. A plan was submitted on time, though not the pre-package petition. The plan was approved in September 2020 and was concluded since no one challenged its approval. This pre-package case took seven months.^[12]
• Sago Electronics: The debtor submitted the pre-package petition in August 2019 and was adjudicated in bankruptcy in September 2019 without needing a pre-bankruptcy procedure, opening the procedure at the reorganisation stage. A plan was submitted on time, though not the pre-package petition. The plan was approved in May 2020 and was concluded since no one challenged its approval. This pre-package case took nine months.^[13]
• Cool Company: The debtor submitted the pre-package petition in November 2019 and was adjudicated in bankruptcy in December 2019 without needing a pre-bankruptcy procedure, opening the procedure at the reorganisation stage. A plan was submitted on time, though not the pre-package petition. The plan was approved in October 2020 and was concluded since no one challenged its approval. This pre-package case took 11 months.^[14]

The most recent cases are Altán Redes^[15] and Alpha Holding,^[16] both of which are still pending.

Conclusion

The introduction of the pre-package petition in 2007 has not been what it was expected to be. The pre-package petition must go through the same procedure as the conventional one, except for the pre-bankruptcy stage. The same obstacles and burdens that apply to the conventional petition apply to the pre-package petition.

Notes