The Mexican Insolvency Law: Resolution Through Litigation – Or Not

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Recently, the Mexican Insolvency Law[2] and the restructuring framework have experienced changes and adaptations in response to a post-pandemic world. These changes have not remained within the realm of mere updates but have extended to adjusting to an extremely volatile economy, market constraints and challenges associated with the costs of conducting a restructuring altogether. In particular, the industry has faced more litigious environments to avoid collection actions and has been gazing north to use a more predictable, and more costly, tool – Chapter 11. Still, the Mexican Insolvency Law remains a practical means to salvage a company, when used as intended and correctly.

Background and recent developments

In 2019, the Mexican Insolvency Law was amended to include majority state-owned companies when they initiate processes of disincorporation or extinction and are administered by the Institute of Administration and Appraisals of National Assets.[3]

As a result of covid-19-mandated court closures required by General Agreement 12/2020, issued by the Council of the Federal Judicature on 8 June 2020, the administration of justice at the federal level was implemented more actively through technological tools, specifically through the Portal of Online Services of the Judicial Power of the Federation,[4] which allows the filing of lawsuits, submissions, follow-up and consultation of files, through the online portal, which makes it easier to conduct insolvency proceedings.

However, at the time of writing in 2023, the implementation of the the Portal of Online Services of the Judicial Power of the Federation has been a success: it has allowed the parties to fully develop an online trial, including replacing personal notifications with electronic ones, which makes judicial process much faster, and has helped in compensating for delays caused by covid-19.

In 2022, the most relevant event in Mexico’s insolvency regulation was the creation of the first and second district courts specialising in insolvency matters (Courts Specialised in Commercial Bankruptcy). On 4 March 2022, the Council of the Federal Judicature published General Agreement 4/2022, which implements the creation and entry into operation of these specialist courts. They are located in Mexico City and have jurisdiction throughout Mexico. These courts began to operate on 7 March 2022 to hear proceedings regulated by the Mexican Insolvency Law and the amparo proceedings related to those.[5]

In Mexico, the collegiate circuit courts are in charge of resolving trials in the final instance. Therefore, we suggest that, just as the Courts Specialised in Commercial Bankruptcy were created, it is necessary to create Collegiate Courts Specialised in Commercial Bankruptcy, in order to continue with the specialisation and to create a unified body of case law more closely attached to the Law of Commercial Bankruptcy.

Concurso mercantil and Chapter 11

There is a discussion between choosing the US Chapter 11 route as an alternative to a Mexican judicial restructuring. Both procedures have their advantages. For instance, Chapter 11 is likely to be more expeditious and predictable; however, the procedure is more costly for the company and of little use if most of the assets are located in a jurisdiction other than the United States, since the Chapter 11 authority cannot interfere in another jurisdiction. The formal insolvency proceeding in Mexico (concurso mercantil) may be more litigious, and there may be a lesser degree of certainty with respect to the outcome of the court’s rulings, but it is more efficient in dealing with assets located in Mexico. In fact, it is the only legal option in the Mexican jurisdiction for dealing with tax and labour claims, which cannot be processed by a Chapter 11 procedure for constitutional reasons, among other things. Thus, deciding which of the two options is the most convenient will depend on the place where the company’s assets are concentrated, and the nature of and ability to treat specific debt, taking into consideration that, as will be detailed below, each legislation may have non-restructurable credits, for instance in Mexico the case of labour and tax credits.

Important considerations are required when choosing Chapter 11 over a concurso mercantil. Under the Mexican Insolvency Law, any main insolvency proceeding in respect of a company with its main place of business or corporate domicile in Mexico that is conducted abroad (i.e., a Chapter 11 proceeding in respect of a Mexican company with its domicile in Mexico) may be recognised in Mexico but the caveat is that, when doing so, the concurso law mandates opening a new concurso mercantil process, thereby defeating the purpose of seeking recognition of a foreign plan. This means that, effectively, a Chapter 11 plan is under serious risk of not being recognised in Mexico if the debtor is a Mexican company.[6]

The concurso mercantil process and litigation

It has been claimed that one drawback with Latin American reorganisations is that they are often resolved in litigation rather than restructuring proceedings. This may be so in respect of some proceedings but, in our opinion, it depends on the attitude of the creditors regarding the proceeding and whether they intend to collaborate in the restructuring process. The reluctance of some creditors to engage with a given restructuring process may be due to the negative impression generated by the previous regulation that failed to establish a final deadline for the duration of the automatic stay.

It is also worth noting that, given the high specialisation that a judicial restructuring has in our legal framework, there may be disinformation regarding the fact that the use of the Mexican Insolvency Law by the applicant is a debt reorganisation tool and not a payment mechanism.

Notwithstanding the aforementioned past and cultural context, the Mexican Insolvency Law has effective tools to protect the debtor from enforcements resulting from litigation, namely cautionary measures that protect a company’s assets and straightforward stays against enforcement. Ultimately, through these tools, any order issued in litigation to collect a claim against a debtor’s assets will be stopped and the amounts owed will end up being part of the reorganisation plan entered into by the majority of the creditors approved by the court. This, effectively, deactivates litigation.

We believe that the unnecessary challenge of judicial resolutions in a concurso mercantil that certain creditors may adopt as a dilatory strategy could be eradicated with a simple amendment to Section 268 of the Mexican Insolvency Law.

With a stricter restriction of the judicial resolutions that may be challenged through an appeal and the eradication of the revocación, creditors will be obliged to only litigate decisions that directly affect fundamental rights through a juicio de amparo. Reorganisation proceedings under the Mexican Insolvency Law are a judicial process and, therefore, present certain litigation challenges. Stays of orders issued by a concurso judge are very rare, allowing the concurso mercantil process and the restructuring to continue while litigation is under way. It is not ideal but possible to still effect a restructuring while facing litigation.

Mexican law enables debtor-in-possession financing to be obtained. However, this generally applies to shareholders or suppliers, since there are many restrictions on banks doing so. Nevertheless, there are exceptions, such as the case of Altán Redes, in which Mexican banks provided financing in exchange for increasing their shareholding.

The concurso mercantil process is shareholder friendly. In this regard, there is no absolute priority rule in Mexico. A shareholder has to waive pre-emptive rights for debtholders to get new equity; this has occurred in some restructurings in which creditors, as in the case of Geo, accepted the capitalisation (payment in kind (PIK)) of their debt. However, in practice, creditors who provide financing or accept a PIK component for repayment of the debt are increasingly inclined towards requiring shareholders to waive their pre-emptive rights and dilute, as a condition for the debtor to obtain financing. The lack of ability to cram down equity ahead of debtholders has proven to be a very effective negotiating tool in recent cases (such as Corporación GEO, Altán Redes, Alpha Credit and MG Polymeros) and has pushed the market to lean heavily on debt instruments as a means for restructuring while preserving the possibility of equity dilution. The inability to effect an immediate restructuring of equity is rooted in legal principles that strongly divide shareholders from the company in which they invest. The responsibility of shareholders, as a general rule, is limited to their capital contribution in the enterprise.

There are other challenges associated with any restructuring in Mexico that contains a PIK or dilution component that touches various statutes in addition to the Mexican Insolvency Law. Certain tax issues still present challenges when suppliers have to capitalise their debt. Often the value of the shares to be received in the capitalisation is lower than the value added tax on the supplier invoices that represent the debt to be capitalised, which prevents creditors from acquiring the shares as provided by a plan. This also affects corporate law and the loopholes associated with acquiring shares as a result of a concurso plan.

As a matter of practice, and closely tied to the lack of ability to cram down equity in concurso, the restructuring negotiations are conducted by shareholders. This creates an environment in which a company’s advisers become advisers for both the company and its equity holders. It is less common to become an adviser to both the board and the company for the same reason.

In addition to the above, we believe it is necessary to reform several legislations, especially banking legislation, in order to make the Mexican Insolvency Law more effective, especially in matters of financing.

Factors affecting recent cases

Given that the magnitude of the effects of the covid-19 pandemic remained highly uncertain for almost two years, various factors, such as supply-chain disruptions or the closure of a greater number of retail outlets, had an adverse effect on the business of retail companies such as the Famsa Group.[7]

Mexico stands out as one of the countries that provided the least support to retail businesses during the pandemic. In data published by the International Monetary Fund,[8] Mexico is shown to be one of the countries with the lowest tax response during 2020 (i.e., the least amount of expenditure in providing aid during the pandemic and the fewest tax cuts).

The Mexican government did allow banks to offer an extension to their clients for the repayment of their loans without having to reserve the loan, as per banking regulations, in the event of failure to make timely payments. Given that this measure was optional for the banks and only delayed the problem for a few months, the measure was ineffective.

Only two aviation cases have been heard by a concurso court throughout the history of the Mexican Insolvency Law: Mexicana de Aviación and Interjet. Both cases, in which the larger amount of the debt was neither financial nor commercial, have gained notoriety for being unsuccessful. Mexicana had a substantial amount of labour debt and Interjet had a huge tax debt. Neither of these types of claims may be restructured through a concurso mercantil, as the statute provides that upon emergence from concurso, labour and tax claims shall be paid in accordance with the applicable regulatory laws (i.e., that it is not possible to restructure these types of debt).

From this perspective, the lack of success in these two cases may be attributed to the nature of the debt as opposed to the process and concurso law itself.

However, approximately a year ago, Mexico’s largest airline Aeroméxico successfully concluded a Chapter 11 proceeding in the United States Bankruptcy Court for the Southern District of New York in which the company achieved a significant financial restructuring that has permitted uninterrupted operations and so far avoided any judicial restructuring procedures under Mexican jurisdiction.

Conclusion

The pandemic, and the closure of courts that resulted from the pandemic, aggravated the negative perception by the public with respect to Mexican restructuring in general, and the concurso mercantil process in particular. The efforts by the Mexican legislature to adopt the UNCITRAL Model Law on Cross-Border Insolvency opened the path for international recognition but also created a situation in which many aspects of the process have been left unresolved and there is a very clear absence of general Mexican law principles incorporated in statute.

In spite of the improvements that we would suggest are needed for concurso mercantil proceedings, we notice a favourable trend with the creation of the district courts specialising in insolvency matters. Within merely a year of their creation, the Council of the Federal Judicature has reported a rise in the admission of restructuring proceedings in our country. It is also noted that the legal community is actively encouraging the creation of a specialised Collegiate District Court specialised in concurso mercantil matters that ensures that the judicial review is practiced over the resolutions issued by the district courts specialising in insolvency matters have the expertise and proficiency in restructuring proceedings.

Yet, it was inevitable that certain companies had to resort to the concurso mercantil mechanism to restructure their debt as they had no other options. This underlined a positive feature of the Mexican Insolvency Law, which is that, if used properly and in good faith, it is still as effective to restructure debt as it was at its inception.

In conclusion, we consider that the Mexican legal community needs to start a long process to pursue a cultural and mindset transition both for judicial government officials and private practitioners so that the insolvency process is considered as an instrument of restructuring and not a payment tool for creditors.


Footnotes

[1] Fernando del Castillo is a founding partner and Karla Silva is a senior associate at Del Castillo y Castro Abogados.

[2] Ley de Concursos Mercantiles.

[3] Instituto de Administración y Avalúos de Bienes Nationales.

[4] Portal de Servicios en Línea del Poder Judicial de la Federación.

[5] See also Chapter 3, ‘Recent Restructuring Reforms in Mexico’.

[6] Chapter 11 as a Restructuring Option for Latin American Companies.

[7] Other relevant cases include AlphaCredit, TT Blues and Grupo Senda.

[8] ‘Fiscal Monitor: Policies for the Recovery’, October 2020.

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