Restructuring

Last verified on Tuesday 2nd January 2018

Mexico

Alejandro Sainz O
Cervantes Sainz

    Actions prior to a formal proceeding

  1. 1.

    What duties do directors, officers or controlling shareholders of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? Is there a standard of care towards third parties? In what circumstances can directors, officers or controlling shareholders be found civilly or criminally liable for continuing to operate a company in financial difficulties? In practice, are such liabilities commonly enforced?

  2. Directors of a company declared insolvent by a competent court, engaging in any malicious act or conduct that causes the non-performance of the company’s payment obligations, might be held liable to civil actions or even subject to criminal prosecution, in the event of fraudulent acts. However, if the company has not been declared insolvent by a competent court, the directors may not be liable for continuing to operate a company under financial distress. It may be considered that transactions related to creditors’ collections rights that have not been segregated are more vulnerable to attack.

    Additionally, according to the Mexican Insolvency Law (the Concursos Law) any of the following transactions may be invalidated if entered into during the period starting on the day that is 270 calendar days prior to the declaration of insolvency by a competent court:

    • transactions executed by a debtor prior to the declaration of insolvency with the intention of defrauding creditors (knowledge of the counterparty is not required if the act was gratuitous);
    • gratuitous transactions;
    • undervalue transactions;
    • transactions not effected at an arm's-length basis;
    • waivers of debts agreed by a debtor;
    • performance of obligations prior to their maturity date; and
    • discounts made by a debtor.

    In line with the foregoing, a presumption exists that the following transactions are executed in fraud of creditors, unless the debtor proves good faith:

    • creation of a new security interests or the increase of any existing security interests if the original obligation did not contemplate the foregoing;
    • payments made with assets other than money if such form of payment was not originally agreed; and
    • transactions entered into by a debtor with related individuals or entities, such as its spouse, concubine, relatives, members of the board or decision-making individuals within the business, or companies where at least 51 per cent of their capital stock is owned or voted by any of the foregoing individuals.

    The Concursos Law has a section which provides for events during which a director or managing officer will become accountable or liable to the debtor, for the benefit of the estate of the company in a concurso procedure, for any damages and losses of anticipated earnings caused by any unlawful decision they had made, provided they cause damage to the estate of the debtor which led to the insolvency situation of the company. This is regardless of any liability incurred by the director or managing officer under any other applicable law.

    Except good faith and compliance with the duties of care and loyalty can be evidenced members of the board of directors, as well as relevant employees, of the debtor shall be liable for damages and losses owing to some of the following activities:

    • voting in board meetings or make decisions regarding the estate of the debtor when conflict of interest is involved;
    • they favour a shareholder or group of shareholders in detriment of the remaining shareholders;
    • they obtain, due to their position and without legitimate cause, direct or indirect economic benefits;
    • produce, publish, provide or order information they acknowledge is false;
    • order or cause to omit the registration of operations carried out by the debtor or modify the registry to conceal the real nature of the operations carried out affecting any concept of the financial statements;
    • order or accept the registration of false information in the debtor's books;
    • destroy, modify or order the destruction or modification of systems or accounting registries or the documentation on which these are based; and
    • in general commit malicious or illegal acts.

    Furthermore, considering the company as a legal entity, criminal liability might be pursued against the members of its board of directors, administrators, managers or liquidators of the legal entity, who were the authors of, or participated in, the criminal offence, if any. In practice, in certain cases such liabilities are commonly enforced.

    In addition to the aforementioned, pursuant to the Concursos Law, the partners or shareholders of the company (as the case may be) will only have personal liability in connection with the company’s debts in the event that they were unlimited responsible partners/shareholders or if such provision was agreed in the by-laws. In practice, this is a really uncommon situation, since in Mexico the partners/shareholders of a company are usually protected by the corporate veil. 

  3. 2.

    What actions are available to creditors (secured or unsecured) prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceedings? 

  4. There are various legal actions available in Mexico in favour of creditors prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor. Of course, the action proceedings (namely, foreclosure, attachment of assets, temporary restraining orders, preliminary discovery or pre-filing motions, etc) may vary depending on the type of agreement, source of the action to be followed (civil, mercantile-ordinary, special), whether collateral was granted, whether promissory notes were issued, type of collateral, etc. In this regard, under Mexican law there are different types of securities that might be constituted over different types of assets. For example, the most common securities for movable or intangible assets are the guaranty trust and the floating lien pledges, while the mortgage is the most common security involving real estate assets. Guaranty trusts and floating lien pledges are governed by federal law, while mortgages are governed by state law. Securities require a publicity principle by means of registration before public record offices so that they may be opposable against third parties. However, there are some cases where the security does not require registration before public record offices and a direct notification to the debtor of the collector’s rights is sufficient; also, there are some cases in which an additional registration is required (namely, with the Federal Telecommunication Registry or the Maritime Public Registry). Therefore, the type of the applicable remedy or legal action will depend on the type of industry and security, if any, implemented over assets of the debtor or the guarantors. Moreover, summary proceedings for the enforcement of commercial claims are available when the lawsuit seeking enforcement is based on a document that allows for summary enforcement as a consequence of non-performance; for example, Mexican promissory notes allow summary enforcements.

  5. 3.

    Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? If so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? Do insolvency proceedings stay the ability of secured creditors to foreclose on collateral of the debtor? Are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?

  6. Yes; a creditor may foreclose on the collateral through the enforcement of its creditor’s rights and by following the special enforcement procedure applicable to the type of collateral granted in its favour (stock pledge; floating pledge over assets; mortgage; special mortgage over concessions, etc). However, if the concurso procedure (see question 5) has been accepted by the court, then the creditors will be prevented to foreclose on the collateral or sell collateral in a private sale while the procedure is in progress. Likewise, special measures or injunctions might be granted to the debtor in order for the latter to preserve its assets and operations, and to protect the debtor from separate or individual creditors’ rights seeking the enforcement of collateral or seizure or attachment over a debtor’s assets. Upon the insolvency declaration by the competent court, a stay is automatically imposed over enforcement of the creditors’ rights (including secured creditors), and remains in force throughout the conciliation stage. In principle, secured creditors must be paid in full according to the terms of their credits unless they agree to a lesser treatment; otherwise, secured creditors retain their pre-concurso liens and other rights. Likewise, if certain assets were transferred into a separate trust agreement in favour of certain creditor, then such assets, in principle, should be separated from debtor’s estate and the beneficiary (namely, creditor) there under might then follow a special or summarised procedure to enforce its claim or even implement a payment-in-kind structure, which depends on the nature and characteristics of the trust (namely, guaranty trust agreement, source of payment trust agreement) and whether a true sale mechanism was implemented. In principle, there are no accelerated procedures available for secured creditors under a concurso procedure.

  7. 4.

    Can creditors that have equity as collateral take control of a debtor by exercising voting rights attached to pledged shares? 

  8. Yes. However, if the concurso procedure has been accepted by the court and an automatic stay is granted, then the creditors might be prevented to foreclose on the collateral or while the procedure is in progress.

  9. 5.

    Can secured creditors credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding? If so, what procedures or limitations apply?

  10. Unlike other jurisdictions, in Mexico there is no express provision that allows secured creditors to use its claim against a debtor as currency in an auction of its collateral. However, the secured creditor is entitled to offset up to the full face amount of its claim against the collateral. This mechanism allows the secured creditor to hold the lien in exchange for a full or partial cancellation of the debt. Outside the insolvency proceeding, the secured creditor may simply enforce its collateral. Within the formal insolvency proceeding the offset of the claim against of the collateral would be applicable.

  11. 6.

    Are there legal or regulatory concerns that secured creditors should consider in connection with a sale or foreclosure? 

  12. Our legal system establishes a firm separation between the patrimony of a business corporation and the patrimony of its shareholders. Regulatory concerns that secured creditors should consider in connection with a sale or a foreclosure depend on the kind of industry (eg, telecommunications and oil industry).

    Formal proceedings

  13. 7.

    What types of insolvency proceedings are available in your jurisdiction? Are different insolvency proceedings available for individuals and companies? Is there any distinction made between "preventive" insolvency proceedings and "actual" insolvency proceedings?

  14. The Concursos Law provides for a single insolvency proceeding known as concurso mercantile (reorganisation or bankruptcy procedure). The concurso procedure consists of two main stages, conciliation stage and bankruptcy stage, each of them supervised by the Federal Institute of Specialists in Mercantile Insolvency and Bankruptcy Procedures (IFECOM). The Concursos Law forms part of Mexico’s federal commercial legislation. Pursuant to article 17 of the Concursos Law, jurisdiction over a commercial insolvency or bankruptcy case lies in the federal district court of the debtor’s corporate domicile or principal place of business, as the case may be. The Concursos Law is based upon certain general principles:

    • all creditors of the same class shall be treated equally, without regard to their nationality, domicile or capacity;
    • all creditors of the debtor, whether domestic or foreign, shall have access to the concurso procedure, and shall collect in equal proportion (according to the class) from the assets located within the territorial jurisdiction of the court;
    • if possible, the debtor’s operations should be preserved, for the benefit of the general economy of Mexico; this principle seeks to avoid the "chain bankruptcies" phenomenon, whereby the commercial bankruptcy of one company and its cessation of operations causes the commercial bankruptcy of its creditors; and
    • all assets of the debtor shall be consolidated and its liabilities determined. This principle is the basis for actions taken to eliminate dubious credits, such as the commencement of legal proceedings to collect debts due in favour of the debtor, or actions to invalidate fraudulent conveyances or other transfers contrary to the Concursos Law, commenced by the debtor in breach of the principle that all creditors of the same class should be treated equally.

    Additionally, and in furtherance to the goals of this principle, third parties are permitted to recover assets in the debtor’s possession not owned by the debtor. Immediately after the insolvency petition is filed and accepted by the court, the court must file a petition before the IFECOM for the appointment of an examiner (visitador). Once the examiner has been appointed and he or she has accepted such an appointment, the examiner shall, within the following 15 to 30 days, report to the court if the debtor is, in fact, insolvent (according to the measures provided for under the Concursos Law) and, thus, is in one or more of the hypothesis established in the Concursos Law to be declared in concurso. The debtor and, in the event that the insolvency petition is filed by creditors (involuntary procedure), the said creditors may challenge the examiner’s report. The court must resolve as to the solvency or insolvency of the debtor within the 15 days following the date of its receipt of the examiner’s report. If the court resolves that the debtor is solvent, the concurso procedure ends. If the court resolves that the debtor is in fact legally insolvent, it shall issue the corresponding declaration or judgment of insolvency, the effect of which is the formal commencement of the conciliation stage.

    The declaration of insolvency must establish that the debtor has incurred a general default of its payment obligations, and must include a provisional list of creditors identified in the debtor’s accounting records. This list does not exhaust the proceeding for recognition, ranking and determination of the priority of creditors’ claims.

    Pursuant to the Concursos Law, the declaratory of insolvency shall include the retroactivity date (that is, the date to which the effects of the concurso procedure will be applied retroactively, known as the "hardening" or "look-back" period); a declaration that the conciliation stage has commenced; instructions for the IFECOM to appoint a professional conciliator; an order for the debtor to immediately provide to the conciliator the debtor’s books, records and all other necessary documents, and allow the conciliator and interveners, if any, to carry out the activities necessary to perform their duties, and to suspend the payment of debts.

    The first stage of a concurso procedure is the conciliation stage, which is purported to encourage a binding reorganisation agreement between the debtor and its creditors and, thus avoid the debtor’s bankruptcy or liquidation (restructuring plan or creditors’ agreement). The conciliation stage may not last more than 185 calendar days, unless extended for up to two additional consecutive periods of 90 calendar days each; provided, however, that in no event shall the conciliation stage last more than 365 calendar days.

    Once the commercial insolvency of the debtor has been declared, the conciliation stage shall commence, and attempts to find a formula to allow the debtor and creditors to come to an agreement will begin. A conciliator, who initially acts as an intermediary between the company and its creditors, must direct this attempt. The role of the examiner and of the conciliator may be performed by the same individual.

    Pursuant to the purposes of the Concursos Law, the conciliator shall act as an amicable intermediary among the parties. One of the functions or powers of conciliator is to recognise claims based on the debtor’s accounting records in order to streamline the claim recognition process. The conciliator will also collaborate in the decision regarding whether the business will continue to be operated by debtor’s restructuring the debt (debtor-in-possession), or whether it is necessary to remove existing management from the operation of the company.

    The objective of the conciliation stage is to preserve the operation of the debtor’s business. The conciliator is responsible for, inter alia, publishing the deadline for creditors to submit proofs of claims, processing proofs of claims, serving as a mediator among the debtor and creditors, and proposing reorganisation plan (creditors’ agreement) to the court.

    The second stage of a concurso procedure, if applicable, consists of the bankruptcy stage. The debtor may be declared bankrupt if the conciliation stage ends without the parties reaching a creditors’ agreement; the debtor fails to comply with the creditors’ agreement; or the debtor requests its bankruptcy, or the conciliator requests the debtor’s bankruptcy and the court agrees to grant it.

    In addition to the effects attributed to the declaration of insolvency, the bankruptcy judgment:

    • suspends the ability of the debtor to perform legal acts, which then affects its business and assets;
    • causes the appointment of a receiver, with full authority to replace the debtor or the conciliator, as the case may be, in the management of the debtor’s business;
    • orders the debtor and any third party having possession of the debtors’ assets to deliver all such assets to the receiver;
    • requires that payments to the debtor only be made with the receiver’s authorisation (failure to obtain such authorisation leads to double payments);
    • invalidates any acts performed by the debtor or its representatives following the bankruptcy judgment without the receiver’s authorisation; and
    • invalidates any payments executed by the debtor after the bankruptcy judgment.

    The Concursos Law does not provide different insolvency proceedings for individuals and companies nor does it make distinction between ‘preventative’ insolvency proceedings and ‘actual’ insolvency proceedings.

  15. 8.

    May government-owned entities, states or municipalities file for an insolvency proceeding in your jurisdiction? If so, are there special rules or a separate regime that applies to such entities?

  16. The Concursos Law includes a chapter that governs special insolvency proceedings. Within these types of procedures the entities that are granted with a public service concession are regulated. These procedures are mainly regulated by the laws, regulations and concession titles and other applicable provisions regarding the concession and the public services rendered. The Concursos Law applies only in those matters that do not contradict or are not regulated by the particular provisions. With respect to government owned entities, states or municipalities, the Concurso Law does not apply. These entities´ financial situation and liquidation is governed by their applicable organic laws, related provisions and specific regulation.

  17. 9.

    On what grounds may or must a debtor be placed into an insolvency proceeding? Who may do this? What are the grounds for a voluntary proceeding? If an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? 

  18. A debtor may be declared insolvent if it proves that it has generally failed to perform its obligations. For the purposes of the Concursos Law, an individual or entity has generally failed to perform its obligations if:

    • it has defaulted its obligations contracted with two or more different creditors;
    • the obligations of the debtor which have been due for at least 30 days represent, at least, 35 per cent or more of all the debtor’s obligations on the date on which the demand or insolvency petition is filed (or depends, or both, if it was an involuntary or voluntary petition, respectively); and
    • the debtor does not have any of the following assets in an amount sufficient to perform at least 80 per cent of its obligations due on the date on which the demand or insolvency petition is filed:
      • cash and demand deposits;
      • term deposits and investments becoming exercisable or maturing in a term no longer than 90 calendar days following the date on which the demand or insolvency petition is filed before the court;
      • customer receivables with a maturity date not exceeding 90 calendar days following the date on which the demand or insolvency petition was filed before the court; or
      • securities or negotiable instruments available at the relevant markets which may be sold within a term of 30 business days, with a known value on the date on which the demand or insolvency petition was filed before the court.

    The debtor itself, any creditor, the district attorney, a judge, and tax authorities in their capacity as creditors, may file insolvency claims.

    With the petition filed by creditors (involuntary) or the insolvency petition filed by the company (voluntary), as the case may be, a guaranty or bond must be posted to guaranty the examiner’s fee payment.

    The court will order the creditor that filed the petition, or the company that filed the insolvency claim, to pay attorney’s fees and expenses (gastos y costas, the amount is regulated by statue), including the examiner’s fees, if any judgment is issued declaring no insolvency of the company.

    The filing of an insolvency petition of a company does not have effect over the subsidiaries or affiliates of the debtor. Pursuant to the Concursos Law, the concurso procedure of two or more debtors cannot be joined. However, the concurso procedure of the following shall be joined but are processed under separate cover: holding companies and their controlled companies; and two or more companies controlled by the same holding company.

    For the purposes of the Concursos Law, companies meeting the following criteria shall be deemed to be business holding companies:

    • Mexican-resident companies;
    • ownership of over 50 per cent of the voting stock of another or other controlled companies, even if such ownership is held through other companies which, in turn, are controlled by the same holding company, have decision power in their meetings, in the ability to appoint the mayority of the management or that by any other means have faculties of taking fundamental decisions within a company; and
    • no other company or companies own over 50 per cent of its voting stock.

    Stock having limited voting rights which, pursuant to the Mexican commercial legislation, are known as preferred stock, shall not be considered voting stocks.

    In the case of companies that are not stock companies, the value of the capital contributions shall be taken into consideration.

    Companies in which over 50 per cent of their voting stock is owned either directly or indirectly or both by a holding company, shall be regarded as controlled companies. For this purpose, the indirect ownership, referred to here, shall mean the holding company’s ownership, through another company or other companies that, in turn, are controlled by the same holding company.

  19. 10.

    What effect, if any, does a filing have on a subsidiary or affiliate of the debtor? Are there any actions the debtor, the subsidiary or the affiliate can take to limit such effects? Are there any grounds for procedurally and substantively consolidating insolvency proceedings involving related parties? If a debtor organised under the laws of your jurisdiction entered into local insolvency proceedings, could the debtor’s foreign affiliates be included in the local filing? 

  20. In principle, the filing of an insolvency petition of a company does not have effect over the subsidiaries or affiliates of the debtor 

    However, the concurso procedures of companies which are part of a corporate group shall be cumulative, filed before the same concurso judge, but handled separately.

    The entities considered as part of a corporate group shall be the holding corporations and subsidiary corporations.

    Debtors which are a part of the same corporate group may simultaneously request the joint judicial concurso decree, without need of estate consolidation. For the joint concurso procedure it is enough that one of the parties of the group is under the assumptions of insolvency under the Concursos Law, and that such condition places one or more of the parties forming the corporate group under the same situation.

    Creditors of debtors that are part of a group that meet the assumptions described above, may claim the joint judicial concurso procedure.The joint judicial concurso procedure can be cumulative with other concurso procedures.

    Only Mexican entities or foreign entities with branches or agencies exercising acts of commerce within Mexican territory may file a petition for concurso declaration when they are unable to and can no longer comply with their obligations.

  21. 11.

    What notifications and meetings are required after a debtor has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? What must they show to prove their ownership interest in the underlying debt? 

  22. Creditors may request the acknowledgment or recognition of their credits as of the date of publication of the declaration of insolvency. Notwithstanding the foregoing, the conciliator shall provide the court with a provisional list of the debtor’s liabilities within 30 days following the last publication of the declaration of insolvency in the Federal Official Gazette. The court will provide creditors a short term for the approval of such a list, and shall issue the judgment for acknowledgment or recognition and preference of credits.

    The Concursos Law, in principle, does not expressly recognise (nor does it expressly permit the full participation of) bondholders under an indenture; however, there is nothing preventing the full participation of an individual bondholder, provided that it is able to evidence its claim against the debtor.

    As opposed to other jurisdictions where the beneficial holders of bonds and other debt securities often participate directly in the bankruptcies of companies in which they invest, a Mexican company will solely recognise, in principle, the indenture trustee as the holder of the claim, which prevents beneficial bondholders to exercise their right to accept or reject the creditors’ agreement. In Mexico, if not properly advised, the beneficial bondholders might face difficulties in exercising the rights that they are afforded abroad (even though the beneficial holders are foreigners, and even though their bonds were issued abroad).

    For example, in these foreign insolvency proceedings, the United States’ indirect holdings system for bonds may confront a foreign legal system in which only a creditor named on a note may sue to enforce that note. In Mexico, in principle, the name on the note constitutes the initial creditor taken into consideration, thus initially, the indenture trustee will generally be recognised as the sole creditor under a bond issuance. Therefore, foreign investors may encounter difficulty evidencing their support for a restructuring plan, but it will be possible to obtain their recognition by evidencing their individual participations; in Mexico the "sole creditor" perspective may be redirected through the submission of proper documentary evidence (filing of documents demonstrating the link between the individual bondholder and the indenture trustee, DTC, EUROCLEAR, DTC/EUROCLEAR participant, nominee name, custodian, etc), in which case the Mexican court shall recognise the individual creditor standing of the bond holder.

  23. 12.

    How are contingent creditors dealt with? Are inter-company or affiliate claims treated differently from other creditor claims in terms of recovery or voting? If so, has this been challenged and with what result? Are there special rules for certain contracts?

  24. Inter-company claims are handled as subordinated credits and may be voted in a plan process

    The new amendments to the Concurso Law, clearly regulate the "intercompany loans" as subordinated creditors. For that purpose, should the intercompany loan represent more than 25 per cent of all the acknowledged loans, a new voting and majority rule is foreseen so that the restructuring agreement is valid; that is, the majority of the remaining common creditors will vote in favour of the restructuring agreement without then counting the intercompany loan or subordinated creditors. The subordinated creditor, is a new classification of creditors that is last in the order of priority in payment. This new category includes those creditors being a related party under the Concursos Law (intercompany loans), those creditors having contractually agreed with the debtor to be considered as subordinated creditors, and those unsecured creditors that had failed to file proof of claims (to get recognition) within the terms or windows provided in the Concursos Law; provided that a secured loan will be excepted from the foregoing, and its order of preference will be observed pursuant to the Law.

  25. 13.

    What effect does the commencement of an insolvency proceeding have on the debtor and its operations? Is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?

  26. One of the effects of the declaration of insolvency consists in the suspension of any payments arising from obligations of debtor existing on the date of the declaration of insolvency, except for payments deemed necessary for debtor’s ordinary course of business, which must be notified to the court by debtor within 24 hours following their execution.

    Pursuant to the Concursos Law, the declaratory of insolvency shall include the retroactivity date (namely, the date to which the effects of the concurso procedure will be applied retroactively (hardening period)); a declaration that the conciliation stage has commenced; instructions to the IFECOM to appoint the conciliator; an order to the debtor to immediately provide to the conciliator the debtor’s books, records and all other documents, and allow the conciliator and interveners, if any, to carry out the activities necessary to accomplish their duties, and to suspend the payment of debts. As stated above, the court will grant an automatic stay preventing third parties from acting against the debtor out of the concurso procedure. The debtor might terminate contracts if this was expressly agreed in the corresponding agreement, but subject to special rules and limitations provided in the Concursos Law (there are special rules for termination of leases, purchase of goods not delivered, deposits, repurchase and derivative agreements, security loan transactions, differential or future contracts, lump sum construction contracts and insurance contracts). During the conciliation stage, the debtor may continue its ordinary course of business with a conciliator reviewing the debtor’s operations and accounting. In principle, the debtor keeps management of its business, unless the conciliator requests from the court the removal of the debtor in order to protect the pool of assets. With some exceptions, any contractual stipulation, which due to the filing of a voluntary petition for concurso or the issuance of the declaration of insolvency sets modifications that worsen the contract terms for the debtor shall be deemed not included.

    If the debtor retains management, the conciliator shall: supervise the accounting and all transactions performed by the debtor; decide if any existing agreements binding on the debtor must be terminated; approve, with the prior opinion of the interveners appointed by the creditors, new credits in favour of the debtor, the creation of new security interests, the substitution of any existing security interests or the sale of any assets not involved in the ordinary course of business of the debtor; and call the board or any other decision-making committee of the debtor to discuss and approve any kind of matters relating to the debtor’s business.

    In the event the debtor is removed from the management of its business, the conciliator will become the administrator and will be granted full authority to conduct the business, on the understanding that the authorities of the debtor and its decision-making committees shall cease. The conciliator may also request the court to suspend the debtor’s operations if the pool of assets or an increase in the debtor’s liabilities is at risk. The court may adopt measures to safeguard assets of the debtor for the benefit of the creditors, and assure that no actions are taken outside the ordinary course of business.

  27. 14.

    In what circumstances could transactions entered into before an insolvency proceeding be challenged? How far does the claw-back period extend? Who can bring such challenges and who bears the burden of proof? How frequently are such challenges made and upheld? 

  28. Pursuant to the Concursos Law any of the following transactions may be invalidated if entered during the period starting on the day that is 270 calendar days before the declaration of insolvency by a competent court:

    • transactions made by a debtor, before the declaration of insolvency, with the intention to defraud creditors (knowledge of the counterparty is not required if the act was gratuitous);
    • gratuitous transactions;
    • transactions at an undervalue;
    • transactions not made at an arm’s-length basis;
    • waivers of debts made by a debtor;
    • payments of obligations before their maturity date; and
    • discounts made by a debtor.

    Additionally, there is a presumption that the following transactions are made in fraud of creditors, unless the debtor proves good faith:

    • to create new security interests or to increase any existing security interests if the original obligation did not contemplate the foregoing;
    • payments made with assets other than money if such a form of payment was not originally agreed; and
    • transactions made by a debtor with related persons, such as its spouse, relatives, members of the board or decision-making persons within the business, or with companies where at least 51 per cent of their capital stock is owned or voted by any of the foregoing persons.

    Challenges may be brought by recognised creditors, by the conciliator, or the interventor (intervening administrator) appointed by the creditors. The party that challenges bears the burden of proof. Challenges filed on solid basis uphold.

    Per the request of the conciliator, liquidator, intervener or any creditor, the judge may extend the 270-day term, but such term may not exceed three years. If subordinated creditors exist (intercompany claims) a 540-day term will apply with respect to the transaction in which these are involved. 

  29. 15.

    How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? Do liens on receivables, revenues or cash flow continue with respect to such collateral after a debtor’s insolvency filing has been accepted by a court, or are they cut off as of the date of the filing or acceptance? If they are not cut off, may the debtor use that cash collateral and, if so, must it provide any protection to the secured creditors?

  30. In principle, secured creditors must be paid in full according to the terms of their credits or agree to a lesser treatment; otherwise, secured creditors retain their pre-concurso liens and other rights. Upon the declaration of insolvency by the competent court, a stay is automatically imposed over enforcement of the creditors’ rights, which stay remains in full force throughout the conciliation stage.

    Unsecured debts cease to accrue interest, while secured debts may accrue interest up to the amount of the collateral. Unsecured debts are indexed as investment units (UDIS – a quasi-currency established by the Mexican government for constant reference, equal to pesos grossed up by accumulated inflation). In the event the unsecured debt is denominated in a foreign currency, it will be converted into pesos and then indexed as UDIS. This might lead to an imminent currency risk to creditors.

    The declaration of insolvency will result in the suspension of the enforcement of legal actions intending to attach debtor’s assets, excepting those aimed at the collection of wages and other monetary benefits of debtor’s employees accrued during the two years prior to the declaration of insolvency.

    Equity holders are not treated in concurso procedures and therefore they may not recover prior to creditors being paid in full.

  31. 16.

    How are unsecured creditors treated? How are equity holders treated? May an equity holder recover prior to creditors being paid in full?

  32. The ranking of credits pursuant to the Concursos Law is the following (additional detail is provided in answer 19):

    • first priority claims against the “estate” of the debtor (creditos contra la masa), which includes (collectively, the “claims against the estate”):
    • singularly privileged creditors;
    • secured creditors (with mortgages and pledges over assets of the debtor) and tax claims secured with a security in rem (up to the value of such guaranty) are paid first with proceeds from the sale of mortgaged or pledged items. If the items have a value or a price in excess of the debt, any such excess or remaining value is directed to cover subsequent debt payments to other creditors. If the price does not cover the debt, mortgage or pledge, the corresponding creditor may participate, pro rata, as a common or unsecured creditor, to collect the remaining amount);
    • other tax claims and labour claims;
    • creditors with a special privilege (ie, retention right, eg, guaranty trust);
    • common or unsecured creditors; and
    • subordinated creditors. 

    Equity holders will receive any remaining amount after having paid all type of creditors. They are not paid prior to any other creditor. 

  33. 17.

    What is the effect of an insolvency proceeding on current and retired employees?

  34. The concurso procedure has no direct effects over a company’s current or retired employees, except with respect to treatment of labour claims against the debtor, as described in the answer to question 19.

  35. 18.

    Do directors or officers of companies in insolvency proceedings suffer any consequences?

  36. In principle, directors or officers of companies in insolvency proceedings do not suffer any direct consequence, unless special measures were ordered to remove management from the company, as stated above, or fraudulent acts were committed by them.

  37. 19.

    How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority? May claimants with lower priority receive consideration under a reorganisation plan even though claimants with higher priority are not paid in full? 

  38. In order for a creditor to file a claim, it must first submit a petition for the recognition of its credit (proof of claim). Once such claim is admitted, the court will call upon the conciliator or the examiner, as the case may be, and the debtor shall submit a response indicating their views on the claim. One permitted response is to request the court to request additional evidence of the validity, legality or amount of the claim. The court will then issue a judgment and divide credits into three categories: those recognised; those excluded; or those still pending upon their status is sufficiently clarified.

    The existing Concursos Law classifies creditors into the following categories or classes (and with the following rankings or preferences):

    (i) first priority claims against the “estate” of the debtor (créditos contra la masa), which includes (collectively, the claims against the estate):

    (a) special labour claims under section XXIII, Chapter A, of article 123 of the Constitution, and applicable regulations, by increasing the wages to the corresponding two years prior to the concurso judgment (formal commencement of the concurso procedure of the debtor) (Special Labour Claims);

    (b) debt incurred for the management of the estate (masa) of the debtor with the authorisation of the conciliator or the receiver, as the case may be, or those contracted directly by the conciliator;

    (c) debt incurred to cover ordinary expenses for the safety of the estate assets, their repairs, conservation and management; and

    (d) debt incurred from the judicial or extra-judicial acts for the benefit of the estate; provided, however, that under article 225 of the Concursos Law against the secured creditors, with mortgages or pledges, or creditors with special privilege, the preference or privilege of the claims against the estate would not apply, except for the following claims: the Special Labour Claims referred in subsection (a) above, the litigation expenses incurred for the defence or recovery of the goods or assets subject to the security interest of the secured claims or over those assets related to the "special privilege", and the expenses necessary for the repair, conservation and sale of those assets;

    (ii) singularly privileged creditors;

    (iii) secured creditors (with mortgages and pledges over assets of the debtor) and tax claims secured with a security in rem (con garantía real) (up to the value of such guaranty) are paid first with proceeds from the sale of mortgaged or pledged items. If the items have a value or a price in excess of the debt, any such excess or remaining value is directed to cover subsequent debt payments to other creditors. If the price does not cover the debt, mortgage or pledge, the corresponding creditor may participate, pro rata, as a common or unsecured creditor, to collect the remaining amount);

    (iv) other tax claims and labour claims;

    (v) creditors with a special privilege;

    (vi) common or unsecured creditors; and

    (vii) subordinated creditors (intercompany claims).

    The Concursos Law provides different rules for the treatment of secured v unsecured creditors (conversion of foreign currency, accrual of interests, etc). Additionally, the Concursos Law provides special rules for certain contracts including, among others, repurchase agreements, securities loans transactions, differential or futures contracts, derivative financial transactions and framework agreements. Likewise, the Concursos Law provides special rules for the concurso procedure of:

    • companies that provide public services under concession titles granted by the Mexican government;
    • credit institutions; and
    • auxiliary credit institutions.

    Please also note that creditors guaranteed with assets placed under true-sale mechanisms in the form of trusts can exercise separation or segregation motions to legally argue that the assets comprising such trusts shall not be included as part of the debtor’s estate.

  39. 20.

    Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?

  40. Local creditors and foreign creditors shall always be treated equally under Mexican Law, without any different treatment. Moreover, the Mexican Constitution contains the general principle of law that everyone must be treated equally. The Concursos Law particularly provides for an additional term for the filing of the proofs of claims to foreign creditors.

  41. 21.

    What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be "crammed down"? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?

  42. During the conciliation stage, the debtor must work with its creditors to reach a creditors’ agreement or reorganisation plan. If a creditors’ agreement is reached and approved by the court, the concurso procedure ends. An express procedure for "cramming down" creditors that does not approve proposals approved within these procedures, as permitted under other foreign jurisdictions, is not expressly contemplated by the Concursos Law. However, it is possible to reach a plan of reorganisation without the vote of all the creditors if certain mandatory conditions and percentages of votes are met, as provided for under the Concursos Law.

    To be effective, the reorganisation plan shall be subscribed by the debtor and the recognised or acknowledged creditors representing over 50 per cent of the sum of:

    • the amount recognised to the totality of the recognised or acknowledged unsecured and subordinated creditors; and
    • the amount recognised to these recognised or acknowledged secured creditors or with special privilege subscribing the plan.

    Pursuant to the recent amendments to the Concursos Law should the subordinated creditors represent more than 25 per cent of all the acknowledged loans, a new voting and majority rule is foreseen so that the restructuring agreement is valid; that is, the majority of the remaining common creditors will vote in favour of the restructuring agreement without then counting the subordinated creditors.

  43. 22.

    May creditors trade their claims during the course of a reorganisation? What impact, if any, will it have on voting for a plan?

  44. Prior to the vote of the creditors’ agreement, the conciliator will need to confirm the holdings and claims, particularly in the case of bondholders. Creditors might trade their claims during the course of reorganisation through a notice of such assignment to the conciliator. In principle, the assignee will have the rights of the assignor.

  45. 23.

    What kind of court supervision is there in each type of insolvency proceeding? Are the judges that supervise and administer the process specialised? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? May a debtor company or its creditors select or influence the selection of the trustee, receiver or other court-appointed officer? Can creditors form creditors’ committees? What formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?

  46. Immediately after the insolvency petition is accepted by the court, the court shall request the appointment of the examiner to the IFECOM. Once the examiner has been appointed and he or she has accepted such appointment, the examiner must report to the court, within the following 15 to 30 days, whether the debtor is in fact insolvent (according to the requirements provided for under the Concursos Law) and, thus, if it fulfils one or more of the requirements contemplated by the Concursos Law to be declared in concurso. As stated above, pursuant to the Concursos Law, the declaratory of insolvency will include instructions to the IFECOM to appoint the conciliator; an order for the debtor to immediately provide to the conciliator debtor’s books, records and all other necessary documents, and allow the conciliator and interveners (appointed by creditors), if any, to carry out the activities necessary to accomplish their duties, and to suspend the payment of debts. In the stage of bankruptcy, a receiver will be appointed.

    Pursuant to the Concursos Law an intervener may be appointed and approved to represent the interests of creditors in the concurso procedure and may be assigned the responsibility of overseeing actions of the conciliator and of the receiver, as well as the actions of the debtor in relation with the operation of its business.

    Any creditor or group of creditors representing, at least, 10 per cent of the value of the credits owed by the debtor, pursuant to the provisional list of credits, has the right to request the court to appoint an intervener in the concurso procedure. The fees of the intervener shall be paid by the creditors requesting such an appointment. The intervener does not have to be a creditor. Any creditor or group of creditors may file before the court requests for the appointment of an intervener. The intervener may be substituted or removed by those who requested his or her appointment. Interveners have certain authorities provided for under the Interventor Law. On a case-by-case basis, the creditors’ committees play an important role in the process. Competing reorganisation plans are not regulated under the Concursos Law, but it is possible to present various proposals for the analysis of the conciliator.

    Creditors can form ad hoc committees aimed at having more leverage and negotiation power in relation to the debtor under the concurso procedure.

    In Mexico, we do not have bankruptcy courts or judges specialising only in concursos. Federal district courts are competent to hear these insolvency processes in addition to other matters.

  47. 24.

    May a debtor obtain financing while in insolvency? Will the lender enjoy special rights or preferences for providing DIP financing? Can a DIP lender ‘prime’ or come ahead of an existing lien? What difficulties typically arise in obtaining such funding or any required approval thereof?

  48. Yes, debtors may obtain financing while in insolvency, subject to the judge and conciliator’s approval to preserve the ordinary course of business and to provide the required liquidity during the procedure and by following certain rules provided under the Concursos Law.The lender can be certain that any loan they grant to such debtor will be repaid before any other loan, pursuant to the order of preference rules provided in the Concursos Law. This special or urgent financing is deemed as a claim against the estate of the debtor and would have preference over common creditors, aim to preserve the ordinary course of business and would provide the required liquidity during the concurso procedure. However, the DIP financing would not have preference over already secured creditors; the new rules include possible loans with priority liens but cannot affect existing priority secured creditors (with mortgages and pledges over certain assets).

  49. 25.

    If a debtor company has issued debt securities, does your jurisdiction’s insolvency or securities law provide for any exemptions from registration of those securities under applicable securities law?

  50. No, such exemptions are not provided.

  51. 26.

    May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does this require court approval? Can creditors recover the expense of participating in the process? How?

  52. Without a valid restructuring agreement with the debtor and approval by the conciliator, creditors cannot offset debts owed to them by the debtor in an insolvency proceeding. Creditors may not recover expenses of participating in the process unless agreed with the company (ie, through lock-up agreements) and approved by the conciliator.

  53. 27.

    If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?

  54. Yes, a debtor company may retain and be able to use such losses after emerging from reorganisation.

  55. 28.

    What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?

  56. During the conciliation stage, the debtor must work with its creditors to reach a creditors ‘agreement. As stated above, if a creditors’ agreement is reached and approved by the court, the concurso procedure ends. 

    In the event the conciliation stage terminates without the debtor having reached a creditors’ agreement with its creditors, whose claims have been recognised in the proceeding, then the court shall declare the bankruptcy of debtor. However, the court may declare the bankruptcy prior to the moment that the debtor or the conciliator proves to the court that a creditors’ agreement is not feasible. Once in bankruptcy, the administration of the debtor’s assets is turned over to the receiver, who may elect to continue or discontinue the debtor’s business pending final liquidation. During the bankruptcy stage, as in the conciliation stage, the court may adopt measures seeking to safeguard the debtor’s assets for the benefit of the creditors and ensure that no actions are taken outside the ordinary course of business. The bankruptcy stage ends with the liquidation of the debtor’s assets for the benefit of its creditors, in accordance with their respective rankings and privileges. This stage does not have a specific term. The receiver must provide a status report to the court every two months. Liquidation continues until no assets are left, and may be restarted by any creditor each time the debtor receives new assets.

  57. 29.

    How long do restructurings last? Is there a formal deadline?

  58. The first stage of a concurso procedure is the conciliation stage, which is purported to encourage a binding reorganisation or plan agreement between the debtor and its creditors and, thus, avoid the debtor’s bankruptcy or liquidation. The conciliation stage may not last more than 185 calendar days unless extended for up to two additional consecutive periods of 90 calendar days each; provided, however, that in no event shall the conciliation stage last for more than 365 calendar days upon publication of the concurso resolution in the Official Gazette.

  59. 30.

    Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work? Are out-of-court proceedings commonly used and what are the primary benefits and drawbacks?

  60. On 2 October 2007 the Mexican Congress issued a decree pursuant to which the Concursos Law was amended. This decree was published on 27 December 2007 in the Official Gazette of the Federation, and became effective as of 28 December 2007.

    Among other amendments to the Concursos Law, a new chapter governing a procedure of "pre-packaged plan" was included, which grants creditors rights and actions to have debtors to comply with a specific financing restructure. It is feasible for a debtor and its creditors to agree in advance on a restructuring plan out of the concurso procedure, and subsequently proceed to file it through a voluntary insolvency procedure, a concurso, but in principle within a summary procedure. In such case, in principle should not be controversy or disagreement with respect to the recognition, graduation and degree of the credits, which means that the procedure will be simplified. However, the effect of the pre-
    package plan is to skip the preliminary stage of a visit or inspection described above.

    concurso procedure filing with a pre-package plan should be admitted by the competent judge, provided that:

    (i) it complies with the insolvency test under the Concursos Law for a debtor to be declared insolvent;

    (ii) it is signed by the debtor with the creditors that represent, at least, 51 per cent of a debtor’s credits;

    (iii) the debtor declares under oath that:

    (a) it is in a condition where it can no longer perform its payment obligations; or,

    (b) it is likely, in a period no longer than 30 days, to be in a condition where it can no longer fulfil its payments obligations, explaining the causes of such insolvency; and

    (iv) it contains a restructuring plan of the debtor’s credits signed by the creditors which represent, at least, 51 per cent of the debtor’s credits or claims. If the request for admission of a concurso procedure with a pre-package plan complies with the above-mentioned requirements, then the competent federal judge will issue the debtor’s declaratory insolvency with a pre-package plan and may order special preventive measures or injunctions to protect the estate of the company.

    Out-of-court proceedings are commonly used when there is the consent of a significant plurality of credits and the main benefits are that statutory time constraints do not apply. Likewise, no automatic stay affects the ongoing business of the company.

    Additional considerations

  61. 31.

    Does the government tend to play an active role in insolvency proceedings? What factors determine this?

  62. The government play an active role in special reorganisations considered as such by the Concursos Law, such as business reorganisations of debtors that provide public services pursuant to government concessions, business reorganisation of credit institutions and business reorganisation of auxiliary credit institutions.

  63. 32.

    How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? If a company organised under the laws of your jurisdiction (or whose principal place of business is in your jurisdiction) entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?

  64. According to the Concursos Law, a foreign proceeding is defined as a collective or universal proceeding, whether judicial or administrative, including provisional proceedings, followed in a foreign state pursuant to a law governing bankruptcy, liquidation, or insolvency matters of the debtor; as a result of these proceedings, the property and businesses of the merchant may result subject to the control or supervision of a foreign court, for purposes of reorganisation or liquidation.

    The Concursos Law recognises foreign proceedings in bankruptcy, insolvency and reorganisation matters, and it recognises foreign representatives appointed through a recognition request. In this regard, the Concursos Law recognises foreign proceedings when legally held in a foreign country in accordance with bankruptcy or insolvency laws applicable to the debtor due to its activities, the location of assets or other similar causes.

    Under the Concursos Law a ‘foreign representative’ is the individual or entity that:

    • has been empowered under a foreign bankruptcy procedure to administrate the reorganisation or settlement of the business; or
    • has been designated as the representative of such foreign bankruptcy procedure.

    The Concursos Law states that any representative of a foreign bankruptcy procedure may request the presiding Mexican court for the recognition of the foreign bankruptcy procedure during a concurso procedure.

    Pursuant to the Concursos Law, any foreign representative is entitled to appear directly before the presiding Mexican court in all procedures brought under the Concursos Law. Such a filing should be made by means of an interlocutory procedure before the civil federal court knowing of the concurso principal proceeding. The interlocutory recognition procedures shall follow the following stages:

    • delivery of a copy of the recognition request to the creditors who have appeared at the procedure abroad, so that within the term of five days, they declare that which is in their best interest. The foreign representative’s allegations will be taken as certain in the case of the creditors who fail to deliver their reply during the term specified for such effects;
    • evidence will be offered in the interlocutory claim and in the interlocutory reply;
    • once the term of the five days has elapsed, the Mexican court will summon the parties to a hearing of proofs and pleas that will be held within the 10 following days;
    • when offering expert or testimonial tests, at the time of offering the test, one copy of the interrogations shall be exhibited to each one of the parties so that they can formulate verbal or written questions when verifying at the hearing. Three witnesses are allowed for each fact. The Mexican court may designate an expert or those that it considers necessary, in order to render joint or separate opinions with the parties’ experts. With the purpose that the parties produce their proofs at the hearing, the authorities or civil employees have the obligation to dispatch them promptly; and
    • once the hearing is concluded and within the term of three days and without summons, the Mexican court will pronounce the interlocutory judgment relative to the recognition of a foreign procedure.

    In terms of the Concursos Law, there are two ways under which a Mexican court can recognise a foreign bankruptcy procedure:

    • as a principal procedure, when the foreign procedure is brought to a court with jurisdiction in the place where the business has its main place of interests; and
    • as a non-principal procedure, when the foreign procedure is brought to a court with jurisdiction in the place where the business has an establishment.

    The main difference between the recognition of a foreign bankruptcy procedure as a principal procedure or as a non-principal procedure is in the direct effect of such recognition over the business’s assets located in Mexico.

    Pursuant to the Concursos Law, if a foreign bankruptcy procedure is recognised as a principal procedure; any and all foreclosure over the business’s assets, and any and all rights to transfer or grant any lien over business’ assets, shall be suspended.

    A Mexican court shall recognise the foreign bankruptcy procedure as a non-principal procedure if the debtor has a permanent place of business outside Mexican territory, but not as a principal foreign bankruptcy procedure.

    The recognition aspects of a non-principal foreign bankruptcy procedure are as follows:

    • the granting of appropriate injunctions that concede to a Mexican court to protect the business’s assets or the creditors’ interests, who may request through the foreign representative, that the receiver, conciliator or examiner, as the case may be:
    • suspends all execution injunctions against the business assets;
    • suspends the rights exercised to transmit or to mortgage the business assets, as well as to dispose of such assets in any other way;
    • orders the delivery of evidence or the provision of information regarding the business’s assets, activities, rights, or liabilities of the business;
    • entrusts the foreign representative, the receiver, conciliator or examiner, with the administration or foreclosure of all or part of the business’ assets located in Mexican territory;
    • extends every granted injunction granted by the foreign recognition procedure request; and
    • grants any other injunction that under Mexican law may be grantable to a receiver, conciliator or examiner.

    Once a foreign procedure is recognised, the foreign representative will be able to ask the receiver, conciliator or examiner, to entrust, through a foreign representative, the distribution of all the business’ assets located in Mexican territory. The Mexican court must make sure that the creditors’ interests domiciled in Mexico are sufficiently protected so that it may decree the injunctions briefed above.

    The foreign representative has the power and capacity to ask that the examiner, the conciliator or the receiver, initiates the recovery of assets actions for the recovery of assets that belong to the entirety of a property, and of nullity acts concerning the defrauding of creditors. The authorisation of the foreign representative to take part in the procedures promoted against the businessman that are in the proceedings and that have a patrimonial content can take place.

    The injunctions that may arise from the recognition of a foreign bankruptcy procedure under a concurso procedure depend on the procedural phase, namely as from the filing of the recognition request throughout the corresponding resolution, and as from the issuance of the recognition resolution.

    Therefore, and provided that the above-mentioned is followed, if a company organised under the laws of Mexico entered into extraterritorial bankruptcy or insolvency proceedings those proceedings would be recognised within Mexican jurisdiction.

  65. 33.

    How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? What factors determine this?

  66. In general, there are more cases of debtor companies reaching the reorganisation plan stage and successfully emerging from bankruptcy, as opposed to liquidation. There are some cases, however, in which the debtor company directly files a voluntary petition for liquidation. Failure to reach a restructuring plan might be the main cause for a company ending in liquidation, as well as the lack of possibility for the company to continue in business.

  67. 34.

    What is the appeal process for an insolvency proceeding in your jurisdiction and what effect do appeals have on approved plans? How long do appeals take to resolve?

  68. Under the Concursos Law an appeal may be filed against the judgment that declares or denies the concurso proceeding and against the credit, recognition, ranking and preference judgment. Such appeals are to be resolved by the corresponding appellate court and the time appeals take to resolve depend on the merits of the case. The appeal does not suspend the approved plan and debtors proceed with the implementation of the plan until the appeal is resolved.

  69. 35.

    Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?

  70. Although there are no common techniques that debtors use to manipulate or control insolvency proceedings, a debtor might follow strategies to minimise potential holdouts.

  71. 36.

    What impact, if any, has the ongoing volatility in the global credit markets and rise in corporate restructurings had on your jurisdiction’s insolvency regime? Are any amendments to your jurisdiction’s insolvency laws envisaged? If so, which problems are such amendments intended to address and how? 

  72. As part of an integral financial reform (13 bills involving 34 statutes) the proposal or bill to the Mexican Congress to reform various articles of the Concursos Law was approved being effective on the Concursos Law as of 10 January 2014.

    Additionally to the provisions already described in this document, the amendments provided, among other important matters, the following:

    • Officers taking part in the concurso procedure shall protect the creditors and the interests on the debtor’s estate, under the relevance, judicial economy, swiftness, publicity and good faith principles of the law, besides the general principle of keeping companies as a going concern and preventing their general failure to comply with their liabilities.
    • The concurso procedure is public, strengthening the principle of publicity to concurso procedures, and allowing any person to request access, at the applicant’s cost, to the documents contained in the file or docket, respecting any reserved or confidential information, pursuant to the applicable laws.
    • The joint concurso procedures concept, providing the assumptions when such proceedings may be filed, as well as any supporting rules. Special rules regarding the jurisdiction of the court and the possibility to establish a single inspector, conciliator or liquidator are also provided. The foregoing is intended to expedite and make more efficient the concurso procedures of corporate groups.
    • Besides any foreign company’s branch, any foreign company’s subsidiary established within Mexican territory may be subjected to a concurso procedure.
    • Option to electronically file a petition or motion, using an electronic signature, as well as the use of standardised formats to apply for, or involuntarily request, a concurso procedure.
    • The concurso procedure may also be requested or petitioned under any of the insolvency assumptions provided in the Concursos Law, provided that it is imminent the debtor will fail to comply with its liabilities within the following 90 days. This change is relevant since it makes it simpler for a debtor to prove its insolvency status and get a faster acceptance of the petition.
    • Easier to appoint and approve of the creditors’ representatives and give them broader powers in the concurso procedure, as an action to protect creditors’ rights.
    • Expediting the separation or segregation of certain assets from the estate of the debtor (ie, placed in trusts).
    • Making it legally feasible that in the event of a special guaranty for which the debtor has transferred ownership over certain assets before the filing of a concurso procedure, such as a security-pledged loan, then the underlying assets of such security instrument may be immediately applied as a repayment and will not become part of the estate of the debtor.
    • Creditors may exert an action for liability against the debtors' relevant managers or directors and senior officers, in the event of any fraudulent conveyance they might have performed, under the rules to be provided in the Concursos Law.
    • The one-year term to process any concurso procedure, in the phase or conciliation or restructuring, cannot be extended, except as specifically provided therein.
    • Reduce the percentage of creditors needed to appoint a conciliator not included in the lists of the IFECOM from 75 per cent to 50 per cent, thereby making it easier for the debtor and creditors to appoint their conciliator of trust aimed at expediting the conciliation or reorganisation process. Likewise, providing the debtor and creditor’s right to appoint a conciliator other than a member of the IFECOM whenever the application for a concurso procedure is submitted accompanied by a reorganisation plan.
    • Debtor has the power to submit its own proposal for a restructuring plan to creditors, a power that is currently reserved to the conciliator. Likewise, to ensure that the conciliator or creditors may request for the debtor to submit any documentation or information required to approve the restructuring agreement any time, in which case the debtor will be bound to submit such documentation or information.
    • The participation of joint obligors of the main debtor is regulated; that is, regarding rules on third-party joint obligors it would be clearer that valid joint obligations should not be affected by the restructuring of the main debtor.
    • Rules on the applicable jurisdiction of competent courts in the event of collective or consolidated proceedings of related parties. Instead of procedures in multiple jurisdictions (eg, domicile of the subsidiaries) the bill proposes that the first court handing the case will be competent to set the procedures for related parties.
    • Reduce the percentage of acknowledged creditors required to request the receiver to be replaced from 75 per cent to 50 per cent, making it easier to remove any receiver in the event that he or she fails to comply with his or her legal liabilities.
    • Requirement to place a guaranty or bond if the judgment declaring the debtors’ concurso procedure, following a voluntary petition, is appealed.
    • Any governmental authority (as a regulator), having granted a title of concession to the debtor, may freely exercise the power provided in the Concurso Law to remove the individuals in charge of managing the company and, instead, to appoint a person to replace such managers, at any time following the declaration of a concurso procedure and with no need for any special approval by the court.
       

    This author considers that the proposed amendments to the Concursos Law have provided more balance between the corresponding interests and rights of creditors and those of debtors. However, it would be advisable to further amend the law regarding a required specialisation on bankruptcy courts to provide more certainty to the parties.

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Questions

    Actions prior to a formal proceeding

  1. 1.

    What duties do directors, officers or controlling shareholders of a company owe creditors or other third parties if the company is insolvent or in financial difficulties, or has negative net worth? Is there a standard of care towards third parties? In what circumstances can directors, officers or controlling shareholders be found civilly or criminally liable for continuing to operate a company in financial difficulties? In practice, are such liabilities commonly enforced?


  2. 2.

    What actions are available to creditors (secured or unsecured) prior to a formal insolvency proceeding to recover on a defaulted loan or obligation of a debtor? Are there any expedited formal proceedings? 


  3. 3.

    Can a creditor that has secured debt foreclose on the collateral or sell collateral in a private sale? If so, what rules exist to ensure the sale or foreclosure generates the maximum amount of sales proceeds possible? Can lenders take possession or control of the underlying collateral? Do insolvency proceedings stay the ability of secured creditors to foreclose on collateral of the debtor? Are there any accelerated procedures available for secured creditors, and if so, under what circumstances can they be used?


  4. 4.

    Can creditors that have equity as collateral take control of a debtor by exercising voting rights attached to pledged shares? 


  5. 5.

    Can secured creditors credit-bid their debt in a sale of a debtor’s assets, outside or within a formal insolvency proceeding? If so, what procedures or limitations apply?


  6. 6.

    Are there legal or regulatory concerns that secured creditors should consider in connection with a sale or foreclosure? 


  7. Formal proceedings

  8. 7.

    What types of insolvency proceedings are available in your jurisdiction? Are different insolvency proceedings available for individuals and companies? Is there any distinction made between "preventive" insolvency proceedings and "actual" insolvency proceedings?


  9. 8.

    May government-owned entities, states or municipalities file for an insolvency proceeding in your jurisdiction? If so, are there special rules or a separate regime that applies to such entities?


  10. 9.

    On what grounds may or must a debtor be placed into an insolvency proceeding? Who may do this? What are the grounds for a voluntary proceeding? If an involuntary proceeding is filed, must a bond be posted or is there any risk of liability to the creditor or creditors who filed the action? 


  11. 10.

    What effect, if any, does a filing have on a subsidiary or affiliate of the debtor? Are there any actions the debtor, the subsidiary or the affiliate can take to limit such effects? Are there any grounds for procedurally and substantively consolidating insolvency proceedings involving related parties? If a debtor organised under the laws of your jurisdiction entered into local insolvency proceedings, could the debtor’s foreign affiliates be included in the local filing? 


  12. 11.

    What notifications and meetings are required after a debtor has been placed in an insolvency proceeding? Do the insolvency laws recognise bondholders under an indenture? What must they show to prove their ownership interest in the underlying debt? 


  13. 12.

    How are contingent creditors dealt with? Are inter-company or affiliate claims treated differently from other creditor claims in terms of recovery or voting? If so, has this been challenged and with what result? Are there special rules for certain contracts?


  14. 13.

    What effect does the commencement of an insolvency proceeding have on the debtor and its operations? Is there an automatic stay that prevents third parties from acting against the debtor? Can a debtor terminate or reject contracts to which it is a party?


  15. 14.

    In what circumstances could transactions entered into before an insolvency proceeding be challenged? How far does the claw-back period extend? Who can bring such challenges and who bears the burden of proof? How frequently are such challenges made and upheld? 


  16. 15.

    How are secured creditors treated in an insolvency proceeding? How do they protect their collateral, particularly liquid assets? Can they seek remedies? Must their approval be obtained to use or dispose of their collateral? Do liens on receivables, revenues or cash flow continue with respect to such collateral after a debtor’s insolvency filing has been accepted by a court, or are they cut off as of the date of the filing or acceptance? If they are not cut off, may the debtor use that cash collateral and, if so, must it provide any protection to the secured creditors?


  17. 16.

    How are unsecured creditors treated? How are equity holders treated? May an equity holder recover prior to creditors being paid in full?


  18. 17.

    What is the effect of an insolvency proceeding on current and retired employees?


  19. 18.

    Do directors or officers of companies in insolvency proceedings suffer any consequences?


  20. 19.

    How do the various types of claims rank in an insolvency proceeding? Do some claims automatically have higher priority? May claimants with lower priority receive consideration under a reorganisation plan even though claimants with higher priority are not paid in full? 


  21. 20.

    Are local creditors treated differently from foreign creditors in practice? What laws exist to prevent such disparate treatment? What factors contribute to how effectively those laws are applied?


  22. 21.

    What level of creditor support is needed to approve a reorganisation plan? Can secured creditors and other priority claim holders that do not approve a reorganisation proposal be "crammed down"? Are there any substantive criteria that a plan must satisfy? Must hearings take place or documents be distributed?


  23. 22.

    May creditors trade their claims during the course of a reorganisation? What impact, if any, will it have on voting for a plan?


  24. 23.

    What kind of court supervision is there in each type of insolvency proceeding? Are the judges that supervise and administer the process specialised? Is a trustee or receiver (or other court-appointed officer) appointed to supervise the debtor or can the debtor continue to control operations during the insolvency proceeding? May a debtor company or its creditors select or influence the selection of the trustee, receiver or other court-appointed officer? Can creditors form creditors’ committees? What formal role do creditors (or creditors’ committees) play in the process? Do insolvency proceedings permit competing reorganisation plans? Are the judges that supervise and administer the process specialised? Does a debtor company or its creditors have any power to select or influence the selection of the trustee, receiver or other court-appointed officer?


  25. 24.

    May a debtor obtain financing while in insolvency? Will the lender enjoy special rights or preferences for providing DIP financing? Can a DIP lender ‘prime’ or come ahead of an existing lien? What difficulties typically arise in obtaining such funding or any required approval thereof?


  26. 25.

    If a debtor company has issued debt securities, does your jurisdiction’s insolvency or securities law provide for any exemptions from registration of those securities under applicable securities law?


  27. 26.

    May creditors offset debts owed to them by the debtor in an insolvency proceeding? Does this require court approval? Can creditors recover the expense of participating in the process? How?


  28. 27.

    If a debtor company has tax losses prior to a reorganisation, will it retain and be able to use such losses after it emerges from the reorganisation?


  29. 28.

    What happens at the end of an insolvency proceeding? If there is a discharge of prior claims, is it permanent or subject to any conditions subsequent?


  30. 29.

    How long do restructurings last? Is there a formal deadline?


  31. 30.

    Is there an expedited or summary proceeding available to obtain court approval of an out-of-court restructuring plan? If so, what types of claims and creditors may participate and how does the process work? Are out-of-court proceedings commonly used and what are the primary benefits and drawbacks?


  32. Additional considerations

  33. 31.

    Does the government tend to play an active role in insolvency proceedings? What factors determine this?


  34. 32.

    How are extraterritorial bankruptcy or insolvency proceedings recognised? Could a bankruptcy or insolvency judgment abroad substantially delay an insolvency proceeding in your jurisdiction? Does your jurisdiction contemplate ancillary or parallel insolvency proceedings with respect to a foreign proceeding? If a company organised under the laws of your jurisdiction (or whose principal place of business is in your jurisdiction) entered into extraterritorial bankruptcy or insolvency proceedings, would those proceedings be recognised in your jurisdiction?


  35. 33.

    How frequently do debtor companies reorganise and emerge from bankruptcy as opposed to liquidation? What factors determine this?


  36. 34.

    What is the appeal process for an insolvency proceeding in your jurisdiction and what effect do appeals have on approved plans? How long do appeals take to resolve?


  37. 35.

    Are there any common techniques that debtors use to manipulate or control insolvency proceedings? Have any of these techniques been challenged, and if so, what was the result?


  38. 36.

    What impact, if any, has the ongoing volatility in the global credit markets and rise in corporate restructurings had on your jurisdiction’s insolvency regime? Are any amendments to your jurisdiction’s insolvency laws envisaged? If so, which problems are such amendments intended to address and how? 


Other chapters in Restructuring