Basic overview of in-court reorganisation in Mexico

August 2016 | EXPERT BRIEFING | BANKRUPTCY & RESTRUCTURING

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The United Mexican States’ Ley de Concursos Mercantiles (LCM or Mexican Business Reorganisation Act) expressly recognises that it is “in public interest to preserve companies and to prevent a general default in payment from risking their failure and the failure of other companies with which they have dealings”. To that end, this Act establishes a governing process for concursos mercantiles (business reorganisation proceedings) similar in some respects to what we understand exists under Chapter 11 of the United States Bankruptcy Code.

A business reorganisation proceeding in Mexico is commenced by the filing of a solicitud de declaración de concurso mercantil (petition) either by a debtor, a creditor or a federal prosecutor in a Mexican Federal District Court, and after preliminary review, it is admitted for further proceedings so long as it contains the information and disclosure required by law.

A business reorganisation proceeding progresses in phases: (i) the ‘analysis and declaration or rejection phase’, in which basically the financial condition of the debtor is reviewed in order to determine whether it fulfils or not the proper requirements for the concurso to be declared; (ii) la etapa de conciliación (the ‘conciliation phase’) – during which reorganisation is attempted, initially for 185 days – begins when the Mexican District Court issues a declaración de concurso mercantil (a business reorganisation judgment) declaring that the debtor meets the requirements for being the subject of this proceeding. Once issued, la masa (an estate) consisting of all of the debtor’s assets and liabilities is automatically created, and all actions by creditors to enforce judgments or otherwise seize the debtor’s assets can be stayed. During this phase, a conciliador (a conciliator) is appointed by IFECOM (a Federal Judiciary Branch) to facilitate an agreement between the debtor and its creditors on the terms of a reorganisation. The conciliation phase may be extended in 90 days if it is requested by the conciliator or the recognised creditors representing more than half of the recognised credits; a third additional period of 90 days can be granted if it is agreed by the debtor and the recognised creditors representing more than 75 percent of the recognised credits; and (iii) the ‘liquidation phase’, if conciliation fails.

Once the conciliation phase has begun, creditors (including foreign creditors) have the opportunity to submit proofs of claim. Afterwards, the conciliator submits a list of creditors to the Mexican District Court (at first a preliminary list subject to objections by interested parties, and then a definitive list), which prior to examination, issues an order recognising the amount and priority of all claims against the estate (the recognised creditors).

The Mexican Business Reorganisation Act provides for the recognition and prioritising of creditor claims in accordance with such ranking. Apart from the sui generis category of ‘singularly privileged creditors’, creditor classes are categorised and ranked as creditors with collateral (secured creditors), creditors with special privileges, common creditors (unsecured creditors) and subordinated creditors.

The goal of the conciliation phase is for the formation of a convenio concursal (a reorganisation plan) that is agreed to by the requisite majority of recognised creditors (more than 50 percent of the sum of (i) the amounts recognised to all common and subordinated creditors, plus (ii) the amount recognised to creditors with collateral or special privilege who agree to the reorganisation plan) and approved by the Mexican District Court.

Thereafter, assuming it is approved by the requisite majority, the conciliator will submit the reorganisation plan to the Mexican District Court for its own review and approval. The conciliation phase (and, indeed, the entire business reorganisation proceeding) will terminate once the reorganisation plan is approved by the Court. Alternatively, the conciliation phase can expire or be terminated for cause which, in either case, results in the commencement of a new phase in the proceeding, la etapa de quiebra (the liquidation phase), the purpose of which is the liquidation of the debtor by the sale of all its assets.

Today, cross-border insolvencies between the US and Mexico are more common. Given the amount of commerce that these countries perform on daily basis (Mexico is the US’ third largest commercial partner while the US is Mexico’s biggest commercial partner) and the number of investments in each other, in the event that a company enters into financial distress, reorganisation efforts must be conducted in both countries.

In fact, in many such cases a reorganisation plan approved in one country probably will need to be recognised in the other, notwithstanding that it is normal for creditors from each country to be a regular part of reorganisation efforts in the other as financing and investments become more international.

Given the rising amount of interest that hedge funds, investment firms and funds specialised in distressed debt are putting in Latin America and Mexico particularly, it is expected that this issue will arise stronger in the future, and Mexican lawyers should be prepared.

Mexico has incorporated in general the UNCITRAL Model Law on Cross-Border Insolvency in Chapter 12 of the Mexican Business Reorganisation Act. Accordingly, Mexico provides recognition and full cooperation on cross-border insolvency.

The whole reason for Chapter 12 of the Mexican Business Reorganisation Act is to provide effective mechanisms for dealing with cross-border insolvency. The underlying principles are international cooperation, increasing legal certainty for trade and investment, and providing a correct vehicle for the reorganisation of financially distressed entities.

Recognition of a foreign reorganisation proceeding (and then the reorganisation plan) is not automatic. The Mexican Business Reorganisation Act provides in general for two ways in which a foreign reorganisation proceeding may be recognised: (i) a main foreign reorganisation proceeding if the foreign jurisdiction in which it is being handled is where the debtor has its centre of main interests (COMI); or (ii) a non-main foreign proceeding if the foreign jurisdiction in which it is being handled is a place where the debtor only has only a commercial Establishment (as described in the Mexican Business Reorganisation Act: any place of operations in which the debtor executes economic activity in a non-transitory manner with human capital and assets or services).

In the first case, the foreign proceeding recognition requires the beginning of a concurso proceeding through its normal course and only when the company is declared in concurso will the foreign proceeding be recognised. This is because if the debtor has an establishment in Mexico through which it conducts business, it may have creditors which will probably have claims against the estate which in any case must be duly recognised.

In the second case, the recognition does not imply the beginning of a concurso proceeding and will consist of an adversarial incidental trial exclusively between the foreign representative and the debtor.

Additionally, the Mexican Business Reorganisation Act foresees the existence of parallel reorganisation proceedings when there exists a Mexican reorganisation proceeding and a foreign proceeding, cases in which the Mexican Court will procure collaboration and coordination with the Court overseeing the foreign proceeding.

Mexican courts can deny recognition of foreign proceedings, and can refuse to grant a foreign representative’s requested relief where such relief is manifestly contrary to Mexican public policy.

In Mexico, none of the provisions related to international cooperation should be construed and interpreted in any way that may be contrary to the rest of the chapters of the Mexican Business Reorganisation Act or the fundamental law principles that exist in Mexico. Therefore, Mexican courts should deny recognition and cooperation to any request that is contrary to the Mexican law or that violates fundamental Mexican law principles.

In order to be recognised as a foreign proceeding, Chapter 12 of the Mexican Business Reorganisation Act contemplates that the district court will exercise its discretion consistent with principles of comity, subject to a narrow exception if doing so would be manifestly contrary to the bankruptcy law or the fundamental principles of Mexican law.

Béla Kálloi Romero is a partner and Ramón Fernández Vigil is a senior associate at Rivera Gaxiola, Carrasco y Kálloi, S.C. Mr Kálloican be contacted on +52 55 10 84 12 30 or by email: bkalloi@rgcyk.com. Mr Fernández can be contacted on +52 55 10 84 12 30 or by email: rfernandez@rgcyk.com.

Béla Kálloi Romero and Ramón Fernández Vigil

Rivera Gaxiola, Carrasco y Kálloi, S.C.