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Legal framework

Legislation

What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The Commercial Insolvency Law is the primary legislation governing insolvency and restructuring proceedings in Mexico.

Regulatory climate

On an international spectrum, is your jurisdiction more creditor or debtor friendly?

Mexico’s regulation is more debtor friendly. However, the Commercial Insolvency Law was amended in 2014 to protect the rights of the creditors and to seek a balance between the parties involved in insolvency and restructuring proceedings.

Sector-specific regimes

Do any special regimes apply to corporate insolvencies in specific sectors (eg, insurance, pension funds)?

Yes, there is a special regulation regarding the insolvency of holders of a public concession under the Commercial Insolvency Law. There is also a special regime for financial and banking institutions.

Reform

Are any reforms to the legal framework envisaged?

No. The last major reform to the legal framework regarding insolvency proceedings was in 2014. 

Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

A director or board of directors can be held liable for a company’s insolvency if:

  • it voted or decided about a matter concerning the company’s properties and assets knowing that a conflict of interests existed;
  • it intentionally favours a shareholder or group of shareholders, thereby injuring or prejudicing other shareholders;
  • it obtains an economic benefit for itself or a third party (including shareholders) without a legitimate cause and because of its position or job;
  • it generates, spreads, publishes, provides or orders information knowing that it is false;
  • it orders or encourages company operations not to be registered;
  • it modifies or orders the modification of the registries to hide the true nature of the operations, affecting the company’s statement of account;
  • it orders or allows the registration of false data in the company’s accountancy;
  • it destroys, modifies or orders the modification of the company’s accountancy; or
  • it modifies or orders the modification of the active or passive accounts of the company or the agreements subscribed by the company conditions, as well as registering non-existent company expenses.

Such conduct can be reported only by the insolvent company, not the creditors or a third party. The penalty is limited to the payment of damages in favour of the company.

Defences

What defences are available to a liable director or parent company?

The following defences are available to a liable director or parent company:

  • proof that it has complied with the legal requirements or company bylaws;
  • proof that it decided or voted in the board of directors sessions based on information from relevant employees, an external auditor or independent expert with unquestionable credibility;
  • proof that it has made the most reasonable decision at the time or that the possible damage to the company’s properties and assets was not foreseeable; and
  • proof that it has complied with an agreement made at a shareholders’ meeting.

Due diligence

What due diligence should be conducted to limit liability?

When the insolvency proceeding is filed, the Federal Institute of Commercial Insolvency must appoint an examiner to conduct due diligence of all the company’s documents, accountancy and contracts in order to determine whether the company should be declared insolvent.

Depending on the circumstances, the liability of the director or board or directors can be limited to the damages caused by the acts or omissions of the directors. 

Within the liability action, the director or board of directors held responsible may offer as evidence a due diligence of the company’s documents, accountancy and contracts.

Position of creditors

Forms of security

What are the main forms of security over moveable and immoveable property and how are they given legal effect?

The main forms of security over movable and immovable property and how are they given legal effect are as follows:

  • mortgage over immovable property – secured creditors may bring an independent and autonomous action in order to enforce their collateral; and
  • pledge over movable property – secured creditors may bring an independent and autonomous action in order to enforce their collateral.

Additionally, another form of security is to execute a guaranty trust, where the assets will be transferred to the trustee and will not be owned by the insolvent company.

Ranking of creditors

How are creditors’ claims ranked in insolvency proceedings?

Creditors’ claims in insolvency proceedings are ranked as follows:

  • creditors against the estate (eg, labour claims regarding unpaid salary of the last two years);
  • singularly privileged creditors (disease and burial expenses);
  • secured creditors (pledged and mortgage);
  • labour creditors and tax creditors;
  • creditors with special privileges (right of retention);
  • unsecured creditors (not subject to any guarantee or collateral security); and
  • subordinated creditors.

Can this ranking be amended in any way?

No. Even if the creditors execute a private agreement recognising a different creditor ranking, the provisions of the Commercial Insolvency Law cannot be waived. These provisions are public policy, issued in the interest of society, and are therefore unwaivable. Consequently, any agreement to the contrary will be unenforceable.

Foreign creditors

What is the status of foreign creditors in filing claims?

Foreign creditors can file their claims and request the acknowledgement of their credits in three different stages:

  • within 20 calendar days of the date of the last publication of the judgment where the merchant is declared bankrupt;
  • within the term for filing objections to the provisional list (ie, within five calendar days of the date on which the judge makes the provisional list available to the company and creditors according to the commercial insolvency proceeding); and
  • within the term for filing the appeal to the credit acknowledgement, ranking and priority of payment ruling (ie, within nine days of the date on which the ruling enters into effect).

Unsecured creditors

Are any special remedies available to unsecured creditors?

The court may dictate ex officio or by petition of the creditors for numerous provisional and special remedies, including:

  • prohibition against payments of obligations due before the date of admittance of the petition of commercial insolvency proceeding;
  • suspension of any enforcement proceeding against the assets and rights of the company;
  • prohibition against the company’s performance of sales, transfers or encumbrances of the principal assets of its enterprise;
  • attachment of assets;
  • appointment of a judicial administrator;
  • prohibition against performance of transfers of funds or securities in favour of third parties; and
  • arrest warrants in respect of the company manager for the sole purpose of not allowing the manager to leave his or her place of residence without issuing an attorney in fact with sufficient instructions and funds.

Debt recovery

By what legal means can creditors recover unpaid debts (other than through insolvency proceedings)?

If the debtor company is under an insolvency proceeding, any other action will be ineffective for recoverning the unpaid debts, unless the creditor has collateral (mortgage or pledge) and files a lawsuit in order to sell the assets given as guarantee. Another exception is the labour creditors – workers can seize the assets of the debtor company even if it is under an insolvency proceeding.

Is trade credit insurance commonly purchased in your jurisdiction?

No.

Liquidation procedures

Eligibility

What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?

The liquidation procedure may be initiated under the following circumstances:

  • if the debtor company applies for an insolvency proceeding in the liquidation stage; or
  • if two or more creditors request the insolvency proceeding of the debtor in the liquidation stage.

In both cases, it must be demonstrated that the company has defaulted in the payment of its obligations in a general manner. In order to prove this condition of general non-performance, a payment default to two or more creditors should exist alongside the following conditions:

  • at least 35% of all company obligations are at least 30 days past maturity; and
  • the company has insufficient liquid assets to satisfy at least 80% of its matured obligations on the date of the petition.

Exceptions The insolvency procedure for mutual insurance companies and insurance institution societies, bonding companies, re-bonding companies and re-insurance companies is regulated by the Commercial Insolvency Law, but governed by the provisions of their special laws.

Procedures

What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?

Out-of-court liquidation

Out-of-court liquidation does not require the filing of a complaint or evidence to demonstrate that the debtor is in payments cessation. It is sufficient that the debtor proves that it is undergoing general, economic or financial difficulties.

Partners may agree on a voluntary dissolution of the company. Such resolution shall be approved at a partners’ meeting (dissolution meeting), in which one or more liquidators are appointed.

Winding-up proceedings begin immediately after the company’s dissolution minutes have been duly registered with the Public Registry of Commerce.

The sole manager must provide all corporate and accounting documents, information and books to the liquidator, which must be registered in an inventory. The liquidator is entitled to act on behalf of the company, acting as legal representative of the partnership, therefore having all the obligations, responsibilities and limitations, as well as the authority and powers of attorney and a of legal representative.

Unless the dissolution minutes or law provides otherwise, the liquidator is obliged to:

  • wind up the outstanding transactions and operations;
  • collect due payments and pay debts;
  • sell the assets;
  • distribute to each partner the remaining assets proportionately to their partnership interest;
  • draft the liquidation balance sheet; and
  • hold the partnership’s documents and corporate and accounting books in deposit for 10 years following the date of the partnership’s winding up.  

The final liquidation balance sheet must be approved by partners in a winding-up meeting. Liquidators may then proceed to:

  • pay partners’ equity against their corresponding partnership interests;
  • give notice of the liquidation to the Ministry of Finance and Public Credit; and
  • request the cancellation of the taxpayers’ registry and partnership’s registry in the Public Registry of Commerce.

Partners will decide during the winding-up meeting on the distribution of the remaining assets (distribution agreement) once the liabilities have been paid or their amount has been deposited whenever payment is not possible. The liquidator will determine the amount or assets that each partner is entitled to receive as final payment for its ownership interest.

Court liquidation The debtor company may voluntarily file an insolvency proceeding requesting the liquidation of all its assets, properties, goods and rights. The Federal Institute of Commercial Insolvency will appoint a receiver to manage the company and sell the assets and rights of the company in order to pay the debts recognised in favour of the creditors.

The compulsory liquidation will take place when company creditors request that the court liquidate the assets, or if the company and creditors do not reach a reorganisation agreement during the conciliation stage of the insolvency proceeding (365 days).

The only structural or regulatory difference between voluntary liquidation and compulsory liquidation is that if the compulsory liquidation is filed by the creditors, the company may reject such petition and the insolvency proceeding will begin from the conciliatory stage.

How are liquidation procedures formally approved?

A federal district court must render a judgment after confirming that the legal requirements for insolvency are fulfilled. In other cases, once the legal term ends for the company to subscribe to a reorganisation agreement with its creditors without such an agreement in place, the federal district court will render a judgment declaring the company bankrupt and ordering its liquidation. 

What effects do liquidation procedures have on existing contracts?

As a general rule, the validity of the contracts is not affected by the liquidation procedure. However, the Commercial Insolvency Law makes a casuistic classification:

  • the validity of the agreements concerning only personal goods will not be affected, as well as inalienable goods, those exempt of attachment and those not subject to a statute of limitation;
  • preparatory and definitive agreements must be complied with by the company, unless the liquidator considers that it will harm the estate;
  • the seller can oppose delivering goods or property regarding purchase agreements in which the company is the buyer, unless the company pays the full price agreed by the parties or guarantees the payment of the goods;
  • deposit agreements, loan agreements and commission and agency agreements will not be terminated for the liquidation procedure, unless the liquidator considers it necessary;
  • existing account agreements will be terminated, unless the company states its continuation with the consent of the liquidator;
  • securities repurchase agreements will be terminated;
  • lease agreements will not be cancelled by the liquidation procedure, unless the company is the lessee and the liquidator considers it necessary, in which case the receiver must pay the penalty agreed in the contract or three months’ rent for the anticipated termination;
  • personal service agreements will not be cancelled;
  • lump-sum construction contracts will be cancelled, unless the company agrees to comply with the agreement with the liquidator’s authorisation; and
  • insurance contracts will not be cancelled if the company is the insured party, but if the company is the insurer, the insured party can choose to terminate the contract.

What is the typical timeframe for completion of liquidation procedures?

It depends on the size of the company, number of creditors and amount of assets, but an approximate timeframe is two years. 

Role of liquidator

How is the liquidator appointed and what is the extent of his or her powers and responsibilities?

In Mexico the Federal Institute of Commercial Insolvency specialists appoints the liquidators in each bankruptcy proceeding.

The liquidator becomes the manager and director of the company and has all the powers to sell, lease and represent the company.

The liquidator’s main responsibility is to sell all the company’s assets, rights, goods and properties in order to pay off the acknowledged creditors.

The main responsibility of the receiver is to sell the properties and rights of the estate, to obtain the greatest possible return from their sale. Other liquidator responsibilities are:

  • filling out monthly reports regarding actions taken and company management;
  • following up the lawsuits and actions initiated against the company;
  • investing the money obtained with the sale of assets, rights, goods and properties of the company; and
  • performing appraisals and reporting in benefit of the creditors.

The liquidator is responsible for the maintenance and conservation of the company’s assets, rights, goods and properties.

Court involvement

What is the extent of the court’s involvement in liquidation procedures?

The court is the director of the procedure. Its involvement is limited to the review of all actions taken by the company, creditors and liquidator (receiver).

The sale of property should be performed by means of a public auction, which is reviewed by the court. The court must also authorise the sale of any property of the estate by means of a procedure other than public auction when the receiver deems that a higher value could be obtained in this way.

Creditor involvement

What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?

The creditors may file any kind of motion, petition, writ or appeal in order to protect their rights and challenge the liquidator’s performance and the sale of the company’s assets, rights, goods and properties.

The creditors are prohibited from attaching any of the assets that comprise the estate of the company, unless their credit is secured by a mortgage or pledge and there is a final judgment that allows them to continue with the sale of the company’s property.

The creditors are also prohibited from agreeing the payment of their credits outside the liquidation procedure. In such a case, creditors would lose their rights as creditors and the agreement will become null and void.

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in liquidation procedures?

As legal representative of the company, the director can also file motions, petitions, writs and appeals concerning the liquidator’s performance and the sale of the company’s estate.

Shareholders are not involved in the liquidation procedure.

Restructuring procedures

Eligibility

What are the eligibility criteria for initiating restructuring procedures? Are any entities explicitly barred from initiating such procedures?

In Mexico the eligibility criteria for initiating a restructuring procedure are based on proving that the company has failed to fulfil its payment obligations in a general manner.

The Commercial Insolvency Law considers that a company is in a general state of non-performance if there exists a payment default to two or more creditors. One of the two following conditions should exist if the insolvency petition is filed by the company, or both conditions if the insolvency petition is filed by the creditors:

  • 35% or more of the company’s payment obligations are at least 30 days past maturity on the date that the restructuring proceeding is filed; and
  • the company has insufficient assets to fulfil at least 80% of its matured payment obligations on the date that the restructuring proceeding is filed.

In addition, the Commercial Insolvency Law foresees several events that constitute a presumption that a company is in a general default of payment of its obligations (eg, the non-existence or insufficiency of assets over which enforcement may be brought in the case of an attachment).

Procedures

What are the primary formal restructuring procedures available in your jurisdiction and what are the key features and requirements of each?

Out-of-court restructuring

Out-of-court restructuring will be entered into with all or a portion of the debtor’s creditors. Court confirmation is not necessary. Non-party creditors are not bound by the restructuring terms, which do not therefore affect their original debt terms and conditions. As a result, out-of-court restructuring has no practical effect or use.

Pre-packaged restructuring The Commercial Insolvency Law provides for two restructuring schemes:

  • formal proceeding (reorganisation), which is similar to the reorganisation procedure regulated under Chapter 11 of the US Insolvency Code; and
  • pre-packaged restructuring.

The debtor and the majority of its secured and unsecured creditors can file for an insolvency proceeding with an established restructuring plan. If it fulfils all the legal requirements, the court will declare the debtor bankrupt and approve the plan.

Reorganisation procedure Debtors may file a voluntary petition for reorganisation at any time before bankruptcy adjudication. Admission of the petition requires the filing of evidence showing that the debtor is in payments cessation at the time of filing.

Along with the petition for reorganisation, the debtor must file:

  • a description of the cause of its economic and financial situation;
  • a statement of assets and liabilities;
  • the debtor’s financial statement for the last three fiscal years; and
  • a list of creditors and debtors.

The debtor enjoys a 180-day period, extendable up to 180 additional days from the date of the court’s resolution admitting the debtor’s petition, during which it must formulate a reorganisation plan and obtain the consent of the required majorities of creditors.

The plan must receive the consent of more than 50% of:

  • all unsecured creditors; and
  • secured creditors that signed the reorganisation agreement.

Once the plan is endorsed and performed, the court will issue a resolution declaring the reorganisation to be concluded and finalising the intervention of the conciliator.

How are restructuring plans formally approved?

Once the company and its creditors enter a reorganisation agreement, the appointed conciliator must submit it to the court for approval. Once the court reviews the agreement and determines that it fulfils the legal requirements, it will approve it in a judgment that will oblige the debtor and all its unsecured creditors.

What effects do restructuring procedures have on existing contracts?

The effects are the same as in the liquidation procedure. The general rule is that the contracts entered into by the debtor will continue to be valid, except when the conciliator rejects them in the best interest of the estate.

Regarding repurchase, securities loans, futures and derivatives transactions, the declaration of commercial insolvency will lead to the early termination of those transactions, provided that:

  • the debts and credits resulting from these transactions are offset;
  • the outstanding balance that may result from the set-off against the debtor may be claimed by the corresponding counterpart by means of the acknowledgement of the credits procedure; and
  • in the case of a balance in favour of the debtor, the counterpart will be bound to pay the conciliator for the benefit of the estate within a term not exceeding 30 calendar days, calculated from the date of the declaration of commercial insolvency.

Lump-sum work contracts will be deemed terminated by the declaration of commercial insolvency of one of the parties, unless the debtor, with the authorisation of the conciliator, agrees to perform the contract with the other contracting party.

What is the typical timeframe for completion of restructuring procedures?

The Commercial Insolvency Law establishes that the de-conciliation stage cannot last longer than 185 days, but it can be extended under several conditions to a total of 365 days.

Court involvement

What is the extent of the court’s involvement in restructuring procedures?

  • The court is the director of the procedure and is involved in all the restructuring proceedings supervising the conciliator’s performance, and it must resolve the petitions of the creditors and debtor.
  • The court determines whether a debtor must be declared insolvent.
  • The court must issue a ruling declaring the ranking and priority of all the creditors.
  • The court approves the reorganisation agreement entered into by the company and its creditors.
  • In general, the court conducts the restructuring proceeding and resolves all motions filed by the parties and the conciliator.

Creditor involvement

What is the extent of creditors’ involvement in restructuring procedures and what actions are they prohibited from taking against the company in the course of the proceedings?

Creditors are an essential part of the restructuring procedure, as they must reach an agreement with the debtor about the terms on which their credits will be paid, the debt amount and an extension of the payments.

During the conciliation stage the creditors can file petitions, writs and appeals concerning their rights, the debtor’s assets, rights, goods and properties, provisional remedies and actions seeking separation of an asset or property from the estate. Creditors are an active part of the conciliation stage in an insolvency proceeding.

Creditors are prohibited from attaching the debtor’s assets and cannot enter into a private agreement with the debtor seeking the payment of their credits outside the insolvency proceeding.

Under what conditions may dissenting creditors be crammed down?

If more than 50% of the debtor’s creditors execute a reorganisation agreement and the agreement is approved by the court, the minority of unsecured creditors will be crammed down. Under the Commercial Insolvency Law, the court’s judgment approving the reorganisation agreement binds the company and all of its creditors. 

Director and shareholder involvement

What is the extent of directors’ and shareholders’ involvement in restructuring procedures?

During the restructuring proceeding, the director will continue with the management of the company.

The director can be removed from the administration of the company if it refuses to collaborate with the conciliator in such cases the conciliator will be appointed as the new manager.

Shareholders are involved only in the filing of the petition for restructuring, since they must agree the submission of the restructuring procedure by means of a shareholders’ meeting.

Informal work-outs

Are informal work-outs available for distressed companies in your jurisdiction? If so, what are the advantages and disadvantages in comparison to formal proceedings?

Yes. The Commercial Insolvency Law provides that a company with economic and financial problems may appear before the Federal Institute of Commercial Insolvency seeking the appointment of a negotiator. This procedure has never been used in Mexico, since these informal work-outs are not mandatory for creditors. An advantage of informal work-outs is the reduced costs incurred.

Transaction avoidance

Setting aside transactions

What rules and procedures govern the setting aside of an insolvent company’s transactions? Who can challenge eligible transactions?

As a general rule, the Civil Code and ordinary proceedings will continue to govern the validity and existence of all the agreements and transactions executed by the debtor (before, during or after it has been declared insolvent).

However, the Commercial Insolvency Law refers to the concept of ‘acts in fraud of creditors‘.

Irrespective of the date on which they have been performed (except for the general commercial rule that sets the statute of limitations at 10 years), acts in fraud of creditors are those that meet the following requirements:

  • they were performed before the declaration of commercial insolvency;
  • they were undertaken with the intention of defrauding creditors; and
  • a third party was aware of the fraud.

The following are acts in fraud of creditors, provided that they have been performed within the date of retroaction:

  • gratuitous acts;
  • acts and sales in which the debtor pays a price with a clearly higher value or receives a price with a clearly lower value to the considerations offered by its counterpart;
  • transactions performed by the debtor in which conditions or terms are established that are significantly different from the prevailing market conditions on the date of their performance in which they have been performed, or from common commercial practices and uses;
  • debt remittances; and
  • payments of unmatured obligations.

The Commercial Insolvency Law deems that the performance of any of these acts inherently includes the bad faith of the person performing it, both of the debtor and the other parties involved. In all such cases the transaction will be null and void.

Operating during insolvency

Criteria

Under what circumstances can a company continue to conduct business during an insolvency procedure?

The debtor will continue to conduct business during the restructuring stage of the insolvency proceeding and the conciliator will watch only the accountability and transactions executed by the company.

However, if the conciliator believes that the estate can be protected in a better way, he or she may file an ancillary motion in order to remove its director from company management. In such a case, the conciliator will continue to conduct business and assume all the capacities and authorities to continue to conduct business. 

Stakeholder and court involvement

To what extent are relevant stakeholders (eg, creditors, directors, shareholders) and the courts involved in any business conducted during an insolvency procedure?

Creditors are relevant only in regards to the substitution of a collateral security granted by the debtor.

Directors will continue conducting all business with the intervention of the conciliator during the insolvency procedure in the restructuring stage. In the liquidation stage, the liquidator or receiver is the only person involved in the business of the company.

The court must review, and in some cases approve along with the appointed conciliator, some of the company’s business during the insolvency procedure, for example:

  • termination of an agreement;
  • execution of new loans; and
  • sale of assets not related to the ordinary business of the company.

Financing

Can an insolvent company obtain further credit or take out additional secured loans during an insolvency procedure?

Yes, the debtor can request authorisation from the court to obtain further credit and secure loans during the insolvency procedure, if the resources are strictly necessary to maintain company operation.

Employees

Effect of insolvency on employees

How does a company’s insolvency affect employees and the company’s legal obligations to employees?

During the restructuring and insolvency procedure the company must continue to oblige all ordinary payments (eg, wages). The company’s legal obligations to its employees are not affected.

If the company decides to terminate the labour relationship with its workers, the applicable rules and procedures are the same as though the company were not under an insolvency procedure.

The labour creditors cannot participate in the reorganisation agreement; however, the debtor can subscribe to another kind of agreement regarding their credits, as long as it does not aggravate the company’s insolvency.

Labour credits (wages for two years) are considered to be credits against the estate and will be the first creditors to be payed if the merchant is declared bankrupt and the court orders liquidation. 

Cross-border insolvency

Recognition of foreign proceedings

Under what circumstances will the courts in your jurisdiction recognise the validity of foreign insolvency proceedings?

Mexican courts recognise the validity of foreign insolvency proceedings:

  • when a foreign court or representative asks for assistance from the Mexican courts regarding a foreign insolvency proceeding;
  • when the insolvency proceeding takes place in Mexico and a foreign country; and
  • when foreign creditors ask for an insolvency proceeding to be initiated in Mexico. 

Winding up foreign companies

What is the extent of the courts’ powers to order the winding up of foreign companies doing business in your jurisdiction?

If the foreign company does business in Mexico or has agencies or offices there, it is considered a merchant under the Mexican Commercial Code and the court with jurisdiction in the place where the foreign company does business can order the insolvency proceedings or liquidation of the foreign company’s agencies and offices. However, it will be limited to the rights, goods, assets and properties located in Mexico. 

Centre of main interests

How is the centre of main interests determined in your jurisdiction?

Under Mexican law, the place where the debtor conducts the administration of its business will be considered the centre of main interests, regardless of the location of its assets and properties.

Cross-border cooperation

What is the general approach of the courts in your jurisdiction to cooperating with foreign courts in managing cross-border insolvencies?

The Commercial Insolvency Law dedicates a whole chapter to cross-border insolvencies and Mexico is part of the United Nations Commission on International Trade Law Model Law on Cross-border Insolvency, so that cooperation with foreign countries in managing cross-border insolvencies is fully regulated and the courts are generally cooperative with foreign courts.