New Principles for Determining Bankruptcy
The new Commercial Bankruptcy Law in Mexico was published in the Official Federal Gazette on May 12 2000. As a consequence of this the Bankruptcy and Payment Suspension Law, effective since April 20 1943, was repealed.
The New Law
The Commercial Bankruptcy Law abandons the traditional concepts of economic solvency and payment cessation as defined and dictated under the previous law, including basic norms of bankruptcy procedure. Instead it is based on precepts of insufficient liquidity and insufficient circulation of assets, which require the merchant to face its obligations.
Article 10 of the new law states that a merchant will be subject to commercial bankruptcy when it has outstanding debts to two or more creditors for more than 30 days. At the conclusion of this term and on the date on which the complaint was filed, these debts must represent 35% or more of the total debt owed by the merchant.
Further, the legislation equally establishes that the merchant will be declared bankrupt when it does not have sufficient assets or liquidity to pay at least 80% of due obligations at the date of the filing of the complaint. The following elements will be considered in analyzing the company's assets:
- cash in hand;
- demand deposits;
- deposits or investments for which the term will expire not more than 90 days from the date on which the complaint was admitted;
- clients and accounts payable for which the term will expire not more than 90 days after the date on which the complaint is admitted; and
- the title certificates of securities for which regular sale-purchase operations in relevant markets are registered, and which can be sold within a maximum period of 30 days.
New Principles for Determining Bankruptcy
Under the previous law, the solvency or the existence of property to guarantee debts was the general rule by which bankruptcy was traditionally determined.
However, Article 11 of the new law establishes presumptions of bankruptcy, such as the general failure to pay obligations, in the following cases:
- the absence of sufficient property to seize in applying an attachment ordered for failure to pay an obligation, or in attempting to enforce a judgment against the merchant with the authority of res judicata (a conclusive final judgment);
- non-compliance in the payment of obligations against two or more distinct creditors;
- concealment or absence, without leaving the administration or operation of the company to someone that could fulfil the obligations;
- closure of the company's stores or operations under the same circumstances as described above;
- engagement in ruinous, fraudulent or fictitious practices in attending to or failing to comply with the obligations of the company;
- non-compliance with pecuniary obligations contained in an agreement signed under the terms of Title Five of the Commercial Property Law, and
- in any other naturally analogous case.
Weighing these presumptions in determining whether to declare the merchant bankrupt falls to the free and arbitrary discretion of the judge.
The Commercial Bankruptcy Law no longer regulates nor conceives of the suspension of payment procedure established in the previous Bankruptcy and Payment Suspension Law. Instead, the new Commercial Bankruptcy Law grants companies a short period in which to liquidate their debt to creditors. A period of six months can be granted in which the merchant, together with the designated conciliator for the case, can reach a payment agreement with the creditors.
The conciliation period is granted for one six-month period. However, it is possible to apply for two equal three-month extensions. The first extension is subject to the approval of two-thirds of the recognized creditors in the trial, while the second extension is subject to the approval of 90% of the recognized creditors in the trial.
The conciliation period should not be confused with the suspension of payment process since, under the new law, the merchant has already been declared bankrupt, and the time period is only granted to resolve the pending debts of the creditors.
The Commercial Bankruptcy Law is innovative legislation in Mexico, particularly in mandating the creation of a specialist commercial bankruptcy institute that shall fall under the authority of the judicial council for the federal judicial power. This institute will regulate the participation of the three officials designated by the institute to bankruptcy cases, namely the inspector, the conciliator and the receiver.
The new Commercial Bankruptcy Law seeks to expedite and regulate the commercial bankruptcy procedure, a reflection of the fact that under the previous law the parties often took advantage of the dilatory suspension of payment procedure. At the same time, the new law grants greater rights to creditors so they can quickly bring their claims and defend their rights within the bankruptcy procedure.
For further information on this topic please contact Jaime R Guerra González, José Victor Rodríguez Barrera or Alonso Rivera Gaxiola at Guerra González y Asociados, SC by telephone (+52 55 5543 9270) or by fax (+52 55 5543 6621 or +52 55 5543 6624) or by e-mail ([email protected]).
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