Article 4 of the Business Reorganisation Act states that a 'merchant' is a person or entity that falls within the definition given in the Code of Commerce. The concept includes commercial entities that are deemed to be holding companies or subsidiary companies, to which reference is made in Article 15 of the act. Article 15 defines a 'holding company' as a company that:

  • is legally resident in Mexico; and
  • owns more than 50% of the voting shares in a subsidiary (either directly or through other subsidiaries).

In no circumstances may more than 50% of the voting shares be owned by other companies.

'Subsidiaries' are defined as companies in which more than 50% of the voting shares are owned, directly or indirectly, by a holding company.

On this basis, holding companies and subsidiary companies are economic entities that produce goods or provide services. Notwithstanding the 'corporate veil' rule in Mexican legislation, such companies cannot - in any form - be recognised as debtors and creditors in bankruptcy proceedings, despite the fact that they have their own property and legal personality. In such proceedings a holding company cannot rely on its subsidiaries to impose a restructuring agreement if such controlled entities are debtors of third-party creditors that are involved in proceedings affecting the parent company.

No specific legislative provisions prohibit subsidiaries from voting in this context; however, the law does not specifically permit them to do so either. Articles 126 and 202 of the act set out a clear principle of law: a person cannot be considered a creditor in the context of a business reorganisation or bankruptcy proceeding if a familial or patrimonial link exists with the debtor. The act provides that "spouses and partners cannot be regarded as each other's creditors".

Where bids or offers are made in an asset sale, the bidders must declare any links - whether family ties or patrimonial or business connections - with the debtor, its administrators or other persons directly related to the merchant's operations. An omission or false statement in a declaration by a bidder or recipient constitutes sufficient cause to annul the sale, irrespective of the obligations that may arise therefrom, and the sale will be deemed not to have taken place. A 'patrimonial or business connection' for these purposes includes a direct or indirect participation of at least 5% of a company's stock.

On this basis, it is arguable that where joint obligations exist between a holding company and its subsidiaries in respect of a third party, the subsidiaries may not vote on a bankruptcy or business reorganisation agreement whereby the holding company would benefit from reductions in its financial obligations or extensions of time that may be approved by subsidiaries, particularly where their claims exceed 50% of the holding company's debt.

However, the situation is different if the subsidiaries have no joint obligation to a third party and therefore may be considered true creditors of the holding company or parent entity. In such cases it is necessary to analyse the origin of the supposed claim. This analysis, which must be undertaken within the scope of proceedings on the authenticity of the claims, must take account of the possibility of a conflict of interest arising at the point when the claim was constituted. Together with the legality of the acts in question, this is an important consideration in determining the validity of the claim and, consequently, the right to vote on a business reorganisation agreement.

To date, there is no legal precedent on this point, as the courts have not addressed the situation. However, in other 'pre-pack' agreement proceedings in Mexico, votes by subsidiaries have been accepted, but only because third-party creditors accepted that such a right to vote existed.

For further information on this topic please contact Jaime René Guerra González at Guerra González y Asociados SC by telephone (+52 55 5488 6100), fax (+52 55 5543 6624) or email ([email protected]).