An extract from The Restructuring Review, 13th Edition
General introduction to the restructuring and insolvency legal framework
The Concurso Law was published in May of 2000 and was amended in December 2007 (with the introduction of the Mexican version of a pre-pack), in January 2014 and, to a lesser extent in August 2019 and in January 2020. Significant amendments are summarised in Section III.
The following subsections present the principal aspects of the Concurso Law.i One proceeding
The Concurso Law provides for one sole insolvency proceeding (concurso mercantil), encompassing two successive phases: a conciliatory phase of mediation among creditors and debtor (known as the conciliation stage), and a second stage of bankruptcy or liquidation. The objective of the conciliatory phase is to conserve the business enterprise as an ongoing concern through a restructuring agreement. On the other hand, the stated purpose of bankruptcy is to liquidate the business. Prior to a debtor being placed in concurso, the process includes a preliminary examination proceeding to verify whether the debtor is 'generally in default'. If a pre-pack is filed, such examination is not required. Unfortunately, while the mandatory formats produced by the Federal Institute of Insolvency Specialist (IFECOM, an agency of the Federal Judiciary) are quite simple in their structure, the examination proceeding seems to be misunderstood as an audit of the company, leading to unexpected delays and confusion. It is noted that the initial preliminary proceeding lacks in transparency, and the examination proceeding reports are not made public.ii Procedural terms
An important part of the Concurso Law involves measures that were designed to expedite the handling of mechanical aspects of insolvency. Procedural terms in legal proceedings are relatively short, yet (with few exceptions) most courts fail to abide by them.
Provisions in the law as to procedural exceptions in legal proceedings were designed to avoid the automatic suspension of the conciliatory proceeding, as was the case under the prior Law of 1943, yet federal judges continue to apply measures that have, in fact, halted concurso proceedings.
The conciliatory stage is designed to be completed in 185 calendar days in the best case, although two 90-day extensions may be granted if a qualified majority of creditors so approves. The Concurso Law clearly underlines that in no event may the conciliatory stage be extended beyond 365 days, whereupon bankruptcy and liquidation of assets are, in theory, to begin immediately. In practice, this is not the case.iii Petition for commercial insolvency
A business enterprise that is generally in default with respect to its payment obligations will be declared commercially insolvent. The debtor, any creditor or, exceptionally, the Office of the Attorney General or the tax authorities may file for insolvency.
The Concurso Law establishes precise rules that determine when a debtor is 'generally in default'. The principal indications or presumptions are the failure by a debtor to comply with its payment obligations in respect of two or more creditors, and the existence of the following two conditions: 35 per cent or more of its liabilities outstanding are 30 days past due; and the debtor fails to have liquid assets and receivables, which are specifically defined, to support at least 80 per cent of its obligations that are due and payable.
Specific instances, such as insufficiency of assets available for attachment or a payment default with respect to two or more creditors, are considered by the Concurso Law to be facts that by themselves will result in a presumption of insolvency.
In theory, the 2014 amendments allow the debtor to file for concurso if it can be anticipated that it will be generally in default with respect to its payment obligations or falling within either of the conditions leading to a presumption of insolvency, as mentioned above, within 90 days of the petition filing. On the other hand, involuntary filings have been largely unsuccessful because of the many formalities that must be met.iv Jurisdiction
The federal courts have jurisdiction over concursos, notwithstanding that even this basic principle has been – unsuccessfully – challenged. While it is a fact that district judges are overburdened with constitutional challenges (amparos) and have little practice in regard to mercantile matters, the selection process, supervision, continued education (other than in insolvency) and preparation of federal judges have been substantially improved in the recent past. Salaries have been materially increased, and there has been greater impartiality. Nevertheless, the courts have been reluctant to accept insolvency cases given their considerable workload, among other reasons, and when they have accepted a major matter, the mere size and thousands (if not millions) of pages involved have made it a huge task to address and preside over these proceedings efficiently.v Experts
The Concurso Law provides for the use and training of experts in the field of insolvency with IFECOM as an entity to coordinate their efforts and provide continuing education.
The specialists who have a role in proceedings under the Concurso Law are:
- the examiner, whose duties are to determine whether the debtor complies with the commencement standards and who participates in the proceeding up to the judge's declaration of insolvency;
- the conciliator, who is appointed in such declaration and who has broad powers to mediate, to take steps to protect the enterprise as an ongoing concern or to immediately begin bankruptcy and who takes on significant responsibilities in a concurso; and
- the receiver, who may or may not be the conciliator and whose principal function is to proceed with the sale of assets and payment of claims.
The judge also has a principal role, although the function of the conciliator is considerable (including the authority to approve debtor-in-possession (DIP) financing).
Those who wish to act as examiner, conciliator or receiver must request IFECOM to register them in the special registry maintained by IFECOM. It is unfortunate that the registry, especially for complex cases, has not been opened for the large accounting or insolvency advisory firms, but only to a limited number of individuals.
There are numerous restrictions prohibiting conflict-of-interest relationships. The appointment procedure is supposedly based on a random, electronic selection from the classes and ranges of experience pertaining to the experts registered with IFECOM, which vary in accordance with the complexity and asset size of the business enterprise.
A qualified majority of creditors may replace or appoint a professional as conciliator or receiver even if the professional is not registered with IFECOM. In cases involving the insolvency of a company operating under a federal concession, the conciliator may be appointed at the request of the corresponding authority, such as the Ministry of Communications in regard to corporations in the telecommunications industry, as was the case with the successful restructurings of Satélites Mexicanos SA de CV.vi Related companies
Insolvency proceedings of two or more entities are not joined, although controlling and controlled companies' proceedings will be joined, but will be handled in separate records. A petition must be filed individually by each group member; nevertheless, the 2014 amendments introduced provisions to allow for a joint petition by multiple group members. This technique was efficiently applied in the Empresas ICA case. Mexican courts do not, however, recognise substantive consolidation.vii Identification of creditors and declaration of insolvency
The debtor that requests a judgment of declaration of concurso mercantil must furnish detailed lists of creditors and debtors, with a description of the nature of the debts. The amendments of 2014 introduced a number of relevant additions to the petition request: a copy of the corporate resolutions that approved the filing (interpreted by several courts as requiring shareholder approval), a proposed reorganisation plan and an enterprise conservation plan, which were intended to include DIP financing terms.
Absent a pre-pack, the day after the judge admits the petition, which in practice may take weeks or months, he or she must send a copy to IFECOM, ordering it to designate an examiner within five days. The judge will order the visit and immediately notify the debtor. The examiner will review the books and records of the debtor and will prepare minutes of the visit, which must also include a list of all creditors in IFECOM formats. The examiner may request that the judge issue precautionary measures needed to preserve the assets of the debtor, although the debtor's counsel usually addresses them upon filing. The examiner will render a report to the judge that will be sent to the debtor and the creditors for their respective comments, if any.
Within a maximum term of 83 days as of the termination of the examination proceeding, the Law provides that the judge must render a judgment of mercantile insolvency, which, among other things, must contain:
- an order to IFECOM to appoint a conciliator;
- a declaration of the opening of the conciliatory stage unless the debtor has requested bankruptcy;
- an order to the debtor to deliver all books and records to the conciliator;
- an order to the debtor to suspend the payment of its pre-petition indebtedness, other than those that are deemed to be essential for the continuation of the business enterprise;
- an order to freeze all asset foreclosure and attachment proceedings; and
- an order to publish a notice to all creditors so that they may appear in the proceeding, although this requirement (a filing proof of claim) is no longer mandatory.
The extensive participation of the conciliator in the proceedings should also be noted. The conciliator is also responsible for proposing the creditors who should be recognised and is mandated to proceed with notices and publications pursuant to provisions that are very specific as to terms. Formalities are always a major issue and creditors must be aware of tactics delaying the publications that may lead to material postponements and ambiguities.viii Effects of a declaration of insolvency
Once the initial judgment declares the debtor in a stage of insolvency or concurso mercantil, attachment or foreclosure of assets is suspended during the conciliatory stage, with the sole exception of labour-related obligations. Tax-related attachments or liquidations under specific provisions of the Concurso Law are specifically stayed.
The debtor maintains the administration during the conciliatory stage, although the conciliator may request court removal of the administration, which is must uncommon. With the express purpose of conserving the enterprise as a going concern within the conciliatory stage, the conciliator is given broad powers to decide on the acceptance or rejection of contracts (within certain parameters), the contracting of new loans – although most litigators insist that the judge must approve – and the sale of non-essential assets. In all cases, the conciliator must report to the court every 72 hours – which is obviously burdensome in major filings –each and every payment to any supplier or person.ix Debts in foreign currency
The Concurso Law attempts to correct prior judicial practice, which converted foreign currency debt to pesos early on in the proceeding. The Law establishes provisions that are designed to protect the monetary value of creditor loans. All peso-denominated obligations are converted into inflation-linked units known as UDIs; foreign currency-denominated obligations are converted into pesos at the prevailing rate of exchange on the date the insolvency judgment is rendered and then converted into UDIs. Only claims with a perfected security interest (mortgages or pledges – but not in regard to guarantee trusts) will be maintained in their original currency or unit of account, and will continue to accrue interest, but only to the extent of the value of the collateral.x Fraudulent conveyances
The Concurso Law provides for a general rule as to the period when insolvency is presumed to have begun, which is of 270 calendar days prior to the judgment declaring insolvency (the retroactive period). Nevertheless, upon the reasoned request of the conciliator, the interventors, who may be appointed by the creditors to oversee the process, or any creditor, the judge may determine a longer period (at most, three years). Conveyances that are not arm's-length or commercially sound, and the creation or increase of security interests within the retroactive period will be presumed fraudulent to creditors and will not be recognised.xi Netting
The general concept of netting is recognised by the Concurso Law, which specifies that netting is mandatory for parties to a transaction recognised by the Law, pursuant to terms agreed upon in the relevant contract, on the date of the declaration of insolvency, in respect of liabilities and rights arising from master or specific agreements entered into in connection with financial derivative transactions, reportos (Mexican law-governed repurchase transactions), securities lending transactions and other equivalent structures.
Mandatory netting is also recognised by the Law as an exception to the cherry-picking powers given to the conciliator (i.e., mandatory netting applies, regardless of whether the conciliator decides to assume or reject the relevant executory contract).
Under the Concurso Law, the effects of a netted transaction are deemed to survive, even if the transaction was netted during the insolvency retroactivity period (as mentioned previously, generally 270 days). This provision constitutes another development that was intended to give financial institutions certainty when netting, on a bona fide basis, financial derivative transactions.
As a prerequisite to netting, the Concurso Law accepts the principle of early termination. It establishes that financial derivative transactions and reportos transactions, maturing after the date of the declaration of insolvency, shall be deemed terminated precisely on that date.
In connection with financial derivative transactions, the Law provides that, if the relevant agreement does not specify the terms pursuant to which a transaction is to be closed-out and netted, the value of the underlying assets and liabilities is to be determined on the basis of their market value on the date of the declaration of insolvency; if such market value is not available or cannot be demonstrated, the conciliator may request an experienced third party to determine such value.
The general concept of netting reflected in the Concurso Law should be broad enough to encompass transactions such as New York or English law-governed repurchase transactions, securities loan agreements and any other transactions that may be expressed in other currencies. However, the broad terms of the relevant provisions in the Concurso Law may result in abuses that would seem to go beyond the intent of the drafters of the Law (i.e., creditors claiming that transactions that are not financial derivative transactions, and, therefore, not benefiting from netting provisions, be considered as derivatives, by virtue of the manner through which such transactions were documented). It is also expected that complex derivatives will be challenged as invalid, based on arguments of ultra vires, lack of authority, disproportional elements and the like, specifically in times of unforeseen volatility. While such issues have been addressed by US courts (principally in New York) in favour of creditor banks in matters where Mexican companies were plaintiffs, the subject of complex derivatives is far from settled in Mexico.xii Restructuring plan; pre-packaged insolvency
A pre-packaged voluntary insolvency must have the support of the filing of the debtor and at least 50 per cent of creditors (taking into account all liabilities). In any event, with or without a pre-pack to become effective, a final restructuring plan must be subscribed to by the debtor and recognised creditors representing more than 50 per cent of the sum of the total recognised amount corresponding to unsecured creditors and the total recognised amount corresponding to secured or privileged creditors subscribing to the plan. For acceptance, a favourable vote of 75 per cent of third-party unsecured claims must be obtained if unsecured inter-company claims account for more than 25 per cent of unsecured claims. Any such plan, with the validation of the court, will become binding on all creditors and the insolvency proceeding will be considered as final and concluded.
One significant problem with the statute is that there are no provisions allowing qualified majorities to impose a plan on any recalcitrant participant in regard to secured creditors, although there are different largely untested theories as to how such imposition may be accomplished.xiii Key procedural events
The key procedural events, in summary – and in theory – are as follows (approximate terms for their completion are in parentheses).Conciliatory stage
- acceptance of filing (by day 10);
- appointment of an examiner (by day 21);
- judgment declaring insolvency (by day 80);
- appointment of conciliator (by day 85);
- judgment recognising creditors and establishing preferences (by day 145); and
- restructuring agreement (by day 365); if not, bankruptcy is declared (on day 365, at the latest).
The bankruptcy or liquidation stage may begin earlier, if requested at any time by the debtor or if the conciliator determines that it will be impossible to reach agreement in respect of a restructuring agreement. Creditors may demand that the concurso begin at the bankruptcy stage, but it is extremely unlikely that any such demand will prevail. Once the bankruptcy stage is declared, a receiver is appointed, which may be the same person who acted as conciliator (by day five of the declaration); the receiver takes over possession of the enterprise and its management (by day 20); the receiver prepares and delivers liquidation balance sheets and inventories (by day 75); the individual assets or the enterprise as a whole are slated for the sale and notices are sent out to potential bidders (by day 135); asset sales begin (the general rule is to conclude liquidation by day 180); and payment to recognised creditors, subject to the preference of labour and, thereafter, secured creditors and taxing authorities, will begin as soon as practicable. In practice, very few cases have reached this stage, and save for only one case, they have all failed to adhere to the time frames set forth by the Law, missing the mark by many years.xiv Duties of directors
The Concurso Law includes a regime for director liability for all business entities, which could have an impact on the manner in which directors behave in the imminence of insolvency and the way in which these issues are addressed by the courts.
Disinterested directors are protected from liability under 'business judgement' provisions, based on the presumption that directors have acted on an informed, good faith basis, on the belief that the action taken was an adequate alternative, if based upon reliance on management and the advice of the corporation's external auditors or legal and financial advisers.
It is the view of the author that as a legal matter, directors and officers must manage an insolvent company and maximise its value for the benefit of all its stakeholders. The focus should be on maximising the value of the enterprise, rather than attempting to maximise recoveries for any particular constituency.