According to the Commercial Insolvency Law in México, the Bankruptcy Court is the “director” of the proceeding, and has all the powers and attributions necessary to achieve the objectives of the proceeding which consist – in the conciliatory stage – of the preservation, operation, and rehabilitation of the company, and, in the case a reorganization agreement cannot be reached – in the liquidation stage – the sale of all the company’s goods to pay its debts.
The Bankruptcy Judge is in charge of all judicial decisions (from the admission of the proceeding to its termination), including: the recognition of all the company’s debts (labor credits, tax credits, privileged credits, etcetera), the granting of precautionary measures to protect the feasibility of the company’s business, approval of the reorganization agreement signed by and between the company and its creditors, analysis of the validity of the transactions allegedly performed to defraud creditors, the ruling regarding the dispossession of certain goods from the company’s estate, the ruling regarding the appeals filed by the parties, and the supervision of the performance of the visitor, conciliator, and liquidator, among many other functions.
In addition to the aforementioned attributions, there is significant debate regarding the role of the Court concerning “extra-judicial” decisions, for instance: management of the case, preservation of the company’s value, request of documents, referral of the parties to mediation, the promotion of transparency between parties, and, since the company’s interest in some situations will oppose the interests of its creditors’, it is also the Court’s responsibility to navigate the balance of such interests.
2. The “judicial” role of the Bankruptcy Court.
As mentioned before, the Bankruptcy Court is the “leader” of the bankruptcy proceeding, and in that capacity, it is in charge of processing the bankruptcy from the case’s admission to its conclusion. This role includes:
a) Admission of the complaint.
Once the Bankruptcy Judge receives the motion for bankruptcy filed by the company or its creditors, the Court may decide whether there is a “presumption” that the company is indeed in a state of insolvency, and admit or dismiss the complaint.
The Court will consider the visitor’s opinion (a Certified Public Accountant appointed by the IFECOM) as well as the parties’ evidence and arguments, and issue a resolution declaring the company as insolvent, ordering the opening of the conciliation stage (185 days).
b) Precautionary measures.
Following the admission of the bankruptcy motion, the Court will dictate – if necessary – all the preemptive or precautionary measures needed to conserve the estate, protect the parties’ rights, procure the conservation and security of the goods, and in general maintain the viability and operation of the company’s business.
Several of the precautionary measures foreseen by the CIL include: (i) prohibition of the company’s payment of expired debts; (ii) the halt of enforcement proceedings against the company’s properties and rights; (iii) prohibition of the company from carrying out operations of the sale of its assets; (iv) seizure of assets; (v) intervention of the company’s administration; (vi) prohibition of transfers of resources in favor of third parties; and (vii) the restriction of the company’s representative to leave his place of residence, among others.
c) Recognition of the company’s liabilities.
The Bankruptcy Court is in charge of the recognition and acknowledgment of all debts. In other words, the Court will resolve any and all controversies regarding the amount, ranking and priority of all debts, including tax credits, labor credits, common credits, and subordinated credits, etcetera.
d) Approval of the reorganization agreement.
The Bankruptcy Court may grant an extension of the conciliation period (which cannot exceed 365 days), if it is requested by the conciliator, the company, or a certain number of creditors. Once a settlement agreement is entered into by the company and its creditors, the Court is in charge of verifying the validity of the agreement such that it fulfills the requirements prescribed by the Bankruptcy Law, and its clauses do not violate the public order.
e) Declaration of bankruptcy.
The Court is the only authority that can declare a company’s bankruptcy as a consequence of its failure to enter into a settlement agreement with its creditors. The company itself may also request to be declared bankrupt.
Once the Court declares the company bankrupt, it will request that the IFECOM appoint a liquidator, who is responsible for the sale of all the company’s goods and rights, as well as payment to creditors according to their ranking and priority.
Sale of the company’s goods must occur at a public auction, a process which will be supervised by the Court. Also, if the liquidator believes there is a better way to maximize the sale, this process needs to be sanctioned and approved by the Court.
f) Decision of ancillary proceedings.
The CIL establishes that the Court is also in charge of resolving all the ancillary proceedings that arise during the bankruptcy, for example: (i) dispossession of certain goods from the company’s estate, when the company does not own the definitive property, (ii) removal of the representative and manager of the company, (iii) anticipation of the termination of the bankruptcy proceeding, and (iv) the declaration of the invalidity of transactions carried out by the company in fraud of its creditors.
g) Other important judicial decisions.
The Bankruptcy Court is in charge of authorizing certain acts in which the specialists (conciliator or receiver) intervene, or acts that the company performs itself by way of its representatives.
DIP financing. The Court authorizes the granting of new credits or loans, as well as the granting of guarantees.
Intervenor’s appointment. The Judge approves the designation of intervenor(s) made by any creditor or group of creditors which represent at least 10% of the company’s total liabilities.
Closing of the company’s business or offices. The Bankruptcy Court, with the previous requirement of the conciliator, may order the shutdown of the company’s premises and offices, which can be total or partial, temporary or definitely.
Increase of the capital of the company. If in the reorganization agreement, an increase in the company’s capital and shares is proposed, the Judge will notify shareholders of such proposal so they may exercise their right of preference over any third party. If the shareholders do not exercise this right, the Judge will authorize the capital and shares increase.
Recognition of foreign proceedings. The Judge will recognize any foreign proceeding governed by a bankruptcy or insolvency law that causes all the company’s goods and businesses to be controlled and supervised by a foreign Court.
3. The “extra-judicial” role of the Bankruptcy Court.
Besides the functions that a Bankruptcy Court performs as a jurisdictional authority, the Court also plays a crucial role in the conservation of the company, management of the case, and gathering all the parties involved in the proceeding. For instance:
- Act with celerity. The Bankruptcy Judge should make its decisions with celerity, so the bankruptcy proceeding concludes as soon as possible and the company can operate its business again. If a bankruptcy proceeding takes 3 to 4 years, even if a reorganization agreement is reached, the company will not be able to continue with its normal course of business.
- Preserve the value of the company and the parties. The Bankruptcy Court must attempt to preserve the business value and relationship between the company and its creditors. Inevitably, a company which takes 3 to 4 years to get through a bankruptcy proceeding will see its assets depreciate, as well as its image and reputation.
- Promote transparency between the parties. The Bankruptcy Judge must promote transparency and conciliation between the parties, requiring them to produce information and documentation, as is done in jurisdictions such as the United States of America, Canada, Luxemburg and Malta, among others.
- Refer and seek mediation between the parties. The Bankruptcy Judge must be authorized to refer the parties to an experienced mediator, with knowledge of the company’s sector or industry. Direct mediation between parties tends to more quickly resolve difficult cases.
These activities comprise the “full management of the case,” which, from our point of view, yields the most success, as the role of the Bankruptcy Court goes beyond simple judicial decisions and basic application of the Law to include a more well-rounded approach.