Introduction

n May 12, 2000, Mexico's then-President Ernesto Zedillo approved a new national insolvency statute passed by Mexico's Congress in December 1999. The new statute, titled "Ley de Concursos Mercantiles,"¹ repeals Mexico's "Ley de Quiebras y Suspension de Pagos"² enacted on April 20, 1943, and any other laws that may oppose the provisions of the new statute. The Law of Commercial Insolvency (the Law) became effective on May 13, 2000, operates prospectively and applies only to cases filed after the effective date of the Law. Cases pending under the old Bankruptcy and Suspension of Payments Law will be decided pursuant to that law.

The stated general purpose of the Law is to protect the public interest by regulating insolvency proceedings to facilitate the preservation of businesses that are insolvent, or at risk of insolvency but viable, and their creditors.³ The Law modernizes Mexico's insolvency laws governing domestic cases, incorporates virtually all the provisions of the United Nations Commission on International Trade (UNCITRAL) Model Law on Cross-border Insolvency for the resolution of cross-border cases, and creates a quasi-judicial agency to oversee the administration of insolvency cases.

Further, the Law clarifies and expands the powers and jurisdiction of bankruptcy judges and the officers of the estate in managing bankruptcy cases; it prescribes, with rigorous details, the substance of the evidence that must be presented to the court and shared with the parties to attain fairness in the administration of bankruptcy cases, and methodically sets forth the rules, form of process and the practice and procedure governing domestic and cross-border cases. Although there is room for further reform, Mexico's Congress managed to harmonize the foregoing attainment with little or no effect on the substantive rights of the affected parties.⁴

The text of the Law reflects the Mexican Congress's recognized practice of scrupulous adherence to procedural formalities. But this time, the language is carefully tailored to reveal the Congress's painstaking effort to develop a legislative framework that would, in practical effect, determine the rights of local and foreign parties and the appurtenant substantive issues in an adequate, fair and efficient fashion. This article will provide readers with an overview of the provisions of the Law that might be relevant and, hence, of interest to the international insolvency community.

Jurisdiction

Bankruptcy cases are in Mexico's federal court system. The federal district courts have original and exclusive jurisdiction over the adjudication of insolvency proceedings,⁵ to the extent that all cases must be filed before the district judge presiding where the debtor has its domicile.⁶ The Law grants broad express and discretionary powers to the bankruptcy judge to handle matters related to insolvency cases. Further, the judge is responsible for effecting service of virtually all documents submitted by the parties to the court in connection with the case, and for providing all notices in the case. The decisions of the bankruptcy judge are appealable to the Federal Court of Appeals.

Federal Institute of Insolvency Specialists

The Law⁷ creates the "Instituto Federal de Especialistas de Concursos Mercantiles"⁸ as an autonomous branch of the recently established Federal Judicial Council,⁹ and is designed to act as the "watchdog" of bankruptcy cases. The Institute, among other things, appoints, supervises and removes—for cause—the officers of the bankruptcy estate, and prescribes the forms of process in bankruptcy cases. The Institute is supervised by the Federal Judicial Council under a multi-disciplinary board of directors that includes the Institute's director and four other members also appointed by the Federal Judicial Council. The Law expressly requires that the five directors be Mexican citizens, independent from each other, and have expertise in the areas of business administration, accounting, economics, finances or law.¹⁰ The chair of the board serves for a period of six years, while the remaining members serve staggered eight-year terms.

The Debtor

The Law uses the Spanish word "comerciante"¹¹ to refer to a bankruptcy debtor. By reference to Mexico's Code of Commerce, a debtor may be a natural or legal person engaged in trading, commerce or any lawful business activities whose debts have been incurred for commercial or business purposes.¹² Thus, entrepreneurs, trusts, partnerships,¹³ corporations, foreign company branches, credit institutions,¹⁴ incorporated governmental units¹⁵ and the affiliates of all of the foregoing are eligible to be debtors under the Law. "Small debtors"¹⁶ may only voluntarily avail themselves of the protections afforded by the Law. The Law expressly excludes insurance companies, surety companies and unincorporated governmental enterprises as eligible debtors. Such industries will continue to be regulated by their special insolvency regimes.¹⁷

The Officers of the Estate

The examiner, conciliator and liquidating trustee have the broad duties and powers expressly conferred upon them under the Law.¹⁸ An examiner is appointed in all cases, as a matter of law and at the expense of the estate, for the purpose of examining the debtor's financial affairs and condition. The conciliator is appointed only in a conciliation case, at the expense of the estate, to oversee the operations and financial affairs of the debtor-in-possession (DIP), and facilitate the negotiation and implementation of a plan of reorganization. The intervener¹⁹ may be appointed in any case, at the request of any creditor or group of creditors collectively holding at least 10 percent in amount of the total claims listed in the preliminary list submitted to the judge by the conciliator, at the expense of the hiring creditors.²⁰ The intervener represents the interests of the secured and unsecured creditors, and monitors the actions of the trustee, the conciliator and the debtor in the administration of the case. There may be more than one intervener appointed in a case. The trustee is appointed only in a straight liquidation bankruptcy to identify, marshal and liquidate the assets of the estate for distribution to creditors. Typically, the conciliator is appointed as the liquidating trustee when the reorganization case is converted to a straight liquidation case.

Once appointed, an officer of the estate—with the bankruptcy judge's approval—may employ, also at the expense of the estate, any assistants necessary to discharge, without delegating, his duties.²¹ The examiner, conciliator and trustee must file periodic work reports with the bankruptcy judge, who then serves the work reports on the debtor, intervener, creditors and any interested parties.²² Further, the officers of the estate are liable to the debtor, interveners and creditors for their acts and the acts of their assistants and for any damage caused in connection with the discharge of their duties and the unauthorized disclosure of confidential information known by virtue of their role in the case.²³ The judge may sanction or replace the officer in order to avoid harm or waste to the estate.

Commencement of a Case

A debtor may file a voluntary bankruptcy petition or be the subject of an involuntary petition filed by its creditors or the Public Ministry.²⁴ Both a voluntary and an involuntary bankruptcy case under the Law may be analogized to a civil suit requesting that an order for relief under the Law be granted. A bankruptcy petition is first lodged with the federal district court. If it meets the initial filing requirements or any deficiency is promptly cured, then the bankruptcy judge "admits" the petition for filing and sets a hearing, usually not later than 10 days from the filing date, to determine whether the request for bankruptcy relief should be granted. Within three days from the date in which the judge provides his notice to the petitioner that the petition has been admitted, the petitioner must guarantee the payment of the examiner's fees to avoid dismissal of the petition.

One day after the bankruptcy petition is filed, the judge transmits a copy of it to the Institute, directing the Institute to appoint a qualified examiner within the following five days.²⁵ The appointment of the examiner is confirmed by the judge prior to the initial hearing on the petition. The examiner immediately visits the debtor's domicile to audit the debtor's material and electronic books and records to determine whether the debtor is insolvent within the meaning of the Law.

Insolvency

1. Actual Insolvency. A debtor is insolvent if it incurs a generalized default of its payment obligations to two or more of its creditors, and (i) of these obligations, those that are at least 30 days past due represent 35 percent or more of all of the debtor's obligations on the date the bankruptcy petition is filed, and (ii) the debtor lacks sufficient assets to satisfy at least 80 percent of the obligations that came due on the petition date.²⁶
2. Presumption of Insolvency. If some of the following are present, the debtor is presumed to have incurred a generalized default of its obligations if it: (i) lacks or has insufficient assets upon which to execute a judgment; (ii) defaults in the payment of its obligations to two or more of its creditors; (iii) is absent or absconds without leaving substitute management to oversee the operations of the business or shuts down its business operations; (iv) uses deceitful, fraudulent or false practices to deal with or breach its obligations; (v) breaches its monetary obligations under its plan of reorganization; and (vi) acts in any other similar manner.

Unless extended for cause, within 15 days from the date the audit began, the examiner must file his report with the court and suggest any provisional relief that the judge should grant during the "gap period"²⁷ in order to preserve the debtor's assets.²⁸ The debtor, creditors and other interested parties will then have 10 days to respond to the report of the examiner. The judge, without a hearing, will issue his decision concerning the petition for relief five days thereafter.²⁹

If the bankruptcy petition is granted, the order³⁰ will, among other things, (i) direct the Institute to appoint a conciliator within five days if the case is a reorganization, or a trustee if the case is a straight liquidation; (ii) direct the debtor to turn over its books and records to the conciliator and to cooperate with him and the intervener; (iii) direct the debtor to turn over the keys to its business to the trustee in a liquidation case and to cooperate with him and the intervener; (iv) suspend payment of all pre-petition debts, except those debts that are essential to the operation of the debtor;³¹ (v) suspend all execution or foreclosure proceedings against the debtor and its assets, except execution to enforce a judgment in favor of an employee or a taxing authority;³² and (vi) direct the conciliator to publish notice of the order, record the order with the public registrar and begin the claim recognition process. The following day, the judge will serve a notice of commencement of case on the debtor, creditors and interested parties.³³

Property of the Estate

All property to which the debtor holds "definitive and irrevocable legal title" is property of the estate, except the debtor's "inalienable rights and assets."³⁴ Assets to which the debtor holds only equitable title, such as real estate, assets held in trust or for the benefit of a third party, money reserved for unpaid tax assessments, and assets simply in the debtor's possession and control are not property of the estate.³⁵

No Automatic Stay

The filing of a bankruptcy petition does not provide an automatic stay of any act or action against the debtor or the debtor's assets. It takes at least 15 days³⁶ after a petition is filed for the bankruptcy judge to enter an order disposing of the petition. Until such time as an order for relief is entered, a debtor can continue to operate its business and dispose of property as though a petition had not been filed. This may be detrimental to creditors, particularly if the debtor is dishonest, and may dissipate its assets.³⁷ Alternatively, an honest debtor may be forced to lose a viable business or cease its business operations during this gap period if one or more creditors levy on its assets. To ameliorate this problem, the bankruptcy judge can, at the request of the debtor, creditors or a party in interest and without notice and a hearing, grant any provisional relief that is necessary or appropriate to preserve the property of the estate.³⁸

However, once the petition for bankruptcy relief is granted, until the conclusion of the case, all litigation, execution and foreclosure actions are automatically stayed, except for probate³⁹ and labor⁴⁰ litigation.⁴¹

Allowance of Claims

Creditors must file their proofs of claim with the court within 20 days after the last day of publication of the notice of commencement of case.⁴² The conciliator must file with the court a preliminary list of claims that should be allowed and classified within 30 days after the last day of publication of the notice of commencement of case.⁴³ The bankruptcy judge then serves the list on the debtor and the creditors, who then have five days to file any objections to claims. Ten days later, the conciliator must file his final list of allowable claims, and the bankruptcy judge will, five days later, issue his order setting forth the allowance, classification and priority of claims.⁴⁴ The next day, the order concerning allowance of claims is published in the Judicial Journal or displayed in the courthouse. This order is final and appealable.

Footnotes

¹ Law of Commercial Insolvency. Return to article

² Bankruptcy and Suspension of Payments Law. Return to article

³ Article 1. Return to article

⁴ Interestingly, the burden of proof on the issues presented by a bankruptcy filing is, in effect, shared by the petitioner, the Institute, the officers of the estate including a foreign representative, and the bankruptcy judge. All relevant evidence must be presented in writing to the judge, who then distributes it among the affected parties in the case. The Law generally refers to documents and computer print-outs, and is silent about the admissibility of oral testimony. The need for suitable methods of proof still remains, since unforeseen contingencies and, hence, the need for fast and practical offers of proof, may arise. Return to article

⁵ See Articles 7 and 17. Return to article

⁶ Article 4, paragraph III of the Law defines the debtor's domicile as the debtor's place of incorporation or principal place of business. If the debtor is a branch of a foreign company, its domicile is the place where the branch has its principal establishment in the Mexican Republic. If the debtor is an individual, his domicile is his company's principal place of business and, if service cannot be effected at that address, then his permanent residence. Return to article

⁷ Title XIII. Return to article

⁸ Federal Institute of Insolvency Specialists. Return to article

⁹ The Federal Judicial Council is composed of Mexico's federal district courts, the circuit court of appeals and the Supreme Court. Return to article

¹⁰ Thus, the board should include a lawyer, turnaround specialist, accountant, economist, and a corporate officer such as a CEO, CFO or CIO. Return to article

¹¹ The word "comerciante" translated literally to English means "entrepreneur." Return to article

¹² Title I, Articles 4, 12-16. Return to article

¹³ The Law expressly provides that if the debtor is a general partnership, the general partners will be deemed for all purposes to also be in bankruptcy unless the general partners, from their own assets, satisfy the obligations of the partnership. However, the bankruptcy of one or more of the general partners of a partnership does not, by itself, effect the bankruptcy of the partnership. See Article 14. Return to article

¹⁴ Credit institutions (banks, finance companies, etc.) are eligible to be debtors only in straight liquidation cases, which may be commenced solely by the Bank Savings Protection Institute or the National Commission of Banking and Securities. Immediately upon the entry of the order granting the petition for bankruptcy, the credit institution must close its public offices and cease all public operations. See Title VIII, Articles 245-261. Return to article

¹⁵ See Title VIII, Articles 237-248. Return to article

¹⁶ Debtors with aggregate debts totaling up to 400,000 UDIs (Inversion Units, a fund rate initially published in the Official Diary of the Federation on April 1, 1995). Return to article

¹⁷ Note 4 of Law of Commercial Insolvency. Return to article

¹⁸ Article 54. Return to article

¹⁹ The Law was enacted partly in response to the demands of the Mexican banks that called for better protection of creditors' rights after the debacle of 1994. Ironically, the Law eliminates the role of the official creditors' committee as the representative of the creditors' body. The author questions the ability of a single individual to represent and advocate, effectively and fairly, the diverse interests of the creditors body, particularly in a multinational case. This is a change from Mexico's old Bankruptcy and Suspension of Payments Law, which arguably obliterates the creditors' collective leverage in the case. The absence of a local creditors' committee in a cross-border or multinational case also makes for a disjoint case administration to the extent that creditors in a foreign jurisdiction will be allowed to organize into committees, while creditors participating in a Mexican case may be left to fend for themselves. One may hope that the Institute and the bankruptcy judge will actively look out for the interests of the creditors and enforce the safeguards provided by Mexico's Congress. Otherwise, the Law may become a filibuster for Mexican banks that might continue to show their mistrust of the Mexican courts' ability to protect their rights by continuing to restrict the public's access to credit. On the other hand, the Law may have positive implications for foreign banks and investors that may be ready to show confidence in Mexico's improved legal framework and judicial infrastructure with respect to the collection of their credits. In fact, the recent mergers and takeovers of Mexico's three largest banks by foreign (Spanish) banks reflect improved investor confidence in Mexico's financial market and should revitalize consumer and business lending in Mexico, which have been stagnant since the crisis of 1994. Return to article

²⁰ Article 62 et seq. Return to article

²¹ Article 55. Return to article

²² Article 59. Return to article

²³ Article 61. Return to article

²⁴ Article 9. Return to article

²⁵ Article 29. At the same time, the judge transmits a copy of the petition to the taxing authorities. Return to article

²⁶ Article 10. Return to article

²⁷ The period from the date the petition is filed through the date the judge decides the petition. Return to article

²⁸ The examiner may also challenge or confirm the nature of the provisional relief sought by the petitioner on the date the bankruptcy petition was lodged. Return to article

²⁹ Article 42 et seq. Return to article

³⁰ Article 43. Return to article

³¹ The debtor must inform the bankruptcy judge of the identity of these creditors within 24 hours. Return to article

³² Articles 65 and 69. Return to article

³³ Article 44. Return to article

³⁴ Article 70 et seq. Return to article

³⁵ Id. Return to article

³⁶ Conceivably 30 or more days if the petition is contested. See Article 26. See, also, Chapter III of Title I. Return to article

³⁷ Post-petition agreements executed by the debtor are void, and creditors that participate in such agreements lose their right to participate in the reorganization process. See Article 154. Return to article

³⁸ Article 26. Return to article

³⁹ Article 84. Return to article

⁴⁰ Article 68. Return to article

⁴¹ The entry of an order for relief does not stay the accrual of any tax assessment, including interest and penalties, made under other applicable law. However, the execution or any administrative proceedings on account of tax claims are suspended until the conclusion of the debtor's reorganization. If a plan of reorganization is confirmed, the penalties and charges assessed will be canceled. See Article 69. Return to article

⁴² Title IV. Return to article

⁴³ The conciliator may also include in the preliminary list any known claims not filed by the claimant. The conciliator must also annex to the list competent evidence to substantiate the claims, and include another list of claims that, in his opinion, should not be allowed. Return to article

⁴⁴ Claims under the Law are generally classified as (i) super-priority administrative claims—employee claims and expenses of preserving the estate including compensation to the fiduciaries of the estate (Art. 224), and medical and funeral expenses if the death of the debtor precedes the bankruptcy (Art. 218); (ii) secured claims (Art. 219); (iii) tax claims and employee claims arising more than two years before the bankruptcy filing (Art. 221); (iv) special privilege claims (paid in parity with secured claims or based on the date the claims arose) (Art. 220); and (v) general unsecured claims (Art. 222). Return to article