SECTION 1: Market overview
1.1 Please provide a brief overview of your jurisdiction's corporate insolvency and restructuring environment and its versatility in cross-border cases. Are there any significant current concerns/debates taking place in the market?
Mexico has endured its fair share of economic downturns, especially during the turbulent decade of the 1980's, the banking meltdown of 1995, and the financial calamities of 2007-2008, including the aftermath of an abuse of toxic derivative products by major corporates. All in all, it has been a jurisdiction in which negotiated, out-of-court solutions have been highly successful, with the participation of sophisticated lawyers, bankers and financial advisors. Prior to 2000, formal insolvency proceedings were uncommon and generally frowned upon, based on the fact that local courts, which were ill-equipped and basically ignorant of financial matters, delayed endless proceedings which literally lasted decades.
In 2000, the current insolvency statute, the Ley de Concursos Mercantiles (the Law) was enacted. It is a clearer statute, giving jurisdiction to the federal courts – although there are no specialised tribunals – and certainly an improvement on prior laws. Although initial cases were successful, it has become evident in recent years that Mexico has failed in advancing the efficient development of reliable and predictable proceedings.
The role of the mediator/facilitator during the insolvency proceedings, known as the conciliador, remains a key element in reaching successful conclusions.
1.2 What have been the key recent market trends and/or legal developments in the area that practitioners should be aware of?
Despite the proliferation of delaying tactics, a lack of interest of the Supreme Court in overseeing the development of functional insolvency practices, and the lack of efficiency of the administrative institute of the Judiciary in charge of supervising proceedings (known as the IFECOM), the recent concurso of Empresas ICA and subsidiaries, concluding the restructuring of $4 billion in liabilities in a record six months, has brought back some credibility to the process. It was structured as a pre-pack and included debtor-in-possession (DIP) financing, arranged as a pre-condition to filing.
Several controversial rulings in other cases, however, have placed a question mark on the very existence of the rule of law, and the prevalent use of questionable tactics have added to the ambiguity in concurso.
1.3 Please review any major (recent/current) restructuring cases or initiatives that are influencing activity or court decisions regarding insolvency and/or restructuring cases that have set precedents.
Among the more notorious decisions are:
- The Third and Ninth Court of Appeals in Civil Matters of the First Circuit have put into question the effectiveness of well-established structured financing transactions, whereby through a trust (fideicomiso) a company has sold future receivables or guaranteed payment obligations with such future receivables, in favour of a financial institution, by holding that if the debtor enters concurso, other provisions of public order come into play protecting broader interests replacing commercial considerations and laws, and thus all future receivables will become a part of the estate, true sales notwithstanding (cases arising in the concurso of Oceanografia).
- The Third of Appeals, two years after the exit from concurso of Corporación Geo, ruled, based on a provision of the Law found in the chapter of liquidation (quiebra), that a company cannot exit concurso with a plan, even if approved by an overwhelming majority, if there are any appeals pending (appeals may well take years to be concluded), which criteria, if generalised, will mean the return to endless and obscure procedures.
- In a case involving Abengoa, the Sixth Federal Court in Civil Matters of Mexico City ruled that notwithstanding that a duly approved auditor (visitador) confirmed that the company did not fall under the parameters and definitions of insolvency established in the Concurso Law, there are other higher interests which should be protected, and then proceeded to involuntarily declare the company in concurso as insolvent. There were other recent rulings principally sustained on arguments of protection of the human right to due process, which have added to the uncertainly as to the outcome and reliability of formal in court insolvency procedures.
Nevertheless, the decisions have been isolated and are being contested or have been overturned. Moreover, in a publicised matter (in Mexicana de Aviación), the Council of the Federal Judiciary took disciplinary action against a judge known for his creativity.
SECTION 2: Processes and procedures
2.1 What restructuring and insolvency processes are typically available for financially troubled debtors in your jurisdiction? Do groups of companies receive special treatment?
The restructuring practice in Mexico, in respect of corporate entities with significant assets and liabilities, continues to focus, with considerable success, on consensual, out-of-court workouts. Since the enactment of the Concurso Law, no more than 25 substantive cases have been brought before the courts
The Law provides for one sole insolvency proceeding (concurso mercantil), encompassing two successive phases: a conciliatory phase and bankruptcy. 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 a bankruptcy is to liquidate the business. Prior to a debtor being placed in concurso, the process includes a preliminary visit stage to verify whether the commencement standards have been met, unless a pre-pack is filed. Unfortunately, mandatory formats relating to the visit seem to be designed for an audit of the company and not for a targeted review of the balance sheet.
The conciliatory stage is designed to be completed in 185 calendar days in the best of cases, 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.
A business enterprise that is generally in default with respect to its payment obligations will be declared commercially insolvent. The debtor, any creditor or the Office of the Attorney General may file for insolvency.
The Law establishes precise rules that determine when a debtor is 'generally in default'. The principal indications 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% 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% of its obligations, which 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 Law to be facts that by themselves will result in a rebuttable presumption of insolvency.
As to groups of companies, amendments to the Law 2014 allow the procedural – not substantive – consolidation of proceedings, which was successfully tested in the recent Empresas ICA concurso.
2.2 What is the impact on creditors of a formal filing? Are contractual termination rights affected? Are security or individual enforcement actions stayed?
Once the initial judgment declares the debtor in an insolvency or concurso mercantil, the 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 Law are specifically stayed.
The debtor maintains the administration during the conciliatory stage, although the conciliador may request the court removal of the administration. With the express purpose of conserving the enterprise as a going concern within such stage, the conciliador is given broad powers to decide on the acceptance or rejection of contracts (within certain parameters), the contracting of new loans – and the sale of non-essential assets. In all cases, the conciliador must constantly report to the court every each payment to any supplier or person.
The Law clearly 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) will be maintained in their original currency, and will continue to accrue interest, but only to the extent of the value of the collateral.
The general concept of netting is recognised by the Law, which specifies that netting is mandatory, 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 derivatives, reportos (Mexican law-governed repurchases), securities lending structures and other equivalent transactions.
Mandatory netting is also recognised by the Law as an exception to the cherry-picking powers given to the conciliador.
2.3 Can a creditor or a class of creditors be crammed down?
Creditors of a class may be crammed down. Nevertheless, secured creditors are not obligated to follow an approved plan, having the right to enforce their security interest, although it is unclear as to how such concept would work with multiple creditors sharing the same security interest.
2.4 Is there a process or practice for facilitating the sale of a distressed debtor's assets or business?
The conciliador may file for judicial approval for the sale of assets, substantiating the reasons why a sale of certain assets of the borrower may benefit the estate and facilitate a restructuring plan. However, the consent of the creditors holding a security interest would be required.
Otherwise, once the procedural term of 365 day to conclude the conciliatory or workout stage lapses, the bankruptcy or liquidation of the business stage follows.
Once the bankruptcy stage is declared, a receiver or síndico is appointed, which may be the same person who acted as conciliador. Other steps follow within allotted time frames: the receiver will take over possession of the enterprise and management; the receiver must prepare and deliver liquidation balance sheets and inventories; the individual assets or the enterprise as a whole are thereafter slated for sale and notices are sent out to potential bidders; in the final stage, asset sales begin; 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, the few cases that have reached this stage, and save for only one, have all failed to adhere to the timeframes set forth by the Law, missing the mark by years.
2.5 What are the duties of directors of a company in financial difficulty?
The Law includes a regime for director liability for all business entities, which could have a significant 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.
Directors are protected from liability under 'business judgement' provisions, based on the presumption that directors have acted on an informed, good faith basis and 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 directors and officers must manage an insolvent company and maximise its value for the benefit of all of its stakeholders. The focus should be on maximising the value of the enterprise, rather than attempting to maximise recoveries for any particular constituency.
2.6 How can any of a debtor's transactions be challenged on insolvency?
The Law provides for a general rule as to the period when insolvency is presumed to have begun, which is 270 calendar days prior to the judgment declaring insolvency. Nevertheless, upon the reasoned request of the conciliador, the intervenors, 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.
2.7 What priority claims are there and is protection available for post-petition credit?
Post-petition credits that are approved by the conciliador and notified to the Court have an absolute preference in respect of the estate. The first major DIP financing was structured and implemented in the Empresas ICA case.
2.8 Are there any sectors or industries with their own or modified insolvency and restructuring regimes?
Amendments implemented in 2014 overhauled the whole bank resolution regime, and expunged it from the Concurso Law so that it is governed solely by the Credit Institutions Law.
SECTION 3: Cross-border cases
3.1 Can restructuring or insolvency proceedings be opened in respect of a foreign debtor?
The Law was intended to embrace the UNCITRAL Model Law on cross-border insolvency and international judicial cooperation. Mexican courts have sporadically recognised and given limited judicial assistance to foreign insolvency proceedings (provided that such proceedings do not contradict Mexican law), although there have been less than a handful of such cases. It is noted that the public policy Law includes substantial changes to the UNCITRAL Model Law that make the process defective because it focuses on channelling procedures through a conciliador, and thus basically imposes the need to file a full concurso proceeding in regard to any significant assets in Mexico.
Related to this topic, it has been more frequent for Mexican companies to file for protection in the bankruptcy courts of the US (mainly in the Southern District of New York) under Chapter 15, after the initiation of a concurso in Mexico, and certainly such courts have responded efficiently, recognising the concurso as the main proceeding. In the case of Vitro, however, the US Bankruptcy Court for the Northern District of Texas ruled against the acceptance of Vitro's formerly approved concurso plan as manifestly contrary to US public policy because it released non-filing guarantors. Courts in the US have stated that this public policy exception must be narrowly construed and is limited to the most fundamental policies of the US. The US Bankruptcy Court's decision was upheld in appeal, although the matter was finally settled before the case could have been heard by the US Supreme Court.
3.2 What recognition and assistance can be given to foreign insolvency or restructuring proceedings?
Practically, to the extent that a company being restructured in a main foreign proceeding has any place of business or establishment in Mexico, a full-blown concurso must be initiated. Thus, recognition and assistance has been the exception.
SECTION 4: Other material considerations
4.1 What other major stakeholders (eg governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
Organised labour, by initiating a strike, may shut down the business and indefinitely delay a concurso proceeding; violations to environmental laws and consumer protection statutes have derailed procedures in the past. On the other hand, in more complex cases, the Federal Government, through the Ministry of Finance, has been a positive factor, acting as a facilitator in support of preserving companies as ongoing concerns. From a statutory perspective, it may also provide significant tax relief further to a final restructuring plan.
SECTION 5: Outlook 2018
5.1 What are your predictions for the next 12 months in the corporate reorganisation and insolvency space and how do you expect legal practice to respond?
There is little expectation of any significant change to the status quo: advancement in the reliability of concurso does not seem to be a priority for the Government nor, for that matter, the legislative or judicial branches. The use of delaying tactics is expected to continue. Consensual restructurings will still be the preferred alternative. Changes may possibly occur in regard to the internal workings of the IFECOM.
|About the author|
Thomas S Heather
Thomas Heather has more than 40 years of experience in banking, restructuring, and mergers and acquisitions. Prior to returning to his current position as a result of the merger of Heather & Heather into Ritch Mueller Heather y Nicolau, SC, he was a partner in a major New York law firm, where he headed the Latin American insolvency and restructuring group, and Ritch Heather y Mueller in Mexico City, where he was the managing partner.
In Mexico and the US, Heather has published many articles and reviews on legal and financial topics, and has co-authored the treatise Regulation of Foreign Banks. He is a board member of several leading corporations and Mexico's second largest banks. Heather is a founding member of the International Insolvency Institute, of the American Bankruptcy Institute and a former member of the Mexican Institute of Insolvency Specialists (IFECOM), having acted as a conciliador in over 18 cases, as a liquidator or síndico, as well as lead counsel in hundreds of mayor restructurings throughout the many years of his career. He has lectured extensively and is a member of the advisory board of the Programme on International Financial Institutions of Harvard University.
Heather holds an LLM from the University of Texas at Austin and obtained his law degree from the Escuela Libre de Derecho.