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Mexicos New Insolvency Act Increasing Fairness and Efficiency in the Administration of Domestic and Cross-border Cases (Part II)

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Editor's Note: This is the second in a two-part series on Mexico's new bankruptcy law. Part I ran in the July/August 2000 issue.

Operative Cases

Under the Law, an insolvency proceeding consists of two successive stages identified as "conciliation" and "liquidation."45 The goal of a conciliation proceeding is to preserve the debtor's business as a going concern by negotiating and implementing a feasible plan of reorganization. Liquidation will occur if a conciliation fails and the case is converted, or if the bankruptcy petition sought relief under a liquidation case. The goal of a liquidation proceeding is to sell the debtor's assets to pay allowed claims.46

Conciliation47

If the case is a reorganization or conciliation case, the debtor will remain in possession of its assets and business and financial affairs under the supervision of the conciliator,48 unless removed at the request of the conciliator.49 The conciliation process may last 185 calendar days from the date of the last publication of the notice of commencement of case, unless (i) the conciliator or creditors holding two-thirds of allowed claims request an extension of up to 90 days, or (ii) the debtor and 90 percent of creditors holding allowed claims request an additional extension not in excess of 90 days. In any event, the reorganization case shall not last more than 365 calendar days.

Plan Confirmation

The plan of reorganization must be approved by the debtor and more than 50 percent of creditors holding allowed claims, including participating secured creditors.50 The plan is binding upon unsecured creditors who vote to reject the plan if it (i) defers payment of their claims, with accruing interest at the legal rate, for a period of time that does not exceed the minimum term accepted by 30 percent of the general unsecured creditors that voted to accept the plan, (ii) reduces their claim to an amount equal to the smallest sum accepted by 30 percent of the general unsecured creditors that voted to accept the plan, or (iii) provides a combination of debt reduction and payment deferral so long as the ensuing treatment of their claims is identical to the treatment received by 30 percent of the general unsecured creditors that voted to accept the plan. With respect to secured creditors that opt out of the reorganization process, these creditors may continue their foreclosure action, unless the plan provides for payment in full of the value of their liens, and any unsecured deficiency claim is treated like other similarly situated claims.

If the reorganization plan calls for a capital contribution, the conciliator informs the judge, who, in turn, notifies the debtor's equity holders in order to allow the equity-holders to exercise their preferential right of making the contribution within 15 calendar days.51 If the equity-holders fail to make the capital contribution within the prescribed 15-day period, the judge may authorize the contribution on the terms proposed by the conciliator.52

The bankruptcy judge will approve the conciliation plan if all the confirmation requirements are satisfied and confirmation would not violate public policy. Confirmation of the reorganization plan concludes the case, and the conciliator is ordered to cancel the public recordation of the declaration of bankruptcy.

Conversion or Dismissal

The conciliator can request the conversion of the reorganization case to a straight liquidation case or dismissal of the case based, among other things, on the debtor's lack of cooperation or inability to effectuate a plan of reorganization.53

Liquidation54

A liquidation case may be commenced (i) upon the debtor's request, (ii) upon the expiration of the conciliation period if a plan of reorganization has not been filed with the court, or (iii) upon the request of the conciliator on the grounds that the effective reorganization of the debtor is unlikely. In general, a liquidation bankruptcy case resembles a case under chapter 7 of the U.S. Bankruptcy Code. A salient distinction is that property acquired by the debtor during marriage at least two years prior to the commencement of the case, and the debtor's property or rights deemed inalienable under Mexican law, are exempt, and thus are not property of the estate.

Executory Contracts55

The entry of the order granting bankruptcy relief does not affect contracts entailing inalienable rights or assets.56 In general, however, the debtor must honor all pre-petition executory contracts, including personal service contracts, unless the conciliator objects. Upon request of the other party to the contract, the conciliator must announce, within 20 days, his intention with respect to the executory contract, or the other party may terminate the contract upon the expiration of the 20-day period by giving notice to the conciliator. The bankruptcy of the landlord or the tenant does not terminate a lease for real property. However, if the debtor is the tenant under a lease of real property, the conciliator may terminate the lease and pay the landlord a sum as set forth in the contract or equal to three months of rental payments.57

Fraudulent Transfers

Any transfer of property or an interest in property knowingly made by the debtor to a transferee (i) with the intent to defraud its creditors, (ii) within 270 days58 before the date of the declaration of bankruptcy, and (iii) not made for the benefit of the estate, is fraudulent and void, except if the transferee is a bona fide transferee.59

Fraudulent transfers include (i) gratuitous title conveyances, (ii) transfers made in exchange for inadequate consideration, (iii) transactions out of the ordinary course of business, (iv) write-offs, (v) payment of unmatured obligations and (vi) discounts. Any transfers made within the 270-day period preceding the declaration of bankruptcy to the debtor's spouse, relatives or a business entity in which such persons or entitities are officers or directors, or own, directly or indirectly, at least a 51 percent interest in the entity will be presumed to be fraudulent. If a transferee turns over to the estate the property fraudulently received, and any proceeds thereof, the transferee may file a proof of claim in the case.

Further, a debtor may be imprisoned for a term of one to nine years if it engages in criminal conduct that results in or aggravates its insolvency.60

Adjustment of Claims Payable in Foreign Currency

On the date the order granting the petition for relief is entered, unsecured claims payable in foreign currency will cease accruing interest, and the outstanding balance of principal and finance charges will be converted to Mexican pesos at the exchange rate published by the Bank of Mexico, then converted to UDIs.61 However, secured claims payable in foreign currency are not affected, except that the contract rate of interest will accrue up to the value of the collateral. Further, a secured creditor whose debt is undersecured as of the date of the declaration of bankruptcy may bifurcate its claim and, thus, have a secured claim to the extent of the value that the creditor assigns to its lien, and an unsecured claim for the remaining deficiency. The Law does not provide any guidance for the valuation of liens. Therefore, a secured creditor must take special care in valuing its lien, because upon bifurcation of its claim, the secured creditor will be required to surrender to the bankruptcy estate any excess value realized on the foreclosure of its lien.62 The adjustment of claims payable in foreign currency could have a significant impact on foreign creditors, depending on the exchange rate applicable on the date of the declaration of bankruptcy.

Cross-border Cases

Title XII of the Law codifies virtually all the provisions of the UNCITRAL Model Law. Title XII will govern cross-border and multinational court-supervised reorganization and liquidation cases filed or pending in Mexico, or in any other country with which Mexico does not have a treaty relationship for the reciprocal recognition or enforcement of foreign judgments. Title XII will enable Mexican courts to cooperate with bankruptcy courts in other countries to coordinate their respective administration in cross-border and multinational cases.

Thus, Title XII will (i) promote comity and cooperation between the Mexican courts and foreign courts; (ii) authorize local recognition and enforcement of judgments issued in connection with foreign insolvency proceedings; (iii) create a worldwide estate that should be administered and distributed as a global unit; (iv) grant foreign representatives direct access to the Mexican courts; (v) enable foreign creditors and parties in interest to initiate or participate in a Mexican bankruptcy case; (vi) afford due process to all creditors, wherever located, concerning any relief requested in the case; (vii) treat all creditors, local and foreign, equally, fairly and equitably; and (viii) preserve and maximize the going-concern value of the troubled business while a global solution is negotiated and implemented.

By being the first country to adopt the UNCITRAL Model Law, Mexico has set a remarkable example for both civil law countries and common law countries in making it possible to facilitate effective cross-border coordination and cooperation in the administration of insolvency cases. Mexico's increased international trade and investment63 will result in a greater number of businesses, with assets in more than one country, that are mismanaged into failure. To the extent that Title XII is fair and harmonized with the existing international legislative framework for managing and resolving cross-border insolvency cases, it should enhance the development of international trade and investment in Mexico. Because Title XII is designed to be an integral part of the Law, business professionals should use it as a risk-management tool when documenting cross-border deals involving Mexico to attempt to neutralize the risks of doing business in Mexico before there is failure.


Footnotes

45 Article 2. Return to article

46 Article 3. Return to article

47 Title V. Return to article

48 Articles 74 and 75. The conciliator, in turn, will have the input of the intervener if there is one in place. Return to article

49 Article 81. Return to article

50 See Title V. Employee and tax claimants are not allowed to vote on the plan. Return to article

51 Article 155. Return to article

52 Id. Return to article

53 Article 150. Return to article

54 Title VI. Return to article

55 Title III, Chapter V, Section II. Return to article

56 Article 91. Return to article

57 Article 106. Return to article

58 This cut-off date may be extended at the request of the conciliator, intervener or any creditor if the request is made prior to the date of the order allowing creditors' claims and establishing the priority of claims in the case. Return to article

59 Title III, Chapter VI. Return to article

60 See Title XI. Return to article

61 Article 89. Return to article

62 Id. Return to article

63 In the past year, Mexico signed free-trade agreements, similar to NAFTA, with the European Union and Israel. Mexico is in the process of negotiating similar trade agreements with Latin America and the Caribbean. Return to article

Journal Date: 
Friday, September 1, 2000

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