Eligibility and Commencement Standards for Bankruptcy in Mexico

The Mexican Insolvency Law establishes a comprehensive framework for determining which entities are subject to bankruptcy protection, and establishes clear and specific standards for the commencement of an insolvency case.

Eligibility

The framework for determining which entities are subject to bankruptcy protection is crucial as it defines the scope of the law's application and ensures that the insolvency regime is appropriately targeted.

Included Merchant

At its core, the law primarily applies to "merchants." In the Mexican legal context, a merchant is defined in two ways. For natural persons, a merchant is someone who has the legal capacity to engage in acts of commerce and does so as part of their ordinary and customary occupation. For entities, those formed pursuant to commercial laws are considered merchants. This the estate of a trust devoted to an entrepreneurial pursuit.

Excluded Merchants

Small merchants (those whose total outstanding debts do not exceed certain statutory limits), and state-owned enterprises that are not formed as commercial companies are exempt from the application of the Insolvency Law.

Foreign Merchants

The law also addresses the case of branches of foreign debtors. While these branches are subject to the Insolvency Law, its application is limited to the assets located in Mexico and claims held by creditors for operations with those branches.

Corporate Groups

Notably, the law has limited provisions for dealing with corporate groups. While it doesn't recognize the principle of substantive consolidation (treating separate legal entities as one for insolvency purposes), it does provide for some level of procedural consolidation. Insolvency proceedings of affiliates can be jointly administered by the same courts, albeit under different dockets. This approach aims to increase efficiency in dealing with related insolvencies while maintaining the legal separation of entities.

Commencement Standards

The Mexican Insolvency Law establishes clear and specific standards for the commencement of an insolvency case, centered around the concept of a debtor's inability to meet its payment obligations. These standards are crucial as they determine when a debtor can be declared bankrupt, or en concurso, triggering the formal insolvency process.

Cessation of Payments

The fundamental criterion for commencing insolvency proceedings is that a debtor has ceased, or it is imminent that it will cease, paying its debts as they become due. This broad principle is then refined through more specific tests to provide clarity and objectivity in determining when a debtor meets this standard.

The law establishes two primary indicators that a debtor has "generally ceased paying debts when due." The first is the failure of a debtor to comply with its payment obligations in respect of two or more creditors. This requirement ensures that the insolvency is not just a dispute with a single creditor but a more general inability to meet obligations.

The second indicator involves two conditions that must both be met:

• Thirtyfive percent or more of the debtor's outstanding liabilities are 30 days past due.
• The debtor has insufficient liquid assets and receivables to support at least 80 percent of its obligations which are due and payable.

These specific thresholds provide a clear, quantitative basis for determining insolvency, reducing ambiguity and potential disputes over whether a debtor meets the commencement standard.

Imminence

Importantly, the law also provides for the concept of imminent insolvency. A debtor can petition for concurso if it declares under oath that it will inevitably fall into either of the two conditions mentioned above within the next 90 days. This benefit allows proactive action by debtors who foresee financial distress, potentially increasing the chances of successful reorganization.

Presumptions

The law also establishes certain rebuttable presumptions of insolvency. These include insufficiency of assets available for attachment or a payment default with respect to two or more creditors. These presumptions can simplify the process of proving insolvency in clear-cut cases.

Asymmetry

Different parties have different standards for initiating insolvency proceedings. A debtor can petition for concurso if any of the two tests are met or if imminent insolvency is declared. On the other hand, a creditor or the Office of the Attorney General can demand the concurso only if both tests are met. This difference reflects a balance between allowing debtors to seek protection early and preventing creditors from prematurely forcing a debtor into insolvency proceedings.

Conclusions

Eligibility criteria under the Mexican Insolvency Law reflect a nuanced approach to defining its scope. By primarily focusing on merchants but including certain non-merchants, excluding small merchants and specific state entities, and providing for the treatment of foreign branches and corporate groups, the law strives to create a comprehensive yet flexible framework. This framework aims to address insolvency issues across a wide range of economic actors while recognizing the unique circumstances of different types of entities. The result is a system that can adapt to the diverse landscape of business and commerce in Mexico, providing a structured approach to insolvency proceedings for eligible entities while acknowledging the need for different treatment in certain cases.

Commencement standards under the Mexican Insolvency Law provide a clear and objective framework for determining when insolvency proceedings can begin. By combining broad principles with specific quantitative tests, presumptions, and the concept of imminent insolvency, the law strikes a balance between flexibility and certainty. This approach aims to ensure that the insolvency regime is accessible to debtors in genuine financial distress while protecting against potential abuse of the system. The differentiated standards for debtors and creditors further refine this balance, recognizing the different perspectives and interests of these parties in the insolvency process.

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