Fraudulent and Preferential Transfers

Fraudulent and Preferential Transfers

The Mexican Insolvency Law incorporates robust provisions to address fraudulent and preferential transfers, which are crucial for maintaining the integrity of the insolvency process and ensuring fair treatment of creditors. These provisions allow for the reversal or "clawback" of certain transactions made by the debtor prior to the insolvency declaration, effectively increasing the pool of assets available for distribution to creditors.

Per Se Fraudulent Transactions

The law distinguishes between two main categories of avoidable transactions. The first category involves transactions entered into before the insolvency, or concurso, declaration that knowingly defraud creditors. These can be set aside if the transaction is gratuitous (i.e., the debtor received no value in return) or, if not gratuitous, the third party involved shares the fraudulent intent. This provision targets deliberate attempts to move assets beyond the reach of creditors.

Cases of Constructive Fraud

The second category is more objective and relates to transactions carried out within a specific period before the insolvency declaration, known as the "retroactive period." Transactions within this period are presumed to be fraudulent to creditors and can be set aside. The standard retroactive period is 270 days prior to the concurso declaration. However, for transactions involving related parties, this period is doubled to 540 days, reflecting the higher risk of insider dealings. The courts may extend the retroactive period upon reasoned request, up to a maximum of three years.

The law provides a non-exhaustive list of transactions that are presumed fraudulent if carried out within the retroactive period. The items in the list may be grouped between those transactions that are rebuttably presumed fraudulent and those conclusively presumed fraudulent.

Rebuttable Presumption

The following transactions are presumed fraudulent, which allows for this presumption to be rebutted providing a degree of flexibility and fairness in the application of these provisions:

• Granting of collateral or additional collateral not originally contemplated in the transaction documents
• Payments-in-kind not agreed upon in the original transaction documents
• Certain related-party transactions

Conclusive Presumption

The following transactions are conclusively presumed to be fraudulent and, therefore, their avoidance may not be prevented on good faith grounds:

• Gratuitous transactions
• Transactions where the debtor pays a notoriously excessive consideration (or receives a notoriously lower consideration) than that of its counterpart
• Transactions on terms significantly different from prevailing market conditions
• Debt remission made by the debtor
• Payment of unmatured obligations

Advantages and Disadvantages

The ability to avoid these transactions serves several important purposes in the insolvency process. It helps to preserve the value of the debtor's estate by bringing back assets that were improperly transferred out. It also promotes equality among creditors by preventing some creditors from receiving preferential treatment in the lead-up to insolvency. Furthermore, it acts as a deterrent against fraudulent behavior by debtors and insiders who might otherwise be tempted to manipulate assets before an insolvency filing.

The application of these provisions can be complex and potentially contentious. Determining whether a transaction was truly fraudulent or preferential often requires careful investigation and analysis. Moreover, unwinding transactions can impact third parties who may have acted in good faith, creating potential conflicts that the court must navigate.

Conclusions

The framework for avoiding fraudulent and preferential transfers in the context of a Mexican concurso represents a critical tool for ensuring the fairness and effectiveness of the insolvency process. By allowing for the reversal of improper transactions, these provisions help to maximize the value of the debtor's estate for the benefit of all creditors, promote equality among creditors, and deter fraudulent behavior. While their application can be challenging, these provisions play a vital role in maintaining the integrity of the insolvency system and promoting confidence among creditors and other stakeholders.

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