Legal considerations regarding reorganization and bankruptcy rules in Mexico – Part I

Insolvency proceedings in Mexico are governed by the Ley de Concursos Mercantiles (Mexican Business Reorganization Act, or “MBRA”). The MBRA, differently from former pieces of legislation on insolvency matters, provides one unique procedure for debtors in financial distress (the concurso mercantil) which consists of two separate and generally successive stages: conciliation (or reorganization) and bankruptcy.

The objective of the conciliation stage is to preserve the business of a person declared in?concurso mercantil?through the negotiation and execution of an agreement with its creditors. The conciliation phase is aimed, among others, to provide distressed debtors with means to emerge financially stronger from?concurso mercantil. On the other hand, the objective of bankruptcy is to sell the assets of the estate to pay the creditors pursuant to the priority afforded by the MBRA to their respective claims.

Declaration of?concurso mercantil?can be requested directly by the debtor, by any of its creditors or by the attorney general (ministerio público). If an involuntary petition is filed by a creditor or the attorney general, the concurso proceedings must commence as a reorganization (conciliation) whereas if the concurso is declared pursuant to a voluntary filing by the debtor, proceedings may move directly to liquidation (bankruptcy) if so requested by the debtor.

Contrary to what we understand to be the case under the U.S. Bankruptcy Code, a decision of a debtor to request its declaration under concurso mercantil, unless its by-laws specifically provide otherwise, does not require prior shareholder or board approval; any person with sufficient authority pursuant to a power of attorney of the debtor can validly file for such declaration.

Filing for Relief

The subject matter of the MBRA is the business reorganization or orderly liquidation of the assets of a merchant in distress. “Merchant” is the term of art of Mexican law which identifies an individual that engages in commerce and makes of it its main occupation and a legal entity chartered pursuant to Mexican commercial statutes or which engages in commerce pursuing profits. Accordingly, where the common debtor is a consumer or a non-for-profit corporation the insolvency proceedings are governed by the applicable civil code and the relevant proceedings heard by civil (State) courts (whereas concursos mercantiles are subject matter jurisdiction of federal courts).

Additionally, other persons and estates may also qualify as debtors under the MBRA, such as estates of individuals, general partners of limited liability partnerships, state-owned companies (to the extent organized as commercial companies pursuant to applicable Mexican laws) and, under certain circumstances, merchants who have ceased operations.

In order to qualify as a debtor under the MBRA and therefore be subject to the relief afforded thereunder, a two-tiered test must be satisfied. First, the debtor must have ceased payments and second, the debtor must meet a twofold (as it encompasses the review of both assets and liabilities) balance sheet test as explained below.

As to the first tier of the insolvency test, the MBRA requires that the debtor has actually or constructively defaulted on its payment obligations generally. A general default is deemed to occur if the debtor is in default with respect to at least two creditors and the debtor satisfies the balance sheet test explained below.

The second tier, on the other hand, is a balance sheet test pursuant to which the debtor qualifies for relief under the MBRA if: (i) its payment obligations due and outstanding for more than thirty (30) days represent at least thirty five per- cent of such person’s aggregate indebtedness as of the date of filing for concurso mercantil, and (ii) its cash and cash equivalents as of such date are not enough to pay at least eighty per-cent of its outstanding obligations as of that same date.

The MBRA applies the foregoing test differently depending on whether the filing for relief is made by the debtor or its creditors. In the latter case, both ends of the balance sheet test must be satisfied (i.e. the debtor must carry outstanding obligations due for more than 30 days and lack cash and cash equivalents in the aforementioned percentages) whereas in the first case only one of such standards needs to be satisfied (i.e. the debtor must at least either carry unpaid obligations due for more than 30 days or lack cash and cash equivalents, in both cases pursuant to the percentages explained above).