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

Recognition and treatment of claims

As part of the conciliation phase of any concurso mercantil, the court will be required to issue a resolution recognizing the claims of the creditors against the debtor and their respective priority. To the extent the concurso is commenced directly as a liquidation or moves to liquidation before recognition of claims is finalized, recognition of claims proceedings will continue beyond conciliation and into bankruptcy (as the same is a pre-requisite to liquidation given that only recognized creditors may be paid out of the estate). Pursuant to this resolution, creditors can be categorized in any of five categories:

(i) claims against the estate (which include certain labor claims, administration and other expenses, obligations incurred after the Concurso Order date (either approved by the mediator or approved directly by him/her) and fees of the business reorganization specialists);

(ii) singularly privileged creditors (applicable only to reorganization of individuals as they refer to death and illness related expenses);

(iii) secured creditors (holding an in rem security interest);

(iv) creditors with special privilege, and

(v) unsecured (common) creditors.

The MBRA (Mexican Business Reorganization Act –?Ley de Concursos Mercantiles) provides an absolute priority rule stating that no creditor of any given category can be paid until all claims recognized as having a higher category have been paid in full.

Generally, secured creditors have an absolute priority to be paid with the proceeds of their collateral except that certain labor and tax claims (and death and illness expenses in the case of individuals), to the extent the other assets of the estate (i.e., assets not subject to a lien in favor of creditors) are not sufficient to pay such claims, have priority over secured claims even with respect to the proceeds of such collateral. Claims against the estate arising out of maintenance and conservation expenses of such collateral would also have priority over such secured creditors.

Currency of claims

Upon the effectiveness of a Concurso Order: (i) unsecured peso debt is converted into inflationary linked units known as Unidades de Inversión (UDIs) and ceases to accrue interest, (ii) unsecured debt denominated in other currency is converted into pesos and then into UDIs, and ceases to accrue interest, and (iii) secured debt remains in its original currency and continues to bear ordinary interest as provided in the relevant agreement, up to the value of the collateral.

Suspension of foreclosure proceedings

From the date in which the Concurso Order is entered (or before if the court hearing the case grants injunctive relief during the performance of the fact- finding visit described above) and until the conciliation stage concludes, any and all foreclosure proceedings, attachments, injunctions or similar actions on or upon the debtor’s properties and/or rights are suspended. This does not limit the ability of the creditors to bring action against the debtor and preserve their rights, but any proceedings so commenced will have to be suspended before reaching a foreclosure stage.

Reorganization Plan

An agreement among the debtor and its creditors (a “Convenio Concursal”) is the only way to lift the concurso mercantil status as declared in the Concurso Order and therefore stop the proceedings from moving to the bankruptcy stage. The MBRA provides specific creditor voting rules for the effectiveness of the Convenio Concursal.

Additionally, the MBRA sets forth classes of creditors which are statutorily unimpaired in the sense that the Convenio Concursal cannot provide for payment of less than 100% of their claims (unless of course they consent otherwise).

If the debtor is unable to reach an agreement with its creditors prior to the expiration of the applicable period, or any of its two possible extensions, if any, or if in the opinion of the conciliador the achievement of such agreement becomes impossible, the court will declare the debtor in bankruptcy.