Voluntary Insolvency Proceedings

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This is the fourth of five articles in the Financial Distress series:

1. Stages of Financial Distress ?
2. Sources of Liability in Financial Distress
3. Out-of-Court Restructuring Strategies
4. Voluntary Insolvency Proceedings
5. Do’s and Don'ts - Action Plan for Debtors in Financial Distress

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Voluntary insolvency proceedings in Mexico provide a structured legal framework for companies facing severe financial distress. While filing for insolvency is a significant step with potentially far-reaching consequences, it can offer important protections and opportunities for restructuring when other options have been exhausted. Understanding the key aspects of voluntary insolvency proceedings is crucial for companies considering this option.

When to File for Voluntary Insolvency

The decision to file for voluntary insolvency is complex and should be carefully considered. While there's no definitive consensus on the optimal timing, generally, filing for insolvency in Mexico may not be the first choice due to the associated costs, uncertainties, and impact on daily operations. However, there are situations where voluntary insolvency can be beneficial:

• To suspend payments of pre-petition debts
• To stay execution proceedings or lift garnishments/seizures of assets
• To reject onerous contracts
• To obtain specific injunctive relief from the courts

Additionally, a debtor, jointly with a majority of creditors, may file for prepack proceedings to make a reorganization plan broadly applicable, when it would otherwise be unfeasible to gather sufficient creditor support for the plan.

Eligibility Requirements

The Mexican Insolvency Law establishes specific criteria for determining when a debtor has ceased, in general, paying its debts as they become due. These commencement standards include:

• Failure to comply with payment obligations to two or more creditors, and
• Either:

A debtor may also commence insolvency proceedings if it declares under oath that it will inevitably fall into one of these situations within the next 90 days.

Key Benefits of Voluntary Insolvency

• Suspension of Payments: One of the most powerful tools provided by voluntary insolvency is the suspension of payments benefit. This legally suspends the enforcement of pre-commencement claims, allowing for an orderly reorganization of the debtor's affairs. The suspension covers all pre-commencement indebtedness, except for essential expenses for the ordinary course of business, labor-related payments, and tax claims.

• Stay of Execution: The stay of execution is another crucial benefit. Once a judgment declaring the debtor en concurso is entered, attachment and foreclosure on assets are stayed during the reorganization stage, with exceptions for privileged labor-related claims. This stay applies to all attachment and foreclosure processes concerning the debtor's assets, though secured creditors may still be able to foreclose on non-essential assets.

• Executory Contracts: Voluntary insolvency provides the debtor with the ability to reject executory contracts that are deemed onerous or unfavorable. This tool allows for the termination of contracts that may be hindering the company's financial recovery, an option that might not be available outside of insolvency proceedings.

• Other Relief: While the Insolvency Law doesn't provide for automatic relief upon filing, the debtor can request temporary measures to preserve assets pending the bankruptcy declaration. These measures may include prohibitions on making payments, stays on enforcement proceedings, enjoining the debtor from disposing of or encumbering assets, and asset seizures.

Prepackaged Insolvency Proceedings

A unique feature of the Mexican system is the option for prepackaged insolvency proceedings. This allows a debtor who has reached agreement with creditors representing a majority of its outstanding debt to file for insolvency with a proposed plan already in place. Benefits of this approach include:

• Avoiding the preliminary visit stage
• Allowing the debtor to request immediate injunctive relief
• No need to establish insolvency (only that it's imminent)
• Using the pre-agreed plan as the basis for reorganization

Filing Process and Requirements

To file for voluntary insolvency, the debtor must provide comprehensive information, including:

• A narrative describing the causes leading to cessation of payments
• Audited financial statements for the past three fiscal years
• Statement of affairs, assets and liabilities
• Preliminary proposals for restructuring plan and?
• A business conservation plan

Conclusions

Voluntary insolvency proceedings in Mexico offer a structured pathway for companies facing severe financial distress. While it comes with challenges and potential risks, it also provides significant benefits that can be crucial for a company's survival and eventual recovery. The option for prepackaged proceedings offers an additional tool for companies that have already made progress in negotiations with creditors.

However, the decision to file for voluntary insolvency should not be taken lightly. It requires careful consideration of the company's financial situation, the potential for recovery, and the implications for all stakeholders. Companies considering this option should seek expert legal and financial advice to navigate the complex requirements and maximize the benefits of the insolvency process.