The concursos law provides for a single insolvency proceeding known as concursos mercantil (concurso procedure). The concursos procedure consists of two main stages, conciliation stage and bankruptcy stage, each of them supervised by the Mexican Federal Institute of Specialists in Mercantile Insolvency and Bankruptcy Procedures (Instituto Federal de Especialistas de Concursos Mercantiles) (IFECOM).

Concursos law principles
The concursos law is based upon certain principles, mainly (i) all creditors of the same class shall be treated equally; (ii) all creditors of the debtor, whether domestic or foreign, shall have access to the concursos procedure, and shall collect in equal proportion (according to the class) from the assets located within the territorial jurisdiction of the court; (iii) if possible, the debtor’s operations should be preserved (avoiding the “chain bankruptcies” phenomenon, whereby the commercial bankruptcy of one company and its cessation of operations causes the commercial bankruptcy of its creditors); and (iv) all assets of the debtor shall be consolidated and its liabilities determined.

Conciliation stage
Immediately after an insolvency petition is filed and accepted by the court, the court must file a petition before the IFECOM for the appointment of a visitador (examiner). The examiner shall report to the court if the debtor is, in fact, insolvent (according to the measures under the concursos law) and, thus, is in one or more of the hypothesis established in the concursos law to be declared in concursos. If the Court resolves that the debtor is in fact legally insolvent, it shall issue a declaration of insolvency, the effect of which is the commencement of the conciliation stage. A debtor may be declared insolvent if it has generally failed to perform its obligations.

The declaration of insolvency shall include, among others, the retroactivity date (date to which the effects of the concurso procedure will be applied, known as the “hardening or look-back period”); a declaration that the conciliation stage has commenced; and instructions for the IFECOM to appoint a professional conciliador (conciliator). The first stage of a concurso procedure is the “conciliation” stage, which is purported to encourage a binding reorganisation agreement among the debtor and its creditors and, thus, avoid the debtor’s bankruptcy or liquidation (creditors’ agreement). The conciliation stage may not last more than 185 days, unless extended, under certain circumstances, for up to two additional consecutive periods of 90 days each; provided, however, that in no event the conciliation stage shall last more than 365 days.

During the conciliation stage, the debtor must work with its creditors to reach a creditors’ agreement. If this is reached and approved by the court, the concurso procedure ends.

The creditors’ agreement must be approved by the acknowledged creditors whose debts represent at least 51 percent of the total amount acknowledged to the unsecured creditors, the secured creditors (willing to vote the creditors’ agreement) and creditors with a special privilege. The approved creditor’s agreement must be filed before the court, which shall grant an additional term to the creditors for objections. If a simple majority of unsecured creditors or any number of creditors representing jointly at least 50 percent of the total amount of acknowledged debt opposes the agreement, the creditors’ agreement shall not be deemed to be approved.

An express procedure for “cramming down” creditors that do not approve proposals approved within these procedures, as permitted under other foreign jurisdictions, is not contemplated by the concursos law. However, it is possible to reach a plan of reorganisation without the vote of all the creditors if certain mandatory conditions and percentages of votes are met.

Bankruptcy or liquidation
The second stage of a concurso procedure is the bankruptcy stage. The debtor may be declared bankrupt if: (i) the conciliation stage ends without the parties reaching a creditors’ agreement; (ii) the debtor fails to comply with the creditors’ agreement; or (iii) the debtor requests its bankruptcy, or the conciliator requests the debtor’s bankruptcy and the court agrees to grant it.

In general, there are more cases of debtor companies reaching reorganisation plans and successfully emerging from bankruptcy as opposed to liquidation. There are some cases, however, in which the debtor company files directly a voluntary petition for liquidation. Failure to reach a restructuring plan might be the main cause for ending in liquidation, as well as lack of possibility for the company to continue in business.

Categories of creditors
The concursos law classifies creditors into five categories: (i) singularly privileged creditors; (ii) secured creditors (with mortgages and pledges); (iii) creditors with special privilege; (iv) common creditors in commercial transactions; and (v) common creditors in other transactions.

Labour credits and tax credits shall be paid after payment of the singularly privileged credits and the secured creditors, but prior to the payment of credits with special privilege or unsecured creditors.

There are other types of credits that have priority over all other categories: (i) pending wages for the last two working years, prior to the date of declaration of insolvency; and (ii) expenses incurred in the administration of the secured assets.

The concusos law provides special rules for certain contracts including, among others, repurchase agreements, securities loans transactions, differential or futures contracts, derivative financial transactions and framework agreements.

Additionally, the concursos law provides special rules for the concurso procedure of (i) companies that provide public services under concession titles; (ii) credit institutions; and (iii) auxiliary credit institutions.

The concurso law, in principle, does not expressly recognise (nor does it permit the full participation of) bondholders under an indenture; however, there is nothing preventing the full participation of an individual bondholder, provided that it is able to properly evidence its claim against the debtor.

As opposed to other jurisdictions where the beneficial holders of bonds and other debt securities often participate directly in the bankruptcies of companies in which they invest, a Mexican company might solely recognise, in principle, the indenture trustee as the holder of the claim, which may prevent beneficial bondholders, in principle, to exercise their right to accept or reject the creditors’ agreement. In Mexico, if not properly advised, the beneficial bondholders might face difficulties in exercising the rights that they are afforded abroad (even though the beneficial holders are foreigners, and even though their bonds were issued abroad).

Pre-package plan
Effective from December 28, 2007, a new chapter governing a procedure of “pre-package plan” was provided in the concursos law, which grants creditors rights and actions to have debtors to comply with a specific financing restructure. Now, it is feasible for a debtor and its creditors to agree in advance on a restructuring plan out of the concursos procedure, and subsequently proceed to file it through a voluntary insolvency procedure, a concursos, but within a summary procedure. In such case, there will not be controversy or disagreement with respect to the recognition, graduation and degree of the credits, which means that the procedure will be simplified.

A concursos procedure filing with a pre-package plan should be admitted by the competent judge, provided that i) it complies with requirements for a debtor to be declared insolvent; ii) it is duly executed by the debtor and the creditors representing, at least, 40 percent of debtor’s credits; iii) the debtor represents that a) it is in a condition where can no longer perform its payment obligations; or, b) it is imminent, in a period no longer than 30 days, to be in a condition where it can no longer perform its payments obligations; and iv) it contains a restructuring plan of the debtor’s credits signed by the creditors which represent, at least, 40 percent of the debtor’s credits or claims. If admitted by the court, then the concursos procedure will commence and the creditor’s agreement might be approved if it complies with all other applicable rules of the concursos procedure.

When the law recognises foreign proceedings in bankruptcy, insolvency and reorganisation matters, it recognises foreign representatives appointed through a recognition request.

Potential amendments
There is currently no formal final draft to amend the concursos law, but only projects under discussion by the Mexican congress to include certain procedural amendments. In our opinion, it is strongly advisable to amend the law regarding (i) the participation of bondholders under an indenture, (ii) creditor’s rights during the preliminary stages and to oppose acts of the examiner and to special measures or injunctions requested by the debtor, (iii) unsecured credits contracted in foreign currency, (iv) treatment of inter-company accounts, and (v) required specialisation on bankruptcy courts.

Alejandro Sainz is Chairman of the Insolvency & Restructurings Practice at Cervantes Sainz, S.C. For more information email: asainz@cervantessainz.com; www.cervantesssainz.com.