The Mexican law on insolvency and bankruptcy (Ley de Concursos Mercantiles) (the LCM or “Concursos Law”) is a federal, specialised law that governs all the steps of the formal in-court federal insolvency procedures available under Mexican law for distressed companies. This is known as the Concurso Mercantil or Concurso. The laws applicable to restructurings and insolvency proceedings are mainly:

• the Concursos Law;
• the General Law on Business Organisations;
• the Law of Credit Institutions; and 
• the Law of Insurance and Bonds Institutions. 

The Concursos Law is a federal, specialised law that governs the sole formal in-court federal insolvency procedure available under Mexican law for companies, establishing all the procedural steps, including detailed rights and remedies of creditors, whether aimed at a restructuring process (phase of conciliation or conciliación) or liquidation (phase of liquidation or quiebra).

A petition for insolvency or Concurso Mercantil in Mexico is commenced by (i) the company filing a voluntary concurso petition (a “voluntary petition”), (ii) a creditor or other interested party filing an involuntary lawsuit (an “involuntary petition”), or (iii) the company filing a pre-packed voluntary petition (a “pre-packed petition”) with the support of a simple majority of its creditors.

The competent authority to hear insolvency and commercial bankruptcy cases is the specialised Federal Bankruptcy Court located in Mexico City (the “Bankruptcy Court”). The Bankruptcy Court is the authority overseeing the insolvency proceeding.

The Federal Institute of Specialists for Insolvency Procedures (Instituto Federal de Especialistas de Concursos Mercantiles or IFECOM) was created specifically to attend insolvency proceedings governed by the LCM, being an entity of the federal judicial branch that participates in a concurso proceeding and that has the authority to issue General Rules applicable to insolvency proceedings governed by the Concursos Law and assist the Bankruptcy Court when a concurso procedure is taking place. IFECOM directs and administers a group of individuals able to carry out the duties of so-called specialists in the LCM. These individuals, who are selected, monitored, and regulated by IFECOM, will serve as examiners, conciliators, or liquidators (receivers) in LCM-compliant insolvency processes.

Upon the admission of the voluntary or involuntary petition by the Bankruptcy Court, the judge orders IFECOM to appoint an independent examiner. The examiner cannot be appointed by the debtor or creditors and has no conflict of interest. The examiner is the only authority entitled by the Concursos Law to determine if the debtor meets the test for insolvency under the statute. During this preliminary visita stage, the examiner reviews and audits the company’s books and records to determine whether the company satisfies the LCM’s insolvency requirements to be eligible for concurso proceedings. The examiner may also recommend to the Bankruptcy Court the issuance of pre-emptive measures to protect the debtor’s assets and estate.

A conciliator is appointed by IFECOM as ordered in the concurso judgment, who is responsible for mediating between the company and its creditors on the terms of a consensual plan of reorganisation, initiating the formal and fully regulated process of proof of claims (by preparing a list of claims for the Bankruptcy Court and, if necessary, requesting the removal of the company from the management of the business). The conciliator is also responsible for reviewing the ordinary operation of the company’s business, approving the expenses during the in-court proceeding, and filing various public reports before the Bankruptcy Court. Finally, the conciliator reviews the company’s accounting, books and records, and supervises any company transactions during the conciliation stage. The conciliator has the authority to resolve, among other things: (i) non-ordinary course dispositions of assets; (ii) the assumption or rejection of material contracts; and (iii) after a concurso judgment has been entered, preferred and senior financing against the estate (equivalent to debtor-in-possession (DIP) financing).

If the concurso proceeding proceeds to the liquidation stage, IFECOM appoints an independent receiver, liquidator, or trustee (síndico) to operate the company in the liquidation stage. The receiver then makes public the Order for Liquidation and files a report concerning the company’s books and records, assets and balance sheet. All of the company’s assets are turned over to the receiver. The receiver then takes steps to liquidate or otherwise dispose of the debtor’s assets for the highest possible price pursuant to the rules and procedures expressly provided in the Concursos Law. The proceeds are then used to provide distributions to creditors in accordance with the claims and rankings set forth in the recognition judgment. The receiver follows the LCM’s strict rules of publicity and operability to guarantee the transparency of a sale procedure and follows the guidance and forms determined by IFECOM.

Pursuant to the Concursos Law, an intervenor may represent the interests of creditors in the concurso procedure and oversee the actions of the conciliator or the receiver, as well as the actions of the debtor with respect to the operation of its business. Any creditor or group of creditors representing at least 10% of the value of the credits owed by the debtor, pursuant to the provisional list of credits, has the right to request the court to appoint an intervenor.

The Concursos Law classifies creditors into the following categories or classes (and with the following rankings or preferences).

• First priority claims against the “estate” of the debtor (créditos contra la masa), which includes:
1. special labour claims under Section XXIII, Chapter A, of Article 123 of the Constitution, and applicable regulations, by increasing the wages to the corresponding two years prior to the concurso judgment (formal commencement of the concurso procedure of the debtor);
2. debt incurred for the management of the estate of the debtor with the authorisation of the conciliator or the receiver, as the case may be, or those contracted directly by the conciliator; and
3. debt incurred to cover ordinary expenses for the safety and protection of the estate assets, their repairs, conservation and management.
• Debt incurred from judicial or extra-judicial acts carried out for the benefit of the estate; provided, however, that per Article 225 of the Concursos Law, where this is against secured creditors, with mortgages or pledges, or creditors with special privilege, the preference or privilege of the claims against the estate would not apply, except for the following claims:
1. the special labour claims under the Constitution referred to above;
2. the litigation expenses incurred in the defence or recovery of the goods or assets subject to the security interest of the secured claims or over those assets related to the “special privilege”; and
3. the expenses necessary for the repair, conservation and sale of those assets.
• Singularly privileged creditors.
• Secured creditors (with mortgages and pledges over assets of the debtor) and tax claims secured with a security in rem (up to the value of such guarantee) are paid first with proceeds from the sale of mortgaged or pledged item. If the items have a value or a price in excess of the debt, any such excess or remaining value is directed to cover subsequent debt payments to other creditors. If the price does not cover the debt, mortgage or pledge, the corresponding creditor may participate, pro rata, as a common or unsecured creditor, to collect the remaining amount).
• Other tax claims and labour claims.
• Creditors with a special privilege (ie, those with a guarantee trust).
• Common or unsecured creditors (trade creditors would usually rank as unsecured creditors and there are no particular mechanisms to secure their unpaid debts by statute).
• Subordinated creditors (intercompany claims).

DIP Financing

The LCM permits a debtor to incur both unsecured and secured debt in the ordinary course of business. If the credit is approved by the court or the conciliator, as applicable, it grants the lender a priority claim or a lien on the debtor’s unencumbered assets or a second-priority claim on encumbered assets.

DIP loans hold a priority claim in insolvency proceedings, except for certain labour, tax and secured claims. Pre-existing liens held by secured creditors cannot be used to secure new financing unless authorised by the affected secured creditors.

First Priority Claims

First priority claims against the “estate” of the debtor (créditos contra la masa) include:

• special labour claims under Section XXIII, Chapter A, of Article 123 of the Constitution, and applicable regulations, by increasing the wages to the corresponding two years prior to the concurso judgment (formal commencement of the concurso procedure of the debtor);
• debt incurred for the management of the estate of the debtor with the authorisation of the conciliator or the receiver, as the case may be, or those contracted directly by the conciliator; and
• debt incurred to cover ordinary expenses for the safety and protection of the estate assets, their repairs, conservation and management.

Administration Expenses

Administration expenses are debts incurred from judicial or extra-judicial acts carried out for the benefit of the estate. These debts are generally privileged but, under Article 225 of the Concursos Law, where they are in conflict with secured creditors with mortgages or pledges, or creditors with special privilege, the preference or privilege of administrative expense claims against the estate would not apply, except for in the following circumstances:

• the special labour claims referred to in the first bullet point in the First Priority Claims list above;
• litigation expenses incurred for the defence or recovery of the goods or assets subject to the security interest of the secured claims or over those assets related to the “special privilege”; and
• the expenses necessary for the repair, conservation and sale of those assets.

Common Forms of Security

The most common security for immovable property is the mortgage, which is governed by state law. This security is required to be documented in a notarial instrument and must comply with the publicity principle in its registration so that it may be enforceable against third parties. Depending on the asset granted as collateral, there are some cases where additional registration is required (with the Federal Telecommunication Registry, Maritime Registry, etc).

The most common securities for movable or intangible assets are floating lien pledges, governed by federal law. Mexican law provides that all rights and movable property can be pledged under a floating lien pledge – except for those rights that are strictly personal to their holder – which is the case of equity quotas (stock pledge). 

Execution

Mortgages must be executed through a judicial procedure. Mexican law provides for a special procedure for the execution of mortgages. The procedure is divided into two phases:

• the general phase, in which the creditor and the debtor file their evidence and pleadings; and
• the execution phase, in which the property is finally sold to pay the debtor’s secured obligations.

Pledges can be executed via a judicial or extrajudicial procedure. The extrajudicial execution procedure is optional and is ideal in cases where there is no controversy over the enforceability of the credit, its amount and the delivery of the property over which the pledge was created. The judicial procedure is similar to that of the mortgage, to the extent that the creditor must file a claim against the debtor for the judge to order the delivery and sale of the property to pay the creditor. The timelines for the execution of securities would depend on multiple factors, but obtaining a final order usually takes between 12 and 30 months. A creditor may foreclose on the collateral through the enforcement of its creditor’s rights and by following the special enforcement procedure applicable to the type of collateral granted in its favour (stock pledge, floating pledge over assets, mortgage, special mortgage over concessions, etc).

Trusts

In Mexico, a trust, known as a fideicomiso, generally involves three principal parties: the settlor (fideicomitente), the trustee (fiduciario), and the beneficiary (fideicomisario). Trusts are widely used in Mexico for a variety of purposes, including estate planning, securing loans, managing business transactions and holding property. The offer a flexible and secure method for managing and transferring assets while allowing for control, protection and specific conditions to be imposed. Additionally, the trust structure in Mexico benefits from legal certainty, as it is governed by specific provisions of the General Law of Negotiable Instruments and Credit Transactions (Ley General de Títulos y Operaciones de Crédito), which provides clear guidelines for the establishment and operation of trusts within the country.

The scope, terms and governing rules of a trust are very flexible, so it is legally possible to use a trust structure, as an SPV, to implement virtually any type of transaction, project, JV, financing or business, with different operational rules, rights and obligations, as the parties might agree depending on the scope of the business or project to be developed through the trust vehicle. Under any type of trust structure, a Mexican bank or financial institution (through its special trustee department) would act as the trustee (fiduciario), which is the party in charge of the implementation of the acts required to be followed as expressly provided in the clauses and governing rules of the trust or by following written instructions of a special committee (the “technical committee”) of the trust which serves as a type of management and supervisory board.

Regarding trust agreements, the most common types are the following:

• in a guarantee trust, the settlor transfers and assigns to the trustee (a Mexican bank acting in such capacity) real or personal property or rights, to guarantee payment of obligations in benefit of the beneficiaries thereunder;
• in a source of payment and administration trust, certain assets (ie, accounts receivable against a third party) are transferred (assignment agreement) to the trust (represented by the trustee) to serve as source of payment of certain indebtedness (normally of the settlor) derived from a loan agreement, according to a waterfall of funds to be provided in the trust agreement; and
• in a securitisation trust, the assets (ie, accounts receivable) are transferred (assignment agreement notified to the debtor of the receivables) to the trust (represented by the trustee) and the trust issues debt instruments to be placed in a secondary market (commercial paper or cebures-securitised certificates).

Under Mexican law, unsecured (trade) creditors have several rights and remedies available to recover defaulted debts outside a formal restructuring or insolvency proceeding. These remedies include the following.

• Pre-judgment attachments – creditors can request pre-judgment attachments to secure assets of the debtor, which may be essential for safeguarding potential recovery in anticipation of a favourable judgment.
• Retention of title – in some cases, creditors may retain title over goods supplied to the debtor until payment is fully made, thus preventing the debtor from disposing of the goods.
• Set-off rights – under Mexican law, set-off can occur by operation of law without requiring a judicial declaration, allowing mutual debts between creditor and debtor to be offset against one another.

The legal proceedings available will vary depending on the nature of the agreement and the specific cause of action. Once a favourable judgment is obtained, creditors can initiate attachment procedures to seize and sell the debtor’s assets to satisfy the debt owed.

Many restructuring proceedings in Mexico begin as informal and/or consensual efforts but end in a judicial proceeding, depending on the specific circumstances surrounding the negotiations and the status of the debtor. The possibility of aligning interests and positions of different creditors is essential, as is the ability to reach a reorganisation agreement. It is likely that, if sophisticated creditors (banks, funds) are involved – which occurs in major restructurings – they will try to be co-operative to reach a reorganisation agreement that may serve to restructure the debtor out of court or prepare it for pre-pack, in-court proceedings (a more expeditious procedure than regular proceedings). 

Mexican law does not require mandatory consensual restructuring negotiations or reorganisation agreements before the commencement of a formal statutory process. However, the Concursos Law provides that a debtor or a creditor can request IFECOM to appoint a conciliator to act as a mediator in order to achieve a consensual restructuring,

Under Mexican law, there is no formal out-of-court restructuring proceeding that provides legal protection to debtors, such as an automatic stay that would grant them a “breathing spell” while negotiating with creditors. This means that, outside of formal insolvency proceedings, debtors are not shielded from enforcement actions or legal claims during restructuring talks. Furthermore, any agreement reached between the debtor and some of its creditors cannot be imposed on dissenting creditors, as the law does not grant the power to bind non-consenting parties. Therefore, any out-of-court financial restructuring is entirely dependent on the voluntary co-operation and agreement of both the debtor and its creditors to resolve the situation amicably.

The parties eligible to initiate a concurso proceeding include merchants, defined as natural persons or legal entities engaged in commercial activities, including trusts dedicated to such activities. Debtors within the same corporate group may simultaneously request a joint judicial concurso declaration without requiring consolidation of assets. For the joint concurso process, it is sufficient if one entity within the group meets the conditions of insolvency under the Concursos Law, provided this condition impacts one or more other group members similarly.

A petition for insolvency or Concurso Mercantil in Mexico is commenced by (i) the company filing a voluntary concurso petition (voluntary petition), (ii) a creditor or other interested party filing an involuntary concurso lawsuit (involuntary petition), or (iii) the company filing a pre-packed voluntary petition (pre-packed petition) with the support of a simple majority of its creditors.

Upon the admission of the voluntary or involuntary petition by the Bankruptcy Court, the judge orders IFECOM to appoint an independent examiner. During the visita stage, the examiner reviews and audits the company’s books and records to determine whether the company satisfies the LCM’s insolvency requirements to be eligible for Concurso Mercantil (the “Insolvency Test”)

The Insolvency Test focuses on whether the company has generally failed to comply with its obligations. Article 10 of the LCM provides that the Insolvency Test is satisfied when (i) the company has failed to comply with its payment obligations in respect of two or more creditors, (ii) 35% or more of all the company’s outstanding liabilities are 30 days overdue, and/or (iii) the company has insufficient liquid assets and receivables as established in the LCM (eg, cash, cash equivalents, and liquid securities) to support at least 80% of its obligations which are due and payable. In cases involving voluntary petitions, the company must satisfy the tests set forth in (i) and either (ii) or (iii) above to be declared insolvent. Alternatively, the company may satisfy the Insolvency Test if it can prove that it will be generally in default with respect to its payment obligations within 90 days from the filing of the voluntary petition. In cases involving an involuntary petition, the company must satisfy the tests set forth in each of (i), (ii), and (iii) to satisfy the Insolvency Test.

The LCM establishes a single insolvency proceeding (Concurso Mercantil) with two subsequent phases: a conciliatory phase of mediation between creditors and the debtor (known as the conciliation stage), and a second stage of bankruptcy or liquidation. Through a restructuring agreement, the purpose of the conciliatory phase is to preserve the commercial enterprise as a continuing concern. The stated objective of bankruptcy, on the other hand, is to liquidate the business.

Conciliation

Upon the commencement of the conciliation stage, the company, IFECOM, and the examiner are served with the concurso judgment. Creditors receive notice through a publication in the Official Gazette of the Federation (Diario Oficial de la Federación). A summary of the concurso judgment in the Public Registry corresponding to the domicile of the company is also published. Additionally, the conciliator mails notices to identified creditors.

The concurso judgment generally stays all acts of collection by creditors. Notably, however, entry of the concurso judgment does not necessarily stay all lawsuits involving the company; rather, it stays proceedings concerning the attachment of assets, enforcement decisions, and the execution of judgments against the company. Some exceptions may apply, including, for example, labour proceedings and those provided in the last paragraph of Article 65 of the LCM.

The conciliator may approve any new credits, new collateral, or substitutions of the existing collateral and the sale of any assets when not related to the ordinary operation of the company subject to LCM rules aimed to protect the estate and rights of the creditors. In such approvals, the conciliator takes into account the opinion of any existing intervenors, who are independent individuals appointed by creditors and who represent the rights of creditors pursuant to the LCM. Preferred and senior financing may be granted for the administration of the estate or to maintain the ordinary course of business of the company and the liquidity required during the concurso proceeding, by following certain guidelines applicable to the conciliator.

The conciliation stage is limited to 185 days; however, the Bankruptcy Court may extend the term for up to two additional periods of 90 days each (for a maximum of 365 days). The first extension can be requested by the conciliator or recognised creditors that represent more than 50% of the total recognised debt. The second extension must be requested by the debtor and the recognised creditors that represent at least 75% of the total recognised debt.

Bankruptcy/Liquidation

In bankruptcy proceedings under the LCM, which are clearly collective proceedings, creditors have numerous rights, the most important of which are to:

• request the commencement of the commercial bankruptcy (either in the ordinary way starting with a conciliation – reorganisation – or in the bankruptcy-stage liquidation);
• request the recognition of their credit or modify the manner in which it is accounted for by the debtor;
• request that their credit be evaluated according to the corresponding ranking and priority sequence;
• participate in the restructuring agreement negotiations with the bankruptcy conciliator and the debtor;
• request the avoidance of the disastrous acts committed by the debtor during the insolvency’s retroactive period;
• request that the conciliator determine whether the outstanding contracts must be executed or continue in effect;
• appoint auditors to oversee the insolvency representatives, often known as “specialists” in the LCM (conciliator and liquidator);
• use the necessary resources to challenge decisions made by the judge presiding over the proceeding; and
• participate in spill-over payments based on their priority.

The conciliation stage ends upon (i) an agreement among the company and a majority of its creditors for a consensual restructuring approved by the Bankruptcy Court in the form of a Plan of Reorganisation of concurso agreement (convenio concursal); (ii) the expiration of the term limit set forth above, at which time the concurso proceeding will move to the liquidation stage; (iii) the request of the conciliator and the Bankruptcy Court’s approval of such request; (iv) the company’s request; or (v) the creditors’ request and the company’s acceptance.

In the case of (ii) through to (v), the company enters the liquidation stage (quiebra) of the Concurso Mercantil following the Bankruptcy Court’s entry of a formal judgment for liquidation (the “Liquidation Judgment”).

To be effective, the reorganisation agreement shall be subscribed by the debtor and the recognised or acknowledged creditors representing over 50% of the sum of:

• the amount recognised to the totality of the recognised or acknowledged unsecured and subordinated creditors; and
• the amount recognised to those recognised or acknowledged secured creditors or those with special privilege subscribing to the reorganisation agreement.

Should the subordinated (intercompany) creditors represent more than 25% of all the acknowledged loans, the majority of the remaining common creditors will vote on the restructuring agreement without considering the subordinated creditors.

Secured creditors cannot be impaired without their consent; however, they may choose to participate in a reorganisation plan and exercise their voting rights. While the Concursos Law does not explicitly outline a procedure for cramming down dissenting creditors, it does allow for a reorganisation agreement that includes measures such as haircuts or maturity extensions to be imposed on unsecured creditors, provided that at least 30% of the unsecured creditor class accepts the same terms. This mechanism offers a path for restructuring agreements to move forward even in the absence of unanimous support from unsecured creditors.

The Concursos Law allows the debtor to enter into a new insolvency proceeding if it fails to meet the obligations under the reorganisation plan or, in exceptional circumstances, to request a modification of the reorganisation plan’s terms.

The debtor may continue to operate its business and usually retains management of it, unless the conciliator requests the court to remove the debtors’ management in order to protect the pool of assets. 

If the debtor retains management, the conciliator shall:

• supervise the accounting and all transactions performed by the debtor;
• decide if any existing agreements binding on the debtor must be terminated;
• approve, with the prior opinion of the interveners appointed by the creditors, any new credit in favour of the debtor, the creation of new security interests, the substitution of any existing security interests, or the sale of any assets not involved in the ordinary course of business of the debtor; and
• call the board to discuss and approve matters relating to the debtor’s business. 

In the event the debtor is removed from the management of its business, the conciliator will become the administrator and will be granted full authority to conduct the business, on the understanding that the authorities of the debtor and its decision-making committees shall cease. The conciliator may also request that the court suspend the debtor’s operations if the pool of assets or an increase in the debtor’s liabilities is at risk. 

The court and the conciliator are authorised to adopt measures to safeguard assets of the debtor for the benefit of the creditors and ensure that no actions are taken outside the ordinary course of business.

The debtor is required to honour all pending contracts and comply with their terms and conditions. However, the conciliator has the authority to reject executory contracts if doing so improves the prospects of rehabilitation and maximises recovery for creditors. This discretionary power allows the conciliator to prioritise the financial restructuring and overall interests of the creditor body during the insolvency process.

Subject to the judge and conciliator’s approval, debtors may obtain financing while in insolvency, to preserve the ordinary course of business and to provide the required liquidity during the procedure, by following certain rules provided under the Concursos Law. Any DIP loan will be repaid before any other loan, pursuant to the order of preference rules provided in the Concursos Law. This special or urgent financing is deemed a claim against the estate of the debtor and has preference over common creditors, aiming to preserve the ordinary course of business by providing the required liquidity during the procedure. However, unlike other jurisdictions, in Mexico the DIP financing does not have preference over already secured creditors. The new rules include possible loans with priority liens but without affecting existing priority secured creditors.

Please see 1.3 Statutory Officers.

Secured Claims

The only claims explicitly recognised as secured under Mexican law are those backed by mortgages or pledge interests.

However, if a concurso procedure has been admitted by the court, then the creditors will be prevented from foreclosing on the collateral or disposing of the collateral in a private sale while the procedure is in progress. Likewise, special measures or injunctions might be granted to the debtor in order for the latter to preserve its assets and operations, and to protect the debtor from separate or individual creditors’ actions seeking the enforcement of collateral, or the seizure or attachment of a debtor’s assets. Upon the insolvency declaration by the competent court, a stay is imposed on the enforcement of the creditors’ rights (including secured creditors) and remains in force throughout the conciliation stage.

See 4.3 The End of the Restructuring, Rehabilitation and Reorganisation Procedure for discussion of cram-down.

Unsecured Claims

Debt

Once in a concurso proceeding, unsecured debt is subject to some special rules, it being noted that only the following may be subject to a set-off after the concurso judgment.

• Any amounts arising from rights and obligations of the debtor and third parties that became due before the concurso judgment and may be subject to a set-off pursuant to Mexican law.
• Any amounts arising from rights and obligations of the debtor and third parties regarding the same transaction, but only if such transaction has not been suspended as a result of the concurso judgment.
• Outright transfers (reportos) of securities, securities’ loans and any other derivative transactions, even if the indebtedness amounts are not determined and cannot be determined within the following nine calendar days. The set-off of these kinds of transactions in cannot be objected to or invalidated by the liquidator, even if they were entered into during the “hardening period”, unless evidence is provided which proves such transactions were made to give a preference to certain creditors.
• Unsecured Mexican peso debts. The outstanding amount (capital, interest and any other accessories) of any unsecured debts denominated in Mexican pesos shall stop accruing interest and shall be converted into Unidades de Inversión (UDIs). These are indexed units of account that are generally preferred to pesos in the Mexican credit system because of their stability.
• Unsecured debts denominated in foreign currency. The outstanding amount (capital, interest and any other accessories) of any unsecured debts denominated in foreign currency shall stop accruing interest and shall be converted first into Mexican pesos and then into UDI.

Equity

In a concurso proceeding, equity holders do not participate and are not considered a class of creditors. There is no equity interest class in a reorganisation plan because such a plan cannot alter shareholders’ rights without their consent (just as no plan can alter a debtor’s rights without their consent). However, if equity holders have intercompany debt, they may be recognised as a class of creditors, depending on the nature and characteristics of that debt. Any plan of reorganisation that involves a debt-for-equity exchange or any amendment that alters the composition of the debtor’s equity, such as an increase, must obtain shareholder consent. Such features of a restructuring are not permitted under Mexican law without consent or approval by the shareholders who are affected. The Mexican General Law of Business Organisations (GBLO) requires that any debt-for-equity exchange or any amendment to the composition of the debtor’s equity complies with the requirements under such law, which include holding a shareholders’ meeting to approve any such transactions or amendments that impact the debtor’s equity. Further, the by-laws of the company normally provide the same limitation, requiring shareholder consent in respect of any debt-for-equity exchange or any amendment to the composition of the equity of the company. The only power afforded to a Mexican Bankruptcy Court regarding a proposed plan for an equitisation of creditors’ claims is the authority to approve a capital increase in the event that the shareholders choose to not exercise pre-emptive rights within the 15-day statutory period.

The GBLO is a Mexican federal corporate law that provides the rules for corporate formation, company by-laws, and corporate governance requirements for various privately held business entities. Article 229 of the GBLO addresses the out-of-court dissolution and liquidation process of wholly owned corporate subsidiaries and affiliates not subject to controversy or limitation. The purpose of the dissolution and liquidation proceeding under the GBLO is to provide for a simplified proceeding that allows enterprises to carry out a simple, expedited, and free dissolution and liquidation process. This proceeding is not applicable for restructurings; rather, it is used for simplified liquidations in very particular situations and that comply with clear conditions to avoid the closing of businesses with pending obligations before shareholders or third parties.

The concurso proceeding is the only commercial insolvency proceeding available for companies in Mexico. All insolvency proceedings of companies or merchants are governed by the LCM, whether aimed at a restructuring process (phase of conciliation or conciliación) or liquidation (phase of liquidation or quiebra).

The second stage of a concurso procedure, if applicable, consists of the bankruptcy or liquidation stage. The debtor may be declared bankrupt if: 

• the conciliation stage ends without the parties reaching a creditors’ reorganisation agreement; 
• the debtor fails to comply with the creditors’ reorganisation agreement;
• the debtor requests its bankruptcy; or 
• the conciliator requests the debtor’s bankruptcy, and the court approves it. 

If the Concurso Mercantil proceeds to the liquidation stage, IFECOM appoints an independent receiver, liquidator, or trustee (síndico) (the “receiver”) to operate the company in the liquidation stage. The receiver then makes public the Order for Liquidation and files a report concerning the company’s books and records, assets, and balance sheet. All of the company’s assets are turned over to the receiver. The receiver then takes steps to liquidate or otherwise dispose of the debtor’s assets for the highest possible price pursuant to the rules and procedures expressly provided in the Concursos Law. The proceeds are then used to provide distributions to creditors in accordance with the claims and rankings set forth in the recognition judgment. The receiver follows the LCM’s strict rules of publicity and operability to guarantee the transparency of a sale procedure and follows the guidance and forms determined by IFECOM.

The liquidation stage is supervised by IFECOM and the receiver, and the length of the procedure will vary depending on the type of industry and the time required to auction, sell and reach agreements among creditors and the conciliator to offset claims. The liquidation stage is intended to terminate any pending company operations, collect any amounts in favour of the debtor, and liquidate any outstanding amounts of the debtor in favour of creditors and, ultimately, its shareholders. The liquidation concludes with the cancellation of the company’s by-law registration.

Pursuant to Article 198 of the LCM, the sale of the debtor’s assets is carried out through a public auction. The auction cannot occur sooner than ten days after and later than 90 days after the publication of the call for an auction. The receiver must notify the call for the auction pursuant to the IFECOM rules.

The liquidation stage concludes once the receiver has completed the realisation of all assets in the debtor’s estate to pay creditors in accordance with the ranking judgment. If funds are insufficient, the receiver may petition for the closing of the liquidation stage. Under the Concursos Law, a reorganisation plan can still be agreed upon, even during the liquidation stage.

Please see 4.6 The Position of Shareholders and Creditors in Restructuring, Rehabilitation and Reorganisation.

Mexico was one of the first countries to adopt the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (the “Model Law”), which was expressly incorporated in Title 12 of the LCM.

The LCM, consistent with the Model Law, recognises two types of foreign proceedings: foreign “main” proceedings and foreign “non-main” proceedings. A foreign main proceeding takes place in the jurisdiction in which the debtor has its “centre of main interests” (COMI). A foreign non-main proceeding, on the other hand, takes place in any country where the debtor has any establishment. The LCM provisions describing “main” and “non-main” proceedings, as well as the definitions of COMI and “establishment”, come directly from the Model Law.

The applicable law is Title 12 of the LCM.

The LCM provides for domestic recognition and enforcement of only two types of “foreign proceedings”: foreign “main” proceedings and foreign “non-main” proceedings:

• as a main proceeding, when the foreign proceeding is brought to a court with jurisdiction in the place where the business has its main place of interest; or
• as a non-main proceeding, when the foreign proceeding is brought to a court with jurisdiction in the place where the business has an establishment. 

The main difference between the two lies in the direct effect of such recognition over the business’s assets located in Mexico. 

If a foreign bankruptcy procedure is recognised as a main proceeding, then any and all foreclosure over the business’s assets, and any and all rights to transfer or grant any lien over the business’s assets, shall be suspended. The Bankruptcy Court shall recognise the foreign bankruptcy procedure as a non-main proceeding if the debtor has a permanent place of business outside Mexican territory, but not as a principal foreign bankruptcy procedure. 

Procedure

The recognition aspects of a foreign non-main proceeding are as follows: 

• appropriate injunctions – which may be requested through the foreign representative, the receiver, conciliator or examiner, as the case may be – that concede the right to protect the business’s assets or the creditors’ interests to a Mexican court are granted;
• all execution injunctions against the business’s assets are suspended, as are the rights exercised to transmit or to mortgage the business’s assets or to dispose of such assets in any other way; 
• the delivery of evidence or the provision of information regarding the business’ assets, activities, rights, or liabilities is ordered;
• the foreign representative, the receiver, conciliator or examiner is entrusted with the administration or foreclosure of all or part of the business’s assets located in Mexican territory; and
• every injunction granted by the foreign recognition procedure request is extended and any other injunction that under Mexican law may be grantable to a receiver, conciliator or examiner are granted.

Upon the recognition of a foreign proceeding, the foreign representative will be able to ask the receiver, conciliator or examiner to entrust, through a foreign representative, the distribution of all the business’s assets located in Mexican territory. The Mexican court must make sure that the creditors’ interests domiciled in Mexico are sufficiently protected so that it may decree the injunctions outlined above.

The LCM contains a special provision in its domestic legislation on cross-border insolvency, in Article 293, which places a unique obstacle on a foreign proceeding that seeks recognition in Mexico. Article 293 requires that, in order for a debtor that has an “establishment” in Mexico to request recognition of a foreign proceeding in a Mexican Bankruptcy Court, the provisions of Chapter IV of Title 1 of the LCM governing the initiation of a concurso proceeding apply. The consequence of this unique provision in the LCM is that, when a foreign insolvency proceeding seeks recognition in Mexico for an entity that has an establishment in Mexico, a concurso proceeding is opened, not an ancillary proceeding.

The co-ordination and co-operation contemplated under Articles 304 and 305 of the LCM concern co-operation in the case of parallel proceedings, where there are bankruptcy cases pending in multiple jurisdictions.

Article 304 requires Mexican bankruptcy judges, inspectors, conciliators and liquidators to “co-operate to the extent possible with foreign courts and representatives”. Article 305 provides the means through which the co-operation referenced in Article 304 may be “put into practice”, including but not limited to: (i) the appointment of a person to act under the direction of the judge, the bankruptcy conciliator, the inspector, or the liquidator; (ii) the communication of information through any means that the judge, the inspector, the bankruptcy conciliator, or the liquidator considers appropriate; and (iii) the co-ordination of the procedures that are being processed simultaneously in respect of the same debtor.

Article 305 does not say anything about enforcing foreign orders in Mexico or granting recognition to foreign proceedings in Mexico.

The concurso proceeding is a fair and collective proceeding that provides for just treatment of all holders of claims against or interests in the estate, including foreign creditors. Specifically, Article 290 of the LCM provides that foreign creditors shall have the same rights as Mexican creditors.

All creditors of the debtor, whether domestic or foreign, shall have access to the concurso procedure, and shall collect in equal proportion (according to the class) from the assets located within the territorial jurisdiction of the court.

Directors are required to fulfil all obligations outlined in the company’s by-laws, including (i) managing the business with the same care as if they were owners, (ii) upholding the duty of loyalty, and (iii) maintaining the duty of care and diligence. Directors with a personal interest in any transaction involving the company must explicitly disclose the conflict of interest and refrain from participating in the transaction, while remaining fully bound by their duty of loyalty. The Concursos Law does not impose any additional duties on directors, nor does it require them to file for insolvency when the company is in the zone of insolvency.

The Concursos Law does not provide for specific actions under which the owners/shareholders can be potentially liable to creditors. However, owners/shareholders may be potentially liable to creditors pursuant to the provisions of civil and criminal regulations.

The directors of a company that has not been declared insolvent by a competent court may not be liable for continuing to operate a company under financial distress. However, the transactions related to the collection of a creditor’s rights could be subject to review when the company is declared insolvent. In the event that the company is declared insolvent, directors engaging in any malicious act or conduct that causes the non-performance of the company’s payment obligations might be liable for civil actions or even potentially criminally liable, if those acts are proven to be fraudulent.

The Concursos Law provides for events during which a director or managing officer will become liable to the debtor, for the benefit of the estate of the company in a concurso procedure, for any damages and losses of anticipated earnings caused by any unlawful decision they have made, provided they cause damage to the estate of the debtor that led to the insolvency of the company. This is regardless of any liability incurred by the director or managing officer under any other law. Unless good faith and compliance with the duties of care and loyalty can be evidenced, members of the board of directors, as well as relevant employees of the debtor, shall be liable for damages and losses due to the following activities:

• voting in board meetings or making decisions regarding the estate of the debtor regardless of a conflict of interest;
• favouring a shareholder or group of shareholders to the detriment of other shareholders;
• obtaining, due to their position and without legitimate cause, direct or indirect economic benefits;
• producing, publishing, providing or ordering information they acknowledge is false;
• ordering or failing to register operations of the debtor or modifying the registry to conceal the real nature of the operations performed, affecting any element of the financial statements;
• ordering or accepting the registration of false information in the debtor’s books;
• destroying, modifying or ordering the destruction or modification of systems or accounting registries or the documentation on which these are based; and
• in general, committing malicious or illegal acts.

Please see 7.2 Personal Liability of Directors.

Please see 7.2 Personal Liability of Directors.

Pursuant to the Concursos Law, some transactions may be invalidated if entered into during the period starting on the day which is 270 calendar days prior to the declaration of insolvency by a competent court. Such period can be extended to up to three years under some situations regulated by law, and would be doubled for intercompany transactions.

Fraudulent claims should be filed before the Bankruptcy Court and processed as ancillary proceedings. Any creditor, intervenor, conciliator or liquidator is entitled to file such claims.

Intentionally fraudulent transactions and certain other transactions may be set aside or declared void when it is established that the debtor received inadequate consideration.

The following transactions are presumed to be a fraudulent transfer, unless the debtor can prove good faith:

• creation of new security interests or the increase of any existing security interests if the original obligation did not provide for it;
• payments in kind when such form of payment was not originally agreed; and
• transactions entered into by a debtor with related individuals or entities, such as their spouse, cohabiting partner, relatives, members of the board or decision-making individuals within the business, or companies where at least 51% of their capital stock is owned or voted by any of the foregoing individuals.

If the claim is successful, the party must pay damages and return any value to the debtor’s estate.