A New Perspective on the Recognition of Foreign Insolvency Procee...

Mexico adopted the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI) in May 2000, when the current Business Reorganizations Law (Ley de Concursos Mercantiles) (LCM) was enacted. It was incorporated in Title XII of the LCM, which contains essentially the same provisions as the MLCBI, with a few additions. It distinguishes between main insolvency proceedings and non-main insolvency proceedings. The former should take place in the debtor’s center of main interest, and the latter should take place in jurisdictions where the debtor has an establishment. It also presumes that the debtor’s registered office is its center of main interest.

However, Title XII of the LCM added that if the debtor has an establishment in Mexico, a Mexican insolvency proceeding should be opened for the recognition to take place, and recognition should be granted in the judgment commencing the Mexican insolvency proceeding (concurso mercantil). It is important to make it clear that the law requires the opening of a Mexican insolvency proceeding only when the debtor has an establishment in Mexico. If the debtor does not have an establishment in Mexico, the opening of a Mexican insolvency proceeding is not required.

Such a requirement has discouraged foreign creditors and representatives of foreign insolvency proceedings to file for recognition in Mexico. This is understandable, as generally the opening of Mexican insolvency proceedings has been cumbersome. Under Mexican law, an insolvency proceeding may only be opened if the debtor is deemed to have incurred a general default of its obligations. Ordinarily, a general default of the debtor’s obligations is deemed to have taken place if the debtor meets a financial test: The debtor must have 35 percent or more of its obligations to two or more different creditors overdue for at least 30 days, and/or lack of liquidity to repay at least 80 percent of its obligations to two or more different creditors due on the date on which the insolvency petition is filed. [1]

The Mexican insolvency proceeding is formally opened with a judgment that declares the debtor in concurso mercantil, which takes place after the judge has received a report by an examiner appointed randomly by the IFECOM [2] providing that the debtor’s accounting meets the financial test mentioned in the preceding paragraph. The debtor and the creditor (if the proceeding started due to a complaint filed by a creditor) may refute the examiner’s report, and both may have the opportunity to prove their statements before the opening judgment is issued. This pre-opening proceeding could take from three months to a year. As district judges became more reluctant to resolve concursos mercantiles, the average time for a case extended. Only pre-packaged proceedings — which have been regulated — may avoid this pre-proceeding.

The fact that the LCM provides that the recognition of a foreign proceeding when the debtor has an establishment in Mexico will take place in the judgment commencing the proceeding — which is issued after the steps summarized in the previous paragraphs have taken place — explains why filing for recognition when the debtor has an establishment in Mexico has not been tested.

However, analysis has mainly focused on the negative side of the regulation and has ignored the experience on the application of Title XII of the LCM. Title XII has been applied in two cases that took place shortly after the law was enacted. The first judgment that recognized a foreign insolvency proceeding was issued in 2002 and the second in 2005. In both cases, the Mexican court recognized foreign main insolvency proceedings that were taking place in the Southern District of Texas. Moreover, the Mexican court not only recognized the foreign insolvency proceedings as main proceedings, it also recognized the judgments issued under chapter 7 of the U.S. Bankruptcy Code, which were enforced in Mexico.

Other considerations may be taken into account when assessing whether to file for recognition of a foreign proceeding in Mexico. In the first place, we should be careful to properly identify the debtor. If the debtor in the insolvency proceeding to be recognized is a foreign debtor and not a Mexican company, it is quite possible that the foreign debtor does not have establishments in Mexico, because any existing establishments may be owned or leased by a Mexican subsidiary. In that scenario, the easiest course of action could be followed, as it would not be necessary to open a Mexican insolvency proceeding to have the foreign proceeding recognized.

Additionally, even if the debtor has an establishment in Mexico and the more cumbersome course of action needs to be followed, we should consider that Title XII of the LCM allows interim measures to be requested of the judge by the foreign representative at the commencement of the initial filing. Indeed, even though, according to the LCM, in such a case actual recognition does not take place until a judgment that declares the debtor in concurso mercantil is issued, the foreign representative may request the interim measures as of the moment it requests recognition of the foreign insolvency proceeding.

Moreover, on March 7, 2022, specialized courts started operating to deal exclusively with insolvency proceedings. Expertise will not take place in a fortnight; however, judges, law clerks and all of the courts’ personnel are being trained in insolvency. Academics, practitioners and insolvency experts, including those registered with IFECOM — who deal on a daily basis with complex insolvency cases and the problems the lack of expertise of judges has generated — have had the chance to participate in the training courses to approach the judges and share their experiences. This is excellent news that may help overcome many of the hurdles and difficulties that were caused by having insolvency cases dealt with by judges with expertise on constitutional law and with no background or knowledge on insolvency.

Ironically, the fact that all Mexican federal judges have expertise on constitutional law — including the new insolvency judges — and therefore have experience in reviewing laws and applying remedies if laws do not honor constitutional rights (such as access to justice, legal certainty and other rights that could be hindered if a foreign proceeding is not timely recognized) could be helpful to ensure the proper application of the rules of the MLCBI adopted by Title XII of the LCM.

All rules providing for international cooperation and harmonization contained in the MLCBI were incorporated into Title XII of the LCM. The LCM insists that judges and insolvency professionals must cooperate with foreign courts and representatives of foreign insolvency proceedings. So, a proper interpretation of such rules, together with the principles of constitutional rights, may result in the timely recognition of a foreign insolvency proceeding, even if the debtor has an establishment in Mexico.

[1] If the debtor files its own petition, only one of the two requirements should be met, but if the filing is made by a creditor, both requirements must be met.

[2] The IFECOM (Federal Institute of Experts in Business Insolvency Proceedings) is a body that is part of the federal judicial branch. Its main role is to register and monitor insolvency professionals who must fulfill the roles of examiners, conciliators or liquidators during formal insolvency proceedings.