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Mexican Legal Framework of Business Insolvency

June 2011
Eugenio Sepúlveda

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All of a debtor's assets are subject to account for the performance of its obligations, except for those assets which, pursuant to law, are inalienable or cannot be attached.

Insolvency is an economic phenomenon with economic, social and legal consequences. When a debtor is unable to pay its debts as they become due, the legal system provides for a mechanism to address the collective satisfaction of the claims from the assets of the debtor.

The legal framework for business insolvency can be seen from three different approaches: (1) out-of-court restructuring; (2) court-assisted reorganization and liquidation; and (3) administrative resolution.

Out-of-court restructuring is governed by scattered substantive and procedural rules, but mostly by internationally recognized principles of conduct and professional practice in the field. Court-assisted reorganization and liquidation are governed by the Insolvency Law. The administrative resolution regime applies principally to banks, where swift regulatory action is deemed necessary.

In an adaptation and extension from another paper, G10 (2002) provides a "timeline" of financial distress for a debtor. This timeline includes four stages (or levels) of distress and the tools to overcome the situation.

When a debtor experiences emerging problems (first stage), most of the solutions rely upon the debtor's management-led corrective actions. Since, for nonfinancial sector firms, most of the cases at this stage have little or no impact on third parties, it is not relevant to delve into them from a legal framework perspective.

When management is unable to resolve emerging problems, these could evolve into acute and worsening problems (second stage). At this stage, the debtor will try to reach an out-of-court workout plan with creditors. Part I addresses these issues.

Part II addresses the court-assisted tools to solve cases of insolvency through reorganization or liquidation (third and fourth stages). The purpose of reorganization proceedings is to develop a reorganization plan. Since a private workout will only be effective upon consenting creditors, court assistance is sometimes necessary to achieve a successful reorganization or make broadly effective an otherwise private workout plan. The purpose of liquidation is to sell off the assets of the debtor and pay creditors with the proceeds of such sale. The line that divides reorganization from liquidation is often blurred (e.g., in the case of sales of complete lines of business or the whole enterprise as a going concern).

Part III addresses special cases of insolvency of public service concessionaires and financial sector firms, other than banks.

Part IV addresses the insolvency of banks. In the case of banks, even the emerging problems (first stage) could trigger "early warnings" that prompt preventive action from regulators.

Other specific topics relating to sundry corporate and other legal issues arising in the context of insolvency are addressed in Part V.