Perez Correa Gonzalez partners want specialized courts to improve Mexican bankruptcy landscape

Fernando Perez Correa[1] and Zulima Gonzalez,[2] partners at Mexican law firm Perez Correa Gonzalez, have been involved in several of Mexico’s high-profile in-court restructurings, including Oro Negro, Oceanografia, Desarrolladora Metropolitana (DEMET) and Grupo FAMSA. Debtwire’s Legal Analyst for Latin America talked[3] with the two practitioners to discuss their thoughts about the country’s bankruptcy system. In part one of this two-part series, the attorneys offered their opinions about certain problems stemming from the lack of specialized courts and the reasons that could justify the rare use of domestic cross-border rules by Mexican distressed companies. The specialists also commented on a proposal made by the Mexican Bar Association to include a fast-track bankruptcy proceeding for emergency situations in the country’s bankruptcy law.

Specialized Courts – urgent need for Mexican bankruptcy courts

The Mexican Judiciary Branch does not have specialized bankruptcy courts, or even specialized commercial courts. As a result, Civil Judges entitled to rule on civil, commercial and labor disputes are also assigned to oversee in-court restructurings, and obtaining an initial protective ruling from those judges can be a very time-consuming task, which Perez Correa and Gonzalez consider one of the main problems with the country’s bankruptcy framework.[4]

Although bankruptcy protection requests should be examined and granted – or dismissed – within three days of the filing date,[5] in practice this deadline is never respected, with certain cases taking several months to be accepted. Oro Negro, one of the largest bankruptcies ever filed in Mexico, is also among the most famous examples of how long a court supervised restructuring can take to start: the oil driller was formally declared in concurso one year after it filed for bankruptcy protection, in 2017.

The attorneys believe that bankruptcies are not among the preferred processes for Mexican Civil judges, possibly because ruling on this sort of proceeding may be “worthless.” On the one hand, it involves several parties and may be the stage for complex litigations, especially when it comes to high-profile cases and unprecedented disputes; on the other hand, these cases represent only one process, in terms of productivity and the “key performance indicators” set forth by Mexican audit authorities. On certain occasions, courts refuse to accept a case relying on unreasonable grounds, making it necessary to seek an appellate court decision to review it, with the company remaining unprotected from individual collection enforcement lawsuits in the meantime.

Perez Correa and Gonzalez commented that, in 2014, government authorities had authorized the creation of commercial specialized courts in Mexico, but only one commercial court[6] has been implemented so far. The IFECOM (Federal Institute of Specialists in Bankruptcy Procedures – “Instituto Federal de Especialistas de Concursos Mercantiles”) has been making its best efforts to convince Mexican Judicial Council to create at least two or three regional specialized bankruptcy courts in the country, though it is not possible to predict if and when this will happen.

Cross-border rules – need of filing for concurso leads to underuse

Mexico was one of the first countries in the world to adopt the UNCITRAL[7] Model Law on cross-border insolvencies in its bankruptcy law,[8] in order to introduce clear rules to deal with in-court restructurings involving companies, creditors or assets located in more than one country. According to the attorneys, however, the way the UNCITRAL model law was introduced in Mexico does not make it work as it should, as certain adaptations made in its inclusion have limited some of the benefits of the process.

First and foremost, Mexican companies – as well as foreign companies holding an establishment in Mexico – that have filed for bankruptcy abroad must file for a “general” concurso[9] in order to seek domestic recognition of the foreign main proceeding, rather than filing for an expedited proceeding of recognition and general assistance as suggested in the model law and adopted by other jurisdictions, for instance, Chapter 15 of the US Bankruptcy Code.[10] As a result, Perez Correa and Gonzalez noted that Mexican companies do not use cross-border rules provided in their domestic bankruptcy law to avoid the problems mentioned above related to the lack of specialized courts and general difficulties having a concurso filing admitted for review.

In addition to the need of filing for concurso, the attorneys also cited the requirement of “reciprocity”, stated in Section 280 of Mexican bankruptcy law, when international cooperation is requested, as another obstacle in the law that may be hampering the use of cross-border rules in the country. Consequently, rather than using domestic restructuring tools, certain local distressed companies needing court oversight to restructure international debt – including Aeromexico and FAMSA – have decided to file for a Chapter 11 voluntary proceeding with a US Court, aiming to benefit from the legal certainty and predictability stemming from that jurisdiction.

Bankruptcy law reform – Bar Association initiative

In May 2020, the Mexican Bar Association submitted to the country’s Senate a proposal for the inclusion, in the country’s bankruptcy law, of a new, expedited bankruptcy proceeding that companies would use to restructure unpaid debt resulting from extraordinary situations, including a declaration of a state of emergency in Mexico or events of force majeure. The proposal came as an attempt to fight the economic consequences of the coronavirus pandemic, as a few weeks prior – on 30 March 2020 – Mexican authorities had declared a state of sanitary emergency in the country as a consequence of the COVID-19 outbreak.

The Mexican Banks Association (Asociacion de Bancos de Mexico - AMB) strongly criticized the proposal, calling it inconvenient, inopportune and unnecessary. AMB sent a letter to the Mexican Congress requesting that the Congress reject the bill, arguing that its approval would lead to negative consequences for the country’s health and economic crises. AMB also argued that the attorneys’ proposal violates the principles of due process and equal rights between the parties.

Perez Correa and Gonzalez, in contrast, support the proposal, as it could streamline bankruptcy proceedings by eliminating certain intermediary steps, such as the visita stage,[11] and making the acceptance of the protection request automatic. However, the specialists say it is not possible to predict when or if the proposal would be converted into law. They believe it is not likely to happen in the short term, as the Mexican government seemingly did not include this and other bankruptcy-related issues among its priorities.

Part two of the discussion with Fernando Perez Correa and Zulima Gonzalez will continue with the attorneys sharing their opinions about the pros and cons of the visita stage, the role played by IFECOM in the Mexican bankruptcy regime, and the reasons why DIP financings are rarely accessed by Mexican companies in bankruptcy, despite the unquestionable funding needs of distressed corporates.

Endnotes

[1] Fernando Perez Correa has almost three decades of experience acting as a legal advisor, mediator, conciliator and trustee in bankruptcy and corporate-related disputes, including international commercial arbitrations. Perez Correa holds a law degree from the Universidad Nacional Autonoma de Mexico and an LLM from Cornell Law School, and is also admitted to practice in New York and in the federal courts of the Second Circuit of the United States.

[2] Zulima Gonzalez has large experience in domestic and cross-border bankruptcy disputes, as well as civil and commercial litigation. Gonzalez holds a law degree from the Universidad Anahuac Mexico Norte and an LLM from University College London.

[3] The interview was conducted on 28 April 2021 via videoconference and has been edited for brevity and clarity.

[4] To go deeper into this topic: GONZALEZ, Zulima. La necesidad de crear los juzgados de distrito en materia mercantil, June 2020.

[5] Three days is the general deadline set forth in Section 1079, VI of Mexican Commercial Code, which applies for acts and situations for which there is no specific deadline stated in the bankruptcy law, according to Section 8, I of Mexican bankruptcy law.

[6] In the City of Toluca, State of Mexico.

[7] United Nations Commission on International Trade Law.

[8] Sections 278 to 310 of the bankruptcy law.

[9] According to Sections 288 and 293 of the bankruptcy law.

[10] Although foreign companies that have only assets, and not and establishment in Mexico, are allowed to request the recognition via an expedited ancillary proceeding, without the need to file for concurso.

[11] Visita stage is a verification visit to the company, made by a court’s assistant who also assess accounting books and other documents and information before the court decides whether to grant the bankruptcy protection request.

by Arthur Almeida

Arthur Almeida is a former restructuring attorney. Prior to joining Debtwire as a Legal Analyst, he practiced with Passos & Sticca Advogados Associados, and worked in the legal department of Banco Fibra S.A. Arthur’s experience includes participating in major civil litigation on credit recovery, representing creditors such as banks and financial institutions in high-profile restructurings. He also obtained his LL.M in Financial and Capital Markets Law from Insper Instituto de Ensino e Pesquisa, and is currently enrolled in the Master's Program in Commercial Law at Universidade de Sao Paulo.

Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.