The cart before the horses, the difficult to avoid conversion to the liquidation stage.

The cart before the horses, the difficult to avoid conversion to the liquidation stage.

Bankruptcy in Mexico has two successive stages: reorganization and liquidation. When reorganization is not possible, bankruptcy is converted to the liquidation stage. The purpose of the reorganization stage is to maintain the enterprise and pay the allowed creditors through a reorganization plan. The purpose of the liquidation stage is to sell the enterprise – as a going concern or in segments – and pay the allowed creditors.

If a plan is not submitted and approved within one hundred and eighty-five calendar days following the publication in the Federal Official Gazette of the summary of the adjudication in bankruptcy, the reorganization stage is converted to the liquidation stage. The court can extend this period by ninety calendar days if the reorganization officer or a certain percentage of the allowed creditors request it. The court may grant a second extension if the debtor and a certain percentage of the allowed creditors request it. However, the period cannot exceed three hundred and sixty-five calendar days.

Only allowed creditors can sign the plan, but to get a claim allowed, one must pass through the allowance of claims proceeding, which is often heavily contested multiparty litigation. Allowed creditors are those that acquire such nature by the judgment on the allowance of claims.

The allowance of claims proceeding is often the most time-consuming aspect of the overall bankruptcy proceeding. In effect, in the allowance of claims proceeding, there could be at least three resolutions, the first instance, the appeal resolution, and the amparo (which is an extraordinary judicial recourse).

In most cases, the one hundred and eighty-five calendar days period may expire even before the allowance of claims proceeding is finished. Hence, the debtor is punished with the conversion to the liquidation stage for not reaching with the creditors a plan within that time, despite there are no creditors with whom a plan can be signed because the allowance of claims proceeding is not finished yet. The cart is before the horses.

The ruling on the conversion to the liquidation stage can be challenged, and courts of appeals have remanded the proceeding to wait until the allowance of claims proceeding is concluded. But, in the meantime, the liquidation stage commences provided that the appeal has not suspensive effects.

For this reason, the bankruptcy law in Mexico needs to be amended in this regard.

For further info about bankruptcy law in Mexico, my work “Bankruptcy Law in Mexico”, written in English, can be accessed at https://works.bepress.com/francisco-rodrigueznepote/4/, where it can be downloaded freely. A complete translation of the legal text can be found there, as well.