WHY BANKRUPTCIES FAIL IN MEXICO

 

WHY BANKRUPTCIES FAIL IN MEXICO

 

          This article aims to explain why bankruptcy has not been the first choice for businesses in Mexico.

 

For many businesspeople, bankruptcies are a failure in Mexico; if they were not, there would be more bankruptcy proceedings. According to the Federal Insolvency Institute, under the current law, from 2000 to 2020, there have been 805 bankruptcies, indicating about 40 bankruptcies per year in a country of 125 million inhabitants[1] and approximately 5 million businesses, 99.8% of which are mini-, small-, and medium-size, while the others are big businesses (about 10,000).[2]

During the Covid-19 pandemic, in 2020, around 1 million mini-, small-, and medium-size businesses closed definitively, yet only 40 bankruptcies were filed in Mexico throughout that year. The companies most damaged by this pandemic were airlines and cinemas. Two of the largest companies in Mexico, consisting of an airline and a cinema, decided not to file for bankruptcy, or at least not in Mexico.

Aeromexico, the largest airline company in Mexico, decided to file a Chapter 11 petition before a New York court, despite its principal place of business and corporate domicile being in Mexico. Moreover, Cinépolis, the biggest cinema company in Mexico and one of the largest worldwide, informed that it is planning to enter negotiations with its creditors outside a bankruptcy procedure.

It appears that in Mexico, businesspeople realized there is too much at stake to put their businesses in the hands of a single judge in a bankruptcy proceeding.

According to the records of the Federal Insolvency Institute, of the 805 bankruptcies registered in Mexico, 458 were voluntary petitions, while 347 were involuntary petitions. Overall, 588 bankruptcies have been closed at this moment, while 217 are still pending. Of the bankruptcies closed, only 41% were through a reorganization plan, representing 241 over 20 years, or 12 per year.

This article aims to explain the causes of why bankruptcies fail in Mexico, according to my experience as a bankruptcy lawyer and the testimonies of clients and businesspeople.

 

          1. Costs.

 

          Bankruptcies in Mexico are expensive. The lawyer’s fees are higher than average, provided that few lawyers practice bankruptcy in Mexico. The fees of the debtor’s lawyers are not regulated or controlled by the bankruptcy court. Moreover, the debtor must pay the insolvency officer’s fees. The first insolvency officer to appear in the proceeding is the visitor, whose task is to assist the judge in determining whether the debtor is on general default. The visitor’s fees are approximately 200.00 USD per hour, and it typically requires about 50 hours of work to draft the report on the general default. Then comes the reorganization or liquidation officer, whose fees are determined in relation to the amount of debtor’s liabilities or debtor’s assets that were sold. For instance, when the liabilities sum to 5 million USD, the reorganization officer’s fees would be about 275,000.00 USD. Meanwhile, when the assets sold sum to 5 million USD, the liquidation officer’s fees would be about 277,000.00 USD.

          In total, this sums to about $300,000.00 for just the insolvency officer’s fees, lawyer’s fees, and other general costs.

          When a businessperson realizes the costs of saving a company, he or she might choose to invest money in creating a new company rather than save the dying one. The high cost of bankruptcies explains why the few bankruptcies that have occurred or were attempted in Mexico relate to big businesses, and why there are almost zero bankruptcies of mini-, small- or medium-size businesses, let alone individuals.

 

          2. Time consumption.

 

Bankruptcies in Mexico are tried within a judicial proceeding. Judicial proceedings in Mexico are timeous and bankruptcies take even longer. Bankruptcies are drawn-out processes because the judicial proceeding is heavily contested due to motions for reconsideration, appeals, and amparo trial (which is an extraordinary judicial recourse).

          In Mexico, a case will be closed if a reorganization plan is submitted and approved within a fixed period; if not, the case will be converted to the liquidation stage. 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. In effect, in the allowance of claims proceeding, there could be at least three resolutions, the first instance, the appeal resolution, and the amparo. The approval of plans is also a heavily contested proceeding, with the possibility of at least four resolutions.

A bankruptcy proceeding takes at least four years. My firm has been participating in a particular bankruptcy proceeding since 2011, and it is still not finalized.

When a businessperson realizes that a reorganization through bankruptcy could be so time-consuming, he or she typically decides to attempt a non-bankruptcy work-out. My firm, for instance, assessed that a debtor with 50 million USD in liabilities should not file for bankruptcy and rather work out with the banks directly. The outcome arrived more quickly, and it resolved with considerably greater success than several other cases in which the petition for bankruptcy was ineludible.

 

          3. Unpredictability.

 

          The Rule of Law provides legal certainty such that a party can foresee the action of the State. All courts in Mexico are bound to act within the legal text and its interpretation. The problem arises when interpreting the LCM, as the Mexican courts do not always know how to construe it.

Repetition perfects knowledge, but bankruptcy cases are few; as such, there is no repetition through which a court can acquire and perfect its knowledge. In fact, some courts have never received a bankruptcy case; if there are no cases, there are no judicial precedents, and there is no jurisprudence on which the parties can rely when interpreting LCM.

          Hence, when a businessperson asks whether the proposed plan will be approved, an honest bankruptcy lawyer should say that it would depend on the court’s interpretation of the law, which sometimes is occurring for the first time and is not being based on previous precedents.

 

          4. Stakeholders remain at stake.

 

          In a business, the parties at stake generally are, besides the debtor, its obligors, or guarantors, and, when the debtor is a legal entity, its shareholders. The reorganization through a bankruptcy proceeding leaves several stakeholders at stake. In effect, the reorganization plan approved bounds only the debtor and his or her creditors, not everyone (e.g., labor creditors fall outside the plan). Furthermore, the approved plan benefits only the debtor, not the shareholders (in an unlimited liability entity), the obligors, or guarantors. Thus, if a creditor is bound by the plan to receive only 15% of his or her claim, the creditor nevertheless can get the payment of the claim from the obligors or guarantors of the rest of the claim. This leaves the stakeholders in the same place no matter whether the debtors reorganize. The shareholders do not play a role in a bankruptcy, provided that they are not considered creditors, unless the entity is put into a corporate dissolution, in which case they cannot participate in the reorganization plan, not even with the absolute priority rule.

 

          In conclusion, there are many areas of opportunity in the bankruptcy regime in Mexico, but in the meantime, many businesses opt to attempt reorganization outside bankruptcy, explaining the few cases that have been pursued in the country.

 

          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.

 

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[1] INEGI, ‘Censo de Población y Vivienda 2020’ https://www.inegi.org.mx/programas/ccpv/2020/ accessed 19 february 2021.

[2] INEGI, ‘EL INEGI PRESENTA RESULTADOS DE LA SEGUNDA EDICIÓN DEL ECOVID-IE Y DEL ESTUDIO SOBRE LA DEMOGRAFÍA DE LOS NEGOCIOS 2020’ (2020) https://inegi.org.mx/contenidos/saladeprensa/boletines/2020/OtrTemEcon/ECOVID-IE_DEMOGNEG.pdf accessed 19 february 2021.