Bankruptcy Clawbacks of Preferential & Fraudulent Transfers in Mexico

 

Bankruptcy Clawbacks of Preferential & Fraudulent Transfers in Mexico

 

Creditors can set aside fraudulent conveyances of their debtors by a revocatory action, also known as actio pauliana. This action is not the same if the debtor is bankrupt. There is the non-bankruptcy actio pauliana and the bankruptcy actio pauliana. Civil codes govern the former and the Bankruptcy Law covers the latter. Creditors under the non-bankruptcy actio pauliana have fewer rights and benefits than those under the bankruptcy actio pauliana.

 

          Only the creditors, creditor’s representatives, and insolvency officers are entitled to bring fraudulent conveyances actions – not the debtor or the debtor-in-possession.

 

1. Relation back period/retroactive date

 

          The bankruptcy adjudication ruling includes the retroactive date, which is the calendar day two hundred seventy before the date of the ruling, which is doubled for subordinated creditors. However, through an ancillary proceeding, the retroactive date can be pushed back further, but not more than three years. The limit to the relation back of the bankruptcy adjudication responds to a need for legal certainty regarding past transactions. The period from the date of the adjudication to the date of its relation back is known as the suspect period.

 

2. Acts committed before the relation back period

 

          For acts committed before the relation back period, the rules governing non-bankruptcy actio pauliana apply. The petitioner does not have access to the presumptions of law that the Bankruptcy Law grants for acts committed within the relation back period, hence he must prove that the debtor and the third party knowingly defrauded the debtor’s creditors. This requirement is not necessary for gratuitous acts. A contract is onerous in which reciprocal benefits and burdens are stipulated, and gratuitous when the benefit is solely for one of the parties.

 

3. Acts committed within the relation back period

 

          Some acts committed within the relation back period are subject to conclusive presumptions of law while others are subject to rebuttable presumptions of law.

 

          3.1. Fraudulent conveyances per se

The following acts that were committed within the relation back period are fraudulent per se with no possibility of rebuttal unless the estate takes advantage of them or the third parties returned what they received from the debtor.

a. Gratuitous acts. Whether they were committed outside of or within the relation back period, gratuitous acts are fraudulent per se.

b. Conveyances with asymmetrical value. Acts and alienations in which the debtor pays compensation of a value notably higher or receives compensation of a value notably lower than the benefit of his counterparty.

c. Conveyances that ignore market conditions. Transactions by the debtor in which conditions or terms were agreed that differ significantly from the prevailing conditions in the market in which they were executed, on the date of its execution, or of the commercial uses or practices.

          d. Remissions of debts. Debt acquittals are gratuitous acts.

e. Payments of unexpired obligations. Such payments are considered early payments.

f. Discounts. The discount made by the debtor from his effects, within the retroactivity date, shall be considered an early payment.

 

          3.2. Fraudulent conveyances unless bona fidei is proven

The following acts that were committed within the relation back period are fraudulent unless the third party proves his good faith:

i. The granting of guarantees or increasing current guarantees, when the original obligation did not include said guarantee or increase.

ii. The payments of debts made in kind, when it differs from the originally agreed one or when the compensation agreed was in money (giving in payment/datio in solutum).

a. When the debtor is an individual. In the case of individual debtors, the following acts that were committed within the relation back period are fraudulent, unless the third party proves his good faith:

a.i. Those executed with his spouse, concubine, blood relatives up to the fourth degree, or up to the second degree if the kinship is through marriage, as well as relatives through civil kinship.

a.ii. Those executed with legal entities in which the persons mentioned above, or the debtor himself, are managers or part of the board of directors; or jointly or separately, directly or indirectly, hold rights that allow them to exercise the vote in respect of more than fifty percent of the capital, have decision-making power in their meetings, can appoint the majority of the members of the body of administration, or through any other means, have powers to take fundamental decisions of the legal entity.

b. When the debtor is an entity. In cases of legal entities, the following acts that were committed within the relation back period are fraudulent, unless the third party proves his good faith:

b.i. Those executed with the administrator, members of the board of directors or relevant employees of the debtor, or of the legal entities indicated in article 117 subsection IV, under what is outlined in article 270 Bis of the Bankruptcy Law, or with the spouse, female or male concubine, blood relative up to the fourth degree, or up to the second degree if the relation is through marriage, as well as relatives through the civil kinship of the persons mentioned above.

b.ii. Those executed with those individuals that jointly or separately, directly or indirectly, hold rights that allow them to exercise the vote in respect of more than fifty percent of the capital of the debtor, or of the legal entities indicated in article 117 subsection IV of the Bankruptcy Law that have decision-making power in their meetings can appoint the majority of the members of their body of administration or through any means have the powers to take the fundamental decisions of the debtor.

b.iii. Those executed with those legal entities where there is a coincidence of the managers, members of the board of directors, or relevant directors with those of the debtor.

b.iv. Those executed with those legal entities that are, directly or indirectly, controlled by the debtor, that exercise control over the latter, or that are controlled by the same company that controls the debtor.

For further information about bankruptcy law in Mexico, my work "Bankruptcy Law in Mexico", 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.