Commercial Bankruptcies in Mexico During Times of COVID-19

The current worldwide health emergency has had serious effects on Mexico's economy. Companies in various sectors and industries are facing serious financial difficulties due to decreasing income, which is having a further effect in complying with their obligations before their creditors. Traditionally, a company that is in a state of insolvency could have access to bankruptcy proceedings, seeking the necessary judicial protection to save the enterprise; likewise, the creditors could obtain, through the bankruptcy process, an orderly, transparent and equitable manner for payment of debts, either through a restructure agreed with the company or, if that is not possible, through its declaration of bankruptcy and liquidation.

Due to the health emergency, the operation of federal courts is currently limited to "urgent cases" amongst which, as per General Agreement 8/2020 from the Federal Judicial Council (Consejo de la Judicatura Federal), are included requests for interim measures in bankruptcy matters.¹ 

These interim measures are not expressly limited, which means that a judge would have wide discretion in his or her decision. For example, these could be requested to maintain the operation and sustainability of the business, avoid the disappearance of assets, authorize credits for the company or preserve jobs.

The request can be submitted through digital mechanisms, including both the Certified Electronic Signature of the Federal Judicial Power (Firma Electrónica Certificada del Poder Judicial de la Federación or FIREL) or the electronic signature or "e.firma" (formerly known as firma electronica or FIEL), which can be requested digitally.

The fact that the interim measures regarding commercial bankruptcy have been included among the emergency cases that the district court must hear during the COVID-19 emergency is something very positive; however, it is not a complete solution to the problems that arise in these types of situations, since judges are prevented from advancing further in the bankruptcy proceedings and could not, for example, appoint a conciliator to seek a viable agreement between the company and its creditors, or issue a judgment declaring the bankruptcy, among other actions.

Interestingly, on April 27, 2020, an initiative to modify the Commercial Bankruptcy Law was published in the Senate Gazette.² This modification seeks to include in the aforementioned statute a new "Emergency Bankruptcy Regime" to allow merchants access to bankruptcy proceedings in emergency cases. 

The initiative would establish the following procedures:

• The Emergency Regime would only be accessible under an unforeseen circumstance, force majeure or, alternatively, an emergency declaration, health contingency or natural phenomenon, national or regional.
• The application may be submitted digitally and without the need for a physical file pursuant to Article 23 Bis of the Bankruptcy Law.³
• The proceedings are to be initiated by the merchant through a document in a format designed by the Federal Institute of Bankruptcy Specialists, in which the merchant declares under oath that he or she is in one of the situations that the Bankruptcy Law establishes as necessary for a declaration of bankruptcy. The merchant does not have to provide evidence of a generalized breach of his obligations.
• Within three business days, the judge would admit the request and issue a judgment declaring bankruptcy.
• The ruling would include interim measures. Importantly, it would include the following:
• The judgment would not exhaust the procedure of recognition, graduation and priority of credits.
• The merchant may not dispose of or encumber his or her main assets, or make payments of overdue obligations due prior to the judgment.
• Modifications or revocations of concessions and work contracts essential for the business may be prohibited.
• The judge may grant any type of interim measures that is requested.
• The judgment will not admit an appeal against it.
• The conciliator must be appointed two business days after notification of the declaration of bankruptcy.

Although it is unlikely that this initiative to modify the Commercial Bankruptcy Law will be approved and enforced before the present health emergency is lifted, it would be important for ideas such as those included in it to become a statutory rule so that both companies and creditors can have better legal tools to face future exceptional situations, similar to the current COVID-19 pandemic.

Holland & Knight has an interdisciplinary restructuring and bankruptcy team made up of specialists in financial law and litigation, ready to support clients in restructuring and bankruptcy proceedings. For more information, contact the authors or Holland & Knight's Mexico City office.

Notes

¹ General Agreement 8/2020, of the Plenary Session of the Federal Judicature, Related to the Work Scheme and Contingency Measures in the Jurisdictional Bodies for the Public Health Phenomenon Derived from the Virus COVID-19.

² Emergency Bankruptcy Regime, Senate Gazette, April 27, 2020

³ Article 23 Bis. Those who request or claim the declaration of bankruptcy in terms of articles 20 and 21, respectively, may do so by submitting their request in written or electronic form. The requests in electronic form will be filed through the use of information technologies, using the Electronic Signature in accordance with the regulations issued for this purpose by the Federal Judicial Council. In any case, whether the parties request or claim the bankruptcy in printed or electronic form, the courts must ensure that that the electronic and printed file coincide entirely for the consultation of the parties. The heads of the courts will be responsible for monitoring the digitization of all promotions and documents that are presented in accordance with this law, as well as agreements, resolutions or judgments and all information related to the files in the system, or should these be submitted electronically, they will be printed to be incorporated into the printed file. The court clerk will attest that in both the electronic and the printed files, each promotion, document, order and resolution is incorporated, so that they coincide in their entirety.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.