Oscos Abogados believes that Mexico’s insolvency legislation is currently too unforgiving, not allowing for the concepts of fresh starts or creditor protection, and that a system more like the one in the US would help foster growth
It’s easy to assume that the insolvency business is a gloomy Dickensian one, with serious-faced professionals presiding over the demise of the collapsed dreams of business success. Perhaps some insolvency practitioners are like that, but Dario Oscos, Senior Partner at boutique law firm Oscos Abogados (Oscos) of Mexico City, certainly isn’t.
A thoughtful, upbeat legal professional whose firm has been recognised by World Finance for the calibre of its insolvency work, Oscos sees insolvency not as a graveyard for commercial organisations, but rather as a vital dynamic in an economy. He regards well-regulated insolvency as allowing entrepreneurs to make a fresh start without being permanently burdened by debts incurred in good faith while they were pressing ahead with doing their utmost to make their business a success.
Of course, he also recognises the vital need to protect debtors. “At present, Mexican insolvency law – the ‘Ley de Concursos Mercantiles’ – is very unsatisfactory,” he says. “First enacted in 2000, it has so far been applied to a grand total of just 305 insolvency cases out of 906 insolvency filings, 134 voluntary and 772 involuntary. The law is so inadequate that in the vast majority of instances, debtors and creditors strive to avoid having to involve themselves with it, and settle out of court instead.”
Oscos concedes that there is a tradition in Mexico of out-of-court settlement of legal cases, but all the same he regards the nationwide aversion to taking insolvency actions through the courts as a symptom of a serious lack of faith in Mexican insolvency law.
Insolvency law in Mexico stipulates two phases of proceedings. Firstly, there is a phase known as ‘conciliation’, which can persist for as long as 185 calendar days and can be extended once or twice by 90 days, though only if the majority of creditors agree; and secondly, liquidation in bankruptcy. In December 2007, Mexican insolvency law was amended to allow courts to approve settlements or reorganisations if these were supported by a simple majority of creditors.
An inadequate legal framework
The law on insolvency in Mexico is claimed by its advocates to encourage settlements and reorganisations, but Oscos sees it as being too formulaic and too prescriptive, and he believes that this has the effect of discouraging debtors from making use of it. His evidence for this assertion includes the fact that during the decade since the law came into force, there have only been those 305 insolvency cases that have come under the law’s jurisdiction. When asked about this he communicates a sense of righteous indignation that the legal framework in his own country in his own profession is so inadequate. Overall, Dario Oscos is bullish about the future of Mexican economic life. “We have an open, dynamic and vibrant economy that has massive growth potential and which I think offers enormously exciting opportunities to both domestic and foreign investors, especially in areas such as infrastructure, tourism, telecoms and oil and gas.”
He adds: “Yes, of course at the start of this second decade of the 21st century, Mexico has been affected by the climate of financial distress that resulted from the world economic crisis. But I think it’s important to note that financial distress also creates its own opportunities, such as in the area of mergers and acquisitions, where domestic and foreign investors have great incentives to invest in new, leaner and more streamlined Mexican businesses. Today, the truly international nature of our economy is shown by the fact that 99 percent of our financial sector is foreign-owned, and the NAFTA market, Canada, the US and Mexico have grown three times.”
Oscos concedes that the period of financial distress has, naturally, placed considerable pressures on his organisation in its daily work in insolvency. “The financial crisis stemming from the international crisis and the consequent Mexican recession has led to many entrepreneurs, financial institutions, and commercial organisations from all sectors suffering serious financial distress; distress that of course affects their families and which can’t be kept out of their personal lives. We take our responsibility to help people suffering from financial problems very seriously, in particular those that have been caused by the economy. We want to find solutions for them, ideally through out-of-court settlements, that minimise stress and disruption and save time and money.”
Advice for broken businesses
In the light of the current insolvency legislation in Mexico, Dario Oscos and his firm pursue a policy of encouraging all parties involved in insolvency cases – whether they be debtors, creditors (including the government and tax creditors), people employed by large organisations, entrepreneurs or any ordinary person – to settle out of court as quickly as is feasible.
“We at Oscos Abogados greatly believe in the importance of keeping all enterprises viable as going concerns wherever this is feasible,” says Oscos. “This is important not only for the people involved, but also for the economy generally. After all, an organisation that ceases to be in business brings no benefit to anyone, least of all those who are making their living from it and the economy itself. But if it is clear that there is no way that the organisation can remain as a going concern, our advice – followed by hands-on help if required – is to liquidate assets in an orderly and efficient process, whether in ‘Concurso Mercantil’ (the Mexican term for commercial bankruptcy), or in an out-of-court procedure.”
Oscos adds: “We only recommend litigation as the very last resort. Our attitude in this respect may change as and when the highly unsatisfactory Mexican insolvency law is changed and brought properly up-to-date, but for the time being our recommendation is to avoid litigation if there is indeed any way that it can be avoided. I suppose it says a great deal about what we, as insolvency practitioners, think of our country’s insolvency legislation that we strive to advise our clients not to make use of it!”
As for the range of services that Oscos Abogados offers, this spans two main categories. The services associated with the contentious side of its business include the following:
- Domestic and international litigation in contract or tort, as well as civil and commercial matters, and litigation in the fields of banking, finance, securities, trust, corporate, construction, energy, oil and gas, shareholders’ disputes and conflicts of interest, leasing and intellectual property;
- Planning and implementation for insolvency, bankruptcy and restructuring;
- Corporate restructuring and reorganisation of groups of companies;
- Contracts and credit/financial operations;
- Arbitration and mediation, both national and international;
- International procedural cooperation as well as recognition and enforcement of foreign judgements;
- Criminal law.
The services offered by the advisory and consulting side of the firm include:
- Civil and commercial;
- Contracts and warranties;
- Real estate;
- Banking, finance and securities;
- Mergers and acquisitions.
Oscos believes that the biggest problem with the Ley de Consorsos Mercantiles is that it only provides for two polarisations – restructuring and liquidation – and nothing in between. As he points out, once an organisation has gone down the path of liquidation, it foregoes the restructuring option. As he puts it: “Our legal framework, which is partly designed to facilitate the restructuring of insolvent organisations if that’s feasible, itself needs completely restructuring. The rigid restructuring/liquidation polarisation makes no sense commercially as a tool to deal with real-life insolvency cases.”
A case for change
Oscos points in particular to the case of Vitro, the Mexican glass industrial corporation which ran up debts totalling more than $1bn with third parties and then created new subsidiaries to which it claimed it also owed a very great sum. By making these subsidiaries substantial creditors, Vitro in effect gained authority over a large proportion of its creditors. Oscos regards this as an unlawful abuse that would not be possible under the insolvency jurisdictions of Western countries.
Yet Oscos is not in business just to give debtors a tough time. On the contrary, he tends to see insolvency as an occupational hazard of business life; indeed, his thinking about his profession tends toward the conclusion that any energetic and dynamic business environment is bound to involve some organisations becoming insolvent.
Oscos is firmly behind the importance of giving entrepreneurs the opportunity to make what he describes as a “fresh start”. As he explains: “One of the many problems with Mexico’s current insolvency law is that it does not provide, inter alia, for pre-insolvency protection, groups of companies, intercompany debt, and the concept of discharge from debts. Mexican insolvency law does not recognise this idea, and so even if a debtor’s assets are liquidated, the debtor still remains liable for the debts. Obviously, this misjudgement in the law militates against the notion of the fresh start, and can’t be good for Mexican business and the Mexican economy. There’s an urgent need for Mexican insolvency law to provide protection for creditors, just as is provided under the legislation of countries such as the US. We in Mexico badly need a modern insolvency law for the 21st century.”