Mexico and US in deadlock over insolvency reforms

A recent dispute between the US and Mexico over the bankruptcy of a leading Mexican-based firm shows that the country urgently needs to update its insolvency laws


As Mexico surges towards becoming a modern, thriving economic hub, its legal processes must be brought up to date in order to ensure confidence from the business community. For a long time the country has offered considerable growth potential, but has suffered from a large unregulated and untaxed black market, as well as state monopolies of certain industries, causing a lack of serious competition.

When President Enrique Peña Nieto assumed control of the country in 2012, he set about a series of reforms aimed at improving Mexico’s competitiveness, stimulating economic growth, and freeing industries from the shackles of state ownership. While the economy is closely linked to the US, it has started to slow in recent years, and GDP growth is thought likely to only hit 1.2 percent during 2013.

This GDP growth is expected to reach 4.2 percent in 2014 with the legislative amendments and their effective implementation in matters of labour, education, tax, finance – including banking and insolvency – energy, oil and gas, and telecommunications.

During times of stagnation as well as economic crisis, a robust legal environment is essential to ensure that when companies fall into trouble, there is a proper framework that protects all stakeholders. Mexico enacted its Commercial Insolvency Law (Ley de Concursos Mercantiles LCM) in 2000, with the intention of governing the process after a company approaches insolvency.

Preventing economic fallout
There have been a number of legal wrangles in recent years that have come as a consequence of differences between Mexican law and that of neighbouring territories, like the US, that companies operate in. Designed to rehabilitate companies before having to put them into liquidation, the LCM does not regulate, inter alia, groups of companies, intercompany debt, discharge and other insolvency items for a 21st century regulation.

Cross-border trade, as well as the onset of increased globalisation, means that there needs to be a level of consistency between laws in both Mexico and other territories

Cross-border trade, as well as the onset of increased globalisation, means that there needs to be a level of consistency between laws in both Mexico and other territories. No more so has this trouble been emphasised than in the recent bankruptcy of Mexican glassmaker Vitro SAB.

While Mexico’s legal system might not be as robust as many international firms may hope for, there are a number of legal practitioners that know their way around the complex legal system. World Finance recently spoke to Dario Oscos Coria, founder of Oscos Abogados, about Mexico’s insolvency laws, and what can be learnt from the Vitro case.

Working around a catch and release
Vitro SAB is a Mexican holding company that has many operations across a number of international subsidiaries, including some in the US. With annual net sales of around $2bn and a primarily Mexican workforce of roughly 17,000, the company is a leading manufacturer of glass products.

In 2009, it fell into trouble, failing to pay $293m worth of derivative contracts, as well as interest on bonds that were set to mature in 2012, 2013 and 2017. This led to the company defaulting on around $1.5bn worth of debt held by banks and bondholders across the world.

In December 2010, Vitro sought bankruptcy as a means to restructure itself, as well as creating $1.9bn of intra-company loans between various subsidies. Such a move was seen as more favourable to shareholders than to creditors.

Mexico is in urgent need of a 21st-century insolvency system

“The company’s intention was to enable the subsidiary creditors that had lent money to the holding company to cast votes in support of Vitro’s restructuring plan, thereby imposing a majority in the reorganisation plan on dissenting creditors,” Oscós said.

“Moreover, its affiliates had also entered into a lock-up agreement with the holding company that required them to vote in favour of a restructuring that would release them from payment guarantees they had extended to outside creditors.”

While the bankruptcy reorganisation plan was granted in Mexico, the US legal courts rejected recognition of the reorganised plan because it was contrary to public policy and would release third party obligations of non-bankruptcy debtors.

Oscós says that the case highlighted the need for Mexico to reform its insolvency laws. “The Vitro insolvency case highlighted many of the deficiencies and possible abuses of the LCM, and may be underlined as the most notable insolvency case in recent years.”

He adds: “After 13 years in effect, experience of the LCM shows that Mexico is in urgent need of a 21st-century insolvency system. The legislator has recognised this situation and has made major amendments to the LCM.”