The "Stay" in Mexican Bankruptcy

The stay is a crucial element of the Mexican Insolvency Law, designed to provide breathing space for the debtor and ensure an orderly and fair process for all creditors. This provision comes into effect once a judgment declaring the debtor bankrupt, or en concurso, is entered.

The stay has two main features: a suspension of pre-commencement claims; and a stay of execution, or freezing of foreclosure actions against debtor’s assets.

Purposes

The primary purpose of the stay is to allow debtors to cease payment of pre-commencement obligations and to freeze most legal actions against the debtor, particularly those aimed at recovering debts or seizing assets. This pause in creditor actions serves several important functions in the insolvency process.

First and foremost, the stay prevents a "race to the courthouse" scenario where creditors rush to enforce their claims individually, potentially dismantling the debtor's business in a piecemeal fashion. By halting such actions, the stay preserves the debtor's assets and business operations, maintaining the possibility of a successful reorganization or, if necessary, a more orderly and value-maximizing liquidation.

Secondly, the stay promotes equality among creditors. By preventing individual enforcement actions, it ensures that all creditors are treated according to their legal rights and priorities as defined in the insolvency law, rather than based on who acts fastest or has the most resources to pursue legal action.

Suspension of Payments

The stay allows for some breathing space by allowing the debtor to optimize cash by preventing them from making payments of pre-commencement claims. Debtors may continue making payment of pre-commencement claims for essential suppliers.

Likewise, debtors may continue making payments in the ordinary course of business, including payments of labor- and tax-related obligations.

Stay of Execution

The stay of execution is quite comprehensive. It covers both attachments (seizure of assets) and foreclosures. This broad coverage ensures that virtually all types of enforcement actions are halted, providing comprehensive protection for the debtor's estate.

However, the stay of execution is not absolute. The law provides for a significant exception: cases involving privileged labor-related claims. Specifically, labor obligations for the previous year's salary, benefits, and severance are not subject to the stay. This exception reflects the special status often accorded to employee claims in insolvency regimes worldwide, recognizing the vulnerable position of employees and the importance of their claims for their livelihood.

Another nuanced aspect of the stay provisions relates to secured creditors. While the general stay applies to secured claims as well, there is a potential exception. Secured creditors may be allowed to begin or continue foreclosing on assets that, in the opinion of the judge and the conciliator, are not essential for the ordinary course of the debtor's business. This provision strikes a balance between respecting the rights of secured creditors and maintaining the viability of the debtor's business during the reorganization attempt.

Breathing Space

The stay of execution is particularly crucial during the reorganization stage of the insolvency process. By providing a period of calm, it allows the debtor and the court-appointed conciliator to focus on developing a viable reorganization plan without the pressure of ongoing enforcement actions. It also provides time for a proper assessment of the debtor's financial situation and the formulation of a fair and comprehensive plan for addressing all creditor claims.

Conclusions

In conclusion, the stay of proceedings under the Mexican Insolvency Law is a vital tool in achieving the law's objectives. By enjoining payments and halting most creditor actions upon the commencement of insolvency proceedings, it creates an environment conducive to either successful business reorganization or orderly liquidation. The stay promotes fairness among creditors, preserves the value of the debtor's estate, and provides the breathing space necessary for developing effective solutions to the debtor's financial distress. While allowing for certain exceptions, particularly for labor claims and some secured creditor actions, the overall effect of the stay is to transform what could be a chaotic and value-destroying process into a more orderly and potentially value-preserving one.

The complete version of this article can be found here