Mexico: New District Courts in bankruptcy matters

Pursuant to Article 1 of the Commercial Bankruptcy Law (Ley de Concursos Mercantiles), "it is in the public interest to preserve companies and prevent widespread payment defaults from jeopardizing the viability of such companies and of the others with which they maintain business relationships." Thus, the Commercial Bankruptcy Law seeks reorganization to achieve the preservation of insolvent companies and of those with which they do business: it seeks to prevent a domino effect in the economy. This recognition of the public interest in preserving companies was, and remains, central to the design of bankruptcy proceedings. It is the basis for establishing the exclusive jurisdiction of federal courts, on account of the State's interest. Since its enactment, the Commercial Bankruptcy Law has excluded concurrent jurisdiction between local and federal courts, which is recognized under Section II of Article 104 of the Mexican Constitution. This restriction did not exist under the prior Bankruptcy and Suspension of Payments Law. A landmark feature of the Commercial Bankruptcy Law was the creation of the Federal Institute of Commercial Bankruptcy Specialists (IFECOM), an auxiliary body of the Federal Judiciary, whose main function is to authorize the registration of the auxiliary specialists in bankruptcy proceedings —examiners, conciliators, and trustees— and which also provides training in the field and technical advisory support to judges. The creation of IFECOM provides additional grounds for the exclusivity of federal jurisdiction, namely: (i) the creation of a specialized body with federal jurisdiction over bankruptcy matters; and (ii) the fact that among its functions is supporting federal judicial bodies in non-legal tasks, i.e., tasks related to administrative, accounting, and financial matters. The federal jurisdiction established under the Commercial Bankruptcy Law was designed to ensure that judges could devote their full attention to their legal functions as the presiding authority over the proceeding, which is why the judge is assisted by IFECOM and its specialists in all other matters related to the bankruptcy case. Under the original design of the Commercial Bankruptcy Law, the legislature did not determine the need to create specialized courts. Moreover, when the Commercial Bankruptcy Law was enacted, the statistics on the number of insolvency cases in Mexico did not justify the creation of specialized courts. Twenty-two years after the Commercial Bankruptcy Law entered into force, the situation is different. Recent practice calls for judicial specialization. Although only 846 insolvency proceedings were admitted and processed from 2000 through November 30, 2021 —an average of 38 per year—, the number of proceedings has increased over the past two years, particularly since the start of the pandemic. In the period from January 1, 2021 to January 1, 2022, 43 insolvency proceedings were admitted, above the annual average. However, 118 cases were dismissed. This brings the total to 161 proceedings filed in 2021. The dismissals, the low number of cases processed over twenty-two years, and the growing migration of cases to the United States have drawn criticism —particularly because, in practice, unnecessary bureaucracy and formalism are evident, pointing to the need for more responsive and specialized judges. In addition, specialization is a trend within the Federal Judiciary, which every year creates specialized bodies in various fields, and commercial and bankruptcy matters are no exception to this trend. The Federal Judiciary itself acknowledged as much. On March 4, 2022, General Agreement 4/2022 of the Plenary of the Federal Judicial Council (Consejo de la Judicatura Federal) was published, establishing the creation of two District Courts specializing in Commercial Bankruptcy Matters, seated in Mexico City with jurisdiction throughout the country. From now on, every insolvency petition or claim, regardless of the domicile of the insolvent company, must be filed and processed in Mexico City. In addition, the Unitary Circuit Courts for Civil and Administrative Matters, and those specialized in Economic Competition, Broadcasting and Telecommunications, seated in Mexico City, were designated to hear appeals and amparo proceedings related to insolvency proceedings. At the start of operations, the two new District Courts and Unitary Courts were assigned the cases initiated as of November 16, 2020, regardless of their stage of development. It is still too early to assess the work of these new courts. The figures continue to show more dismissals than admissions. However, the number of cases dismissed in the first half of 2022 is less than half of the 2021 figure, a total of 36.6. It remains to be analyzed what causes these dismissals, in order to determine whether the formalism of the past has been overcome. In addition, there are pending issues whose feasibility or challenges will be determined in the coming months: the specialization of second-instance courts, online proceedings to facilitate access to justice, and the remote functions of the specialists. Nevertheless, it is undeniable that the Judiciary has taken an indispensable step toward improving bankruptcy proceedings for the benefit of the parties involved. Together, we will build the future of these new courts; constant improvement is necessary, and practice provides the means to achieve it.

By Jessika Rocha
Partner, Litigation, Arbitration and Commercial Bankruptcy
Von Wobeser