“Insolvency has been like a maze”

Mexican history has been dynamic and rich. It comes from the ancient great Olmeca, Mayan and Aztec cultures in the prehistoric stage, through 300 years thereafter of colonialism under the Spanish Crown domination; 11 years independence war; two empires – Iturbide and Maximiliano; foreign intervention and invasion wars by the US, England and France; the Republic with Juarez; the 30 years of Porfirism dictatorship; 10 years revolution war that forced Dictator Porfirio Diaz to flee Mexico; 71 years of political party PRI's totalitarism (Partido Revolucionario Institucional); the current lengthy and costly transitory way to democracy; war against the drug dealers and insecurity, the war against deep and extreme poverty (44.2 percent poverty as per CONEVAL Consejo Nacional de Valuacion de la Politica de Desarrollo Social. As per CEPAL Comision Economica para America Latina 34.8 percent under extreme poverty, with an increase in 2010 of 3.5 percent); having the richest man in the world ($51.5bn); and the war against demography exploitation. Mexico City is one of the most populated cities in the world (22 million).

Mexico has been strong enough to overcome these crises and is taking actions to surmount what has been called “the worst financial crisis ever in the world”. This 2008-09 crisis placed most economies worldwide, from developed and under-developed countries, under recession. The US is now attempting to prevent second recession. Mexico is closely linked to the US economy. This international crisis was, in essence, caused by financiers' extreme greed, abuse and financial maneuvers as well as weak or lack of timely overview, control and reaction by regulators.

The impact of the 2008-09 US crisis caused uncertainty and volatility although governments did take monetary and tax actions to face the crisis. The Mexican peso devalued 40 percent. The growth index for services has been 2.1 percent, raw materials 3.2 percent and industrial –0.7 percent. During January and February 2010, 128,000 people lost their jobs. As per INEGI's (Instituto Nacional de Estadistica y Geografia) statistics, consumer trust was down to 78.9, the lowest level in the last 30 years. Some 85 percent of Mexican manufacturing exports are sent to the US, where the automotive sector represents 27 percent. Annual exports had a growth of 5.1 percent; however, in January exports fell –26 percent. Unemployment in 2009 was five percent. In 2009, offer and demand of goods and services fell 9.5 percent, the worst in 28 years. Statistics of INEGI's report that 2009 has seen the most adverse meltdown in the exchange market of goods and services since 1982, even more intense than that experienced in 1995. From the offer side, GDP fell to a 9.5 percent annual rate and imports fell 18.2 percent. From the demand side, it was affected by the 6 percent fall in private consumption, an index that is equivalent to 52 percent of the total economic activity.

Consumption of families and companies fell to –9.5 percent; export of goods and services fell 14.8 percent, the worst in 30 years; expenditure in fixed assets fell 10.1 percent; inventory fell 475 percent; and in the fourth quarter of 2009 there was an offer and demand decline of 1.7 percent, for the fifth con-secutive quarter.

In 2010 Mexico has experienced a slow general recovery, by means of a rebuttal from the economic crisis and reactivation in the US automotive sector (GDP in Q1 was 4.5 percent and 7.5 percent in Q2), gaining in employment, exports to US and having better levels of manufactures, infrastructure and services, however, Mexican economy is still weak and is shaking due to US weak and shaking economy, under the shadow of a second recession.

Insolvency has been seen like a maze, the seven heads demon or the economy evil. However, insolvency is an effect of financial distress situations, which, in turn, are the effect of economical mistakes or diseases, abuse or greed, whether from the government or private sector or both. Giants' financial distresses show it: GM, AGI, Chrysler, Lehman Brothers, Bern Sterns, City Corp, inter alia. At the end, insolvency, most of the times, is an effect of human being behaviour, rather than an act of God.

Under financial distress situations, it is of essence to be equipped with a modern, orderly, predictable, accountably, efficient and effective legal insolvency system to protect debtors and creditors' rights, to optimise assets and as long as possible preserve jobs and businesses. Mexico through its history has lacked such a system. Current insolvency system, concurso mercantil for merchants enacted in 2000 and concurso civil for consumers, enacted in 1932 have been, without a doubt, failed.

In the systemic financial distress situations of the XX and XXI century, Mexico has been forced to overcome distress economies, through vehicles outside insolvency proceedings. It was the case of the FICORCA in the mid 80's, the UCABE, the FOBAPROA and the IPAB, in the high 1990's, which were, in fact, official rescue programmes, wherein the government assumed the risks. Risks, which at the end, were paid by federal treasury with taxpayers taxes. Most individuals, consumers, holding high debts, banking debts, mortgages, credit card debts, and other debts had no option but to be forced to participate in ruinous restructuring programmes, recognising and acknowledging the full debt, principal plus interest, payable in a longer period. In other instances, financial systemic crisis have been faced with the support of the international finance institutions, foreign indebtedness and other countries financial support.

Upgrade needed
Mexico urgently requires a 21st century insolvency system. In the insolvency context, financial distress entrepreneurs and individuals look for reorganisation rather than liquidation or at least a fresh start. Debtors seek bankruptcy protection when available, whether in reorganisation, liquidation or out of court settlement. Insolvency systems should provide for timely, orderly, efficient and effective bankruptcy protection. Bankruptcy protection benefits the economy and trading chain, even with a fresh start. Major bankruptcy systems in the UK, US, Canada and Japan regulate and provide bankruptcy protection to prevent insolvency or while under economical crisis.

Even when facing a systemic financial and subprime crisis in 2008 − 2009 that spread worldwide, causing, after the great recession, international financial distress where financial titans fell – AIG, Citi, GM, Merrill Lynch, Bern Sterns, Lehman Brothers – there has been bankruptcy protection to alleviate, rescue or reorganise the bankrupt as well as to give them a fresh start – a hope – and also provide protection to creditors.

For the time being, debtors are seeking out-of court reorganisations and settlements. As the financial situation becomes worse and with rescue programmes being insufficient, in 2010–2011 it is expected that there will be an increase in insolvencies and eventual liquidations. In some cases, there may be a reorganisation plan settled by debtors and creditors to overcome a financial distress situation as a transitory vehicle. On the other hand, distressed financial entities may just close their business and runaway by fact (factual liquidation). It is also expected creditor's foreclosures and judicial executions since concurso mercantil (insolvency) is not mandatory. In Mexico we have already seen that the Concurso Mercantil Law is not effective. Ley de Concursos Mercantiles strongly needs to be amended. Its structure was patterned in the old Spanish bankruptcies laws of the 18th century. There is an urgent need for an insolvency system that will effectively provide for the 21st century legal regime that will help debtors and creditors overcome the financial stress situation, including labour, tax, suppliers of goods, services and finance, merchants and non merchants, whether large, medium or small. For instance in Mexico, small businesses and non merchant's (consumer) insolvency lack all bankruptcy protection.

Another feature of the Mexican insolvency system is that labour creditors and tax creditors (federal, state and municipal) are super priority creditors. Labour and tax creditors do not enter insolvency. They are enforced, recognised and paid in their special courts, outside of insolvency. When it happens, generally, there is nothing left for other creditors.

Likewise, only post-petition actions, including arbitration, enter insolvency proceedings under the concurso mercantil. Thus, pre-petition action and arbitration do not join the concurso mercantil.

On the other perspective, Sistema de Administracion Tributaria (SAT) data shows that Mexican IRS records 26.3 million active taxpayers – 16.3 million employed, nine million individuals and 831,000 legal entities. Informal sector – not under IMSS (Social Welfare) government control and non-taxpayers – 12,612,617 in April 2009 accounting for 28.3 percent of total employed people.

We consider that a 21st century insolvency system encompassing and protecting all debtors and creditors, whether merchants or consumer as well as all creditors, including labour, tax and all others may help importantly to overcome and reduce significantly the informal sector and non tax payers, based upon the fact that all of them would prefer the insolvency benefits (such as the automatic stay, discharge and tax benefits) under the formal insolvency proceedings.

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