Are You a Supplier to an Insolvent Company? Here’s What to Do
by Federico de Noriega | Partner | Hogan Lovells
When writing or discussing the Mexican Insolvency Law (Ley de Concursos Mercantiles), we are tempted to focus only on financial creditors and their rights with respect to the debtor. Often, we forget about other important stakeholders and the actions they can take in an insolvency governed by Mexican law (a process known as “concurso mercantil”). In this piece, we will discuss what one of these groups of important stakeholders — suppliers of the debtor filing an insolvency petition — can and should do.
Typically, supply agreements include a provision that allows termination in the event a client files for insolvency. Suppliers come to us feeling comfortable that they will be able to use this provision and escape from getting involved in a tedious and long insolvency proceeding. But it is not that easy for suppliers. The Mexican Insolvency Law provides that clauses that aggravate the situation of a debtor by reason of filing an insolvency petition are void. A clause allowing termination on the basis of an insolvency petition may be challenged.
So, what can the suppliers do? Are they required to continue supplying during the insolvency? Will they be paid during the insolvency? As a general rule, the conciliator (conciliador) has the power to make these decisions on behalf of the debtor. The conciliator is an expert appointed by a governmental agency known as IFECOM (except in insolvency of certain companies like banks or telecom companies). The conciliator is in charge of recognizing and classifying credit, overseeing the management of the debtor during insolvency and putting together a reorganization plan. The conciliator also has the power to reject executory contracts, including supply agreements, or decide that the debtor should continue complying with them.
Suppliers should contact the conciliator to ask him to decide whether the particular contract will be rejected. If the conciliator decides that the contract will be honored, the debtor must continue paying during the insolvency proceeding. If the conciliator rejects the contract or fails to reply within a 20-day term after the supplier contacted him/her, the supplier can then terminate the contract.
There are, however, certain exceptions to this general rule. The Mexican Insolvency Law provides particular rules for certain specific contracts. For instance, a seller of personal or real property is not required to deliver the sold goods to the debtor unless the price is paid in advance or payment is secured. If the goods are in transit, the seller can stop them. But what can a seller do if it already delivered the goods on credit as is often the case? If the supply agreement provides that it may be rescinded for lack of payment and such provision is registered with the Public Registry of Commerce, the supplier may claim back the goods delivered and separate them from the estate of the debtor. However, in most cases we do not have a registered rescission clause, which means that the seller may not be able to recover the goods and will need to get in line with other creditors to get paid.
There are also special rules for real property lease agreements, services agreements, construction and turnkey contracts, insurance, derivatives and derivative master agreements, repurchase agreements and others.
Another important rule that suppliers need to consider is that, to continue being paid during the insolvency proceeding, they need to be considered essential suppliers. As a general rule, debtors cannot make payments during the insolvency proceeding. However, the law allows them to pay expenses that are necessary for the ordinary course of business. Again, the conciliator will play an important role in deciding what are “ordinary course of business” expenses and whether they need to continue being paid to preserve the business.
The key takeaway is that suppliers of a debtor subject to an insolvency proceeding need to get involved in the proceeding and get responses from the conciliator about the status of their contracts. Suppliers cannot rely on contractual provisions allowing them to terminate due to insolvency. They are subject to the rules of the Mexican Insolvency Law.
It is important for suppliers to raise these issues with the conciliator as soon as the conciliator is named. Suppliers should also know that the conciliator is not named upon the filing of the petition of insolvency and it takes some time for the conciliator to be appointed. It may even take a few months. So, what do suppliers do in the meantime? The law is not clear about this. But the suppliers will need to review if the provisional relief awarded by the court after the insolvency filing allows them to continue being paid during this interim period.