What assets can be separated from bankruptcy in Mexico?

When a company you do business with is declared bankrupt, it is crucial to analyze whether there are assets that can be separated from the bankruptcy estate. This prevents certain assets from being used to pay creditors when they are not actually part of the assets of the company that is declared bankrupt.

The separation action is a legal mechanism that allows third parties and recognized creditors to recover assets that, although they are in the possession of the merchant in Commercial Bankruptcy, are not the property of the latter. This procedure is especially relevant in cases such as leases, consignments and contracts with retention of title, among others.

Throughout this article, I will explain the Commercial Bankruptcy, the figure of the incidents within the procedure, the incident of separation of assets and the recent criteria that have defined with greater precision which assets can be separated.

Commercial Bankruptcy in Mexico

The Commercial Competition is a legal procedure of public interest, regulated by the Commercial Competition Law (the “Law on Commercial Competitions”).LCM”), whose purpose is to preserve the operation of companies and prevent the widespread non-compliance of their payment obligations from affecting their viability and that of those with which they maintain commercial relations[1].

To achieve this balance between business continuity and the protection of creditors' rights, bankruptcy proceedings are conducted under the principles of transcendence, procedural economy, speed, publicity and good faith. These principles seek to ensure that the procedure is efficient, transparent and allows for a fair resolution for all parties involved.

This process consists of two main phases, which are consecutive.[2]:

1. Conciliation: Once a company has been declared in Commercial Bankruptcy, the Federal Institute of Commercial Bankruptcy Specialists (the “IFECOM")[3], will appoint a Conciliator, who will be in charge of seeking to ensure that the company and its creditors reach an agreement (the “Bankruptcy Agreement”) that allows the restructuring and payment of the credits recognized in favor of its creditors.

During this stage, the company continues to operate on its own, under the supervision of the Conciliator, who acts as an intermediary in the negotiations.[4]The purpose of the Conciliation is to preserve the Merchant's business through the Bankruptcy Agreement signed with its recognized creditors.

2. Bankruptcy: In the event that the Bankruptcy Agreement cannot be signed during the period of the Conciliation stage[5], the company enters a liquidation phase, in which its assets are sold to pay recognized creditors according to the order of priority established by law.[6].

Incidents in the Commercial Competition

In the context of Commercial Bankruptcy, it is common for various issues to arise that require specific attention during the main process. To address these situations, the LCM provides for the figure of the incidents, which are auxiliary procedures intended to resolve particular matters without stopping the course of the main procedure.

According to Article 267 of the LCM, incidents refer to all those issues that arise during the processing of the commercial bankruptcy and that do not have a specific established procedure.

Incidents play a crucial role in bankruptcy proceedings, as they allow:

• Resolving Specific Disputes: Addresses specific issues that, if not addressed in a timely manner, could hinder or complicate the main proceedings.
• Guarantee Rights: They provide parties with a way to assert their rights and obtain judicial decisions on specific matters.
• Maintaining Procedural Efficiency: By not suspending the main procedure, they ensure that the bankruptcy proceeding progresses without unnecessary delays.

In short, incidents are essential procedural tools within commercial bankruptcy, designed to effectively address and resolve the various issues that may arise during the development of the process, thus ensuring a prompt and expeditious administration of justice.

The Separation of Assets Incident

The Incident of Separation of Assets is a legal mechanism in Commercial Bankruptcy that allows third parties and Recognized Creditors in the procedure to recover assets that, although they are in the possession of the merchant declared bankrupt, are not part of his assets, since their ownership has not been transferred definitively and irrevocably.[7].

The main objective of this incident is to exclude these assets from the bankruptcy estate intended for the payment of creditors, thus protecting the rights of their legitimate owners.

Common cases for separation action

One of the most representative cases in which a separation action is requested is leasing. In situations where a creditor has leased goods to a merchant and the latter has defaulted on payments, the creditor has the right to recover his goods, since the ownership of these was never transferred to the lessee. This assumption is contemplated in article 71, section VI, subsection a) of the LCM, which allows the separation of goods in cases of deposit, lease, usufruct, administration or consignment.

In addition to leasing, other common cases include[8]:

• Goods in deposit or consignment: Those that the merchant possesses as depositary or consignee.
• Comodato: Goods loaned to the merchant for his use, without transfer of ownership.
• Goods purchased on credit with reservation of title: Those in which ownership is transferred until full payment of the price and said condition is duly registered.
• Securities issued in favor of the merchant as payment for sales on behalf of others: Provided that it is proven that the obligations fulfilled come from them and have not been settled in a current account between the merchant and his client.

Requirements and deadlines for filing an incident

For the process to proceed Incident of Separation of Assets, it is necessary to meet the following requirements:

1. Identifiability of the goods: The goods must be clearly identifiable and be in the possession of the merchant from the time of the declaration of bankruptcy.
2. Absence of transfer of ownership: Ownership of the goods must not have been transferred to the merchant by a definitive and irrevocable legal title.

The procedure for filing this incident is as follows:

• Filing the separation claim: The legitimate owner must file a claim before the bankruptcy judge, complying with the requirements established in article 267 of the LCM.
• Lack of opposition: If the merchant, the conciliator or the intervenors do not oppose the claim, the judge will order the separation of the assets outright in favor of the plaintiff.
• Existence of opposition: If there is opposition, the separation action will be processed in the incidental manner, following the procedure provided for in the law.

It is important to note that the law does not establish a specific deadline for filing a separation claim; however, it is advisable to do so as soon as possible once the Commercial Bankruptcy has been declared, to prevent these assets from being used to pay creditors or being disposed of improperly.

In summary, the Incident of Separation of Assets It is an essential tool for third parties and recognised creditors to protect their rights over assets that, although in the possession of the bankrupt merchant, do not form part of his assets. Prompt action and compliance with the legal requirements are essential to ensure the exclusion of such assets from the bankruptcy estate.

New criteria regarding the incident of separation of property

Recently, relevant criteria have been issued regarding the separation action in Commercial Bankruptcy, specifying in which cases it is appropriate to recover assets from the bankruptcy estate.

Money in regular deposits can be claimed through a separate action[9]

The criterion establishes that money deposited in deposit notes can be subject to a separatory action. In a recent case, it was discussed whether a sum of money, kept in a deposit note, could be claimed through this mechanism. Initially, the request was denied on the grounds that money is a fungible good and could not be individualized.

However, the court determined that it is possible to recover this type of money through a separate action, provided that it comes from a regular deposit, that is, when the depositor has not transferred ownership of the money to the merchant in bankruptcy. In contrast, if it is an irregular deposit, where the merchant does acquire ownership of the money, the separate action is not admissible, and the depositor could only claim it as another creditor within the bankruptcy.

This criterion is relevant because it clarifies that not all fungible assets automatically fall within the bankruptcy estate. If a third party can prove that the money or assets given to the merchant never ceased to be his property, he has the right to separate them from the proceedings and recover them.

Judges cannot reject outright a separation action because they question the validity of the rights claimed[10]

The criterion establishes that the validity of the rights claimed in a separation action is a question of substance and cannot be a reason for the judge to reject the claim outright. In a recent case, a judge dismissed a request for separation of assets arguing that the rights that the plaintiff sought to separate were no longer valid.

However, the court clarified that this type of analysis must be done during the incidental procedure and not at the initial stage. The reason is that the validity of the rights is part of the substance of the case and must be analyzed with evidence during the trial, not in advance by the judge when deciding whether or not to admit the claim.

This criterion is important because it guarantees the right of the parties to have their arguments duly analyzed in the process. If a judge rejects a severance action outright based on a premature analysis of the merits, fundamental principles of due process are violated, such as the right to a hearing and the obligation to resolve based on evidence.

Conclusion

The separation action is a fundamental tool within the commercial bankruptcy to protect assets that are not part of the assets of the merchant in bankruptcy. Its correct application can make the difference between the recovery of assets and the loss of rights over assets that should not legitimately be integrated into the bankruptcy estate.

For companies, suppliers and creditors, it is crucial to know the circumstances in which a separation action is appropriate, to adequately document their operations and to act quickly when a company with which they have a business relationship enters into Commercial Insolvency.

Recent court rulings reinforce the importance of this action, clarifying which assets can be separated and establishing limits on the judge's powers when analyzing the admissibility of the separation action. In this sense, having specialized advice and a well-defined strategy can make a big difference in protecting the interests of companies and their creditors.

[1] Article 1 of the Bankruptcy Law.

[2] Article 2 of the Bankruptcy Law.

[3] The IFECOM is an auxiliary body of the Federal Judiciary Council, with technical and operational autonomy, responsible for regulating and supervising the work of the specialists (Visitors, Conciliators and Trustees) who intervene in the Commercial Bankruptcy proceedings in Mexico. Its main function is to authorize, register and appoint the specialists who participate in these processes, ensuring that they meet the necessary requirements to perform their functions efficiently and professionally.

[4] Article 3 of the Bankruptcy Law.

[5] In terms of article 145 of the Bankruptcy Law, the Conciliation stage in a Bankruptcy has an initial duration of 185 calendar days. This period may be extended up to two times for additional periods of 90 calendar days each, if certain requirements established in the Bankruptcy Law are met. In no case may the Conciliation last more than 365 calendar days (one year).

[6] Article 3 of the Bankruptcy Law.

[7] Article 70 of the Bankruptcy Law.

[8] Article 71 of the Bankruptcy Law.

[9] Collegiate Court, Digital Registry 2029863, Eleventh Period, Subject(s): Civil, Thesis: I.4o.C.39 C (11a.), Isolated Thesis, Judicial Weekly of the Federation, Publication: Friday, February 7, 2025, “SEPARATORY ACTION. IN COMMERCIAL BANKRUPTCY, THE MONEY FROM REGULAR DEPOSITS CONTAINED IN DEPOSIT NOTES MAY BE CLAIMABLE IN IT (article 71, section VII, of the Commercial Bankruptcy Law)." Detail – Thesis – 2029863

[10] Collegiate Court, Digital Registry 2029864, Eleventh Period, Subject(s): Civil, Thesis: I.4o.C.40 C (11a.), Isolated Thesis, Judicial Weekly of the Federation, Publication: Friday, February 7, 2025, “ SEPARATORY ACTION. THE VALIDITY OF THE RIGHTS CLAIMED IS A SUBSTANTIVE ISSUE THAT SHOULD NOT GIVE RISE TO THE OUTRIGHT DISMISSAL OF THE CLAIM (LEGISLATION APPLICABLE TO MEXICO CITY)." Detail – Thesis – 2029864