7 A Visitador is a private agent appointed by the government by the IFECOM (Instituto de Espacialistas en

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1 Prosecution of Crimes Under the Mexican Commercial Insolvency Act Eduardo Alfonso Eric Martínez Rodríguez 1 Carlos Guerrero González 2 On May 2000, President Ernesto Zedillo s Administration enacted the Mexican Commercial Insolvency Act (the CIA ) 3 establishing three basic criminal conducts. Such crimes are: (i) The intended aggravation of the generalized breach of payment obligations 4 ; (ii) The failure to file the accounting information within the term established by the District Court; (iii) The request of the acknowledgement of an inexistent or simulated credit. It is important to note that such white collar crimes are special crimes under the CIA, which do not substitute in anyway the rest of the economic felonies which may be prosecuted and punished under the Mexican Federal Criminal Code or any Mexican State Criminal 5 Code, such as fraud, robbery, false declarations before a court or money laundry, if committed during or prior to an insolvency proceeding. (i) The intended aggravation of the generalized breach of payment obligations 6. Such a crime has three elements which must be met under article 271 of the CIA; (1) an intended act to perform the crime; that is, gross negligence would not be considered as an available conduct as to prosecute such a crime; a negligent conduct may give raise to the insolvency or bankruptcy proceeding but not to a crime. (2) the generalized breach of payment of the obligations. Per legal mandate, a 1 Founding partner of Eduardo Martínez Abogados, S.C., Professor of Law Universidad Anahuac, Escuela Libre de Derecho. Member of the Board of the ANADE, Mexican Bar of Corporate Lawyers. 2 Member of Eduardo Martínez Abogados, S.C. LLM Georgetown University Law Center. 3 The CIA follows the UNCITRAL Law model. 4 Important is to take note that article 11 of the CIA almost reproduces the contents of article 2 of the former law (Ley de Quiebras y Suspensión de Pagos), the Bankruptcy and Payments Suspension Law, under which the generalized breach of payment obligations is deemed to take place when: (i) Non existence or lack of enough attachable assets; (ii) the lack of payment to two or more creditors; (iii) the occultation or hiding of the merchant without appointing an attorney-in-fact authorized to comply with all its obligations; (iv) the closing of the company s facilities;(v) incur in fraudulent, ruinous, false actions or the breach of payment of the obligations; (vi) the breach of the assumed obligations under the insolvency agreement; and (vii) any other events of similar nature. 5 Unlike in the United States, in Mexico all crimes are not subject to construance by analogy, that is the conduct described in each article of a Criminal Code by the Congress shall be construed by its text and therefore it is not permissible to punish similar conducts or substitute an event or element. 6 In terms of article 10 of the CIA, a generalized breach of the payment of a merchant s obligations, happens when such payment obligations are due to two or more creditors and (i) such obligations are 30 days due and represent 35% or more of all the obligations of a merchant, and (ii) the merchant involved has no assets as to secure, at least 80% of the due obligations.

2 2 generalized breach of payment of the obligations is presumed to have taken place, when the accounting information is carried out in such a way that it may not be known its real financial situation; is altered, falsified or destroyed. That is, a criminal action may be available, when the accounting information is carried out in such a way, as to deceit any creditor or authority. (3) the cause-effect of the intent to perform the crime, with the result in deceiving the creditors by means of a false book keeping. (ii) (iii) The failure to file the accounting information within the term established by the District Court. In terms of articles 29, 31, 32, 33, 34, 35 and 36 of the CIA, a merchant subject to a commercial insolvency proceeding, must provide all the accounting, financial and other documentation decreed by the Insolvency Court to the Visitador 7, at the moment, the visit takes place, either at the Company s s facility or at other places within the five next days after the visit is decreed by the District Court. If at such visit, the entity subject to an insolvency proceeding hides or does not provide the documentation subject to review or refrains from providing it to the Visitador, regardless of the legal consequences, such as the immediate declaration by the Court of an insolvency proceeding, the Court may as well require the public prosecutor to initiate a criminal action against the entity subject to the insolvency proceeding, in terms of article 272 of the CIA. The request of the acknowledgement of an inexistent or simulated credit. This crime affects the rest of the creditors that is by simulating a preference, priority or better right in an insolvency proceeding among the rest of the creditors is punished with up to nine years imprisonment. Crimes under the CIA are federal felonies and they shall be prosecuted by the Federal General Attorney who shall request as, part of the criminal penalty, the indemnification for the damages and losses in favor of the victims. However, under the CIA, the prosecution of the damages and prejudices is a duty of the Circuit Court and not of the General Attorney. Because criminal liability to a corporation entails the dissolution and liquidation of the corporation plus the payment of the damages and losses, when any of the above mentioned crimes is committed, in terms of article 273 of the CIA, the criminal liability shall be suffered by the members of the Board of Directors, the Directors, Managers, Liquidators, whether they participate directly as authors of the crime or as persons that concealed the crime. 7 A Visitador is a private agent appointed by the government by the IFECOM (Instituto de Espacialistas en Concursos Mercantiles) or Mexican Agency of Specialists in Mercantile Insolvency Proceedings, is a branch of the Mexican Judicial Power with technical and operational independent powers, which main function is to appoint receivers, visitadores and mediators.

3 3 All the crimes established under the CIA, are prosecuted at the request of the offended party. Under Mexican law, crimes may be prosecuted in two basic ways, by official duty, that is, it is no need, as requirement, a request by the offended party to prosecute such crimes; nor the pardon of the offended party extinguishes such a crime; a few examples such as homicide, drug smuggling are crimes prosecuted by official duty. On the other hand, the crimes prosecuted under the CIA, are of the category which requires the consent of the offended party as to initiate the criminal prosecution. Therefore, such crimes may be extinguished if a pardon is granted by the offended party. A Federal Criminal Court is the competent authority to resolve on the existence of a crime and the criminal liability; no other entity is entitled to perform such declarations. Criminal actions may be prosecuted even if the insolvency proceeding is not terminated, pursuant to article 277 of the CIA. (to be continued )

4 Prosecution of Crimes under the Mexican Commercial Insolvency Act II Eduardo Alfonso Eric Martínez Rodríguez 1 Carlos Guerrero González 2 During a Mexican insolvency proceeding, prosecution of several criminal conducts may occur. Such conducts may be attributed to the members of the board of directors, managers, employees and receivers of the insolvent company. The basic criminal conducts are: (i) The intended aggravation of the generalized breach of payment obligations; (ii) The failure to file the accounting information within the term established by the District Court; (iii) The request of the acknowledgement of an inexistent or simulated credit. Unlike a traditional criminal procedure, crimes arising under an insolvency proceeding are prosecuted on a fast-track basis, not being therefore subject to certain rules and timing as regulated by Mexican Criminal Procedural Codes to other criminal investigations and proceedings. The three main exceptions to a common criminal process are the following: A. The criminal court shall have no venue to judge on the damages caused by the criminal conduct. This characteristic constitutes and exception to the general rule established in any criminal code 3 in Mexico, including the Mexican Constitution, where it is a duty of any criminal court to decide on the crime existence, the criminal liability and the payment of damages. Under the CIA 4, such powers are exclusively reserved by the Federal District Civil Court which shall resolve on the insolvency proceeding. The reason for such provision is due to the fact that a tort action and its indemnification are subject to the terms and conditions of payment of the rest of the obligations under the rules of priority and preemption established in the insolvency agreement and the CIA. Thus under an insolvency proceeding any ordinary action is attracted by the Federal District Court. Notwithstanding the foregoing, note should be taken in the sense that any decision of the Federal District Court shall not affect the course of the criminal actions at all and it is independent to any other sanction such as imprisonment. 1 Founding partner of Eduardo Martínez Abogados, S.C., Professor of Law Universidad Anahuac, Escuela Libre de Derecho. Member of the Board of the ANADE, Mexican Bar of Corporate Lawyers. 2 Member of Eduardo Martínez Abogados, S.C. LLM Georgetown University Law Center. 3 In Mexico, there are common felonies which are punished by the State Criminal Codes and Federal Felonies which are punished by a Federal Criminal Code and those deriving from special federal laws. 4 Comercial Insolvency Act.

5 2 B. Crime prosecution may be brought, regardless of the judicial stage of the Insolvency. This is an exception to the Mexican general procedural rule, where normally criminal conducts are subject to the final resolution of the main cause of action. That is, certain crimes involving a commercial relationship are subject to the commercial lawsuit results as to confirm or deny certain rights and duties subject to the commercial litigation. The final resolution is the legal basis for the existence of a crime. In such respect, any crime prosecution shall be suspended until the commercial action is terminated. Under the CIA, the filing of a criminal claim may be at any time and is not subject to the final resolution of the Federal District Court. Evidence in respect of the criminal claim may be obtained from the review of the files of the insolvent company or from any other source. The Federal Public Prosecutor has all the power and authority to obtain evidence from any source, national and international. Based on international cooperation, the Mexican Federal Public Prosecutor may obtain any and all evidence on the persons involved in a criminal claim from any source. Mexico has executed treaties, such as the Inter-American Convention on Mutual Assistance in Criminal Matters of Nassau Bahamas of 1992, also ratified by the United States of America for the obtainment of criminal evidence. C. Criminal nature. Note should be taken that the criminal conducts regulated by the CIA are not federal crimes, but ordinary crimes. However, based on the fact that the law that regulates such crimes is a Federal Law, in order to initiate any prosecution it must be filed directly before the Federal Prosecutor for Federal Special Crimes. These provisions of the CIA constitute an exception to other financial and white collar crimes that require the prior participation of other authorities, such as the Mexican Ministry of Finance, as provided by the Mexican Banking Law 5 in order for the Federal Public prosecutor to initiate the criminal procedures. D. Specific consent required. Finally, it is important to outline that a specific consent of the affected party is needed, in order for the Federal Public Prosecutor to initiate a criminal investigation. That is because only an interested or affected party is authorized to initiate a crime proceeding; these crimes are not prosecuted by the mere action of the Mexican government or of the Public Prosecutor. 5 Ley de Instituciones de Crédito.