This article critiques Mexico’s formalist approach to intra-group guaranties in insolvency, urging a shift toward economic substance and creditor protection.
Javier Garibay critically examines the treatment of upstream and cross-stream guaranties in Mexican insolvency law, exposing the doctrinal and practical shortcomings of a formalist legal framework. These guaranties—common in corporate group financing—often become problematic when the guarantor enters concurso mercantil, due to the absence of a clear legal standard for assessing their enforceability.
Central to the issue is Article 1837 of the Federal Civil Code, which distinguishes between onerous and gratuitous contracts. Mexican courts interpret this narrowly, focusing on formal reciprocity within the contract rather than considering indirect or group-level economic benefits. This contrasts with U.S. doctrines like “reasonably equivalent value” and the “indirect benefit” test, which allow for more nuanced evaluations of intercompany obligations.
Garibay argues that this rigid interpretation exposes upstream and cross-stream guaranties—especially those lacking demonstrable benefit to the guarantor—to reclassification as gratuitous. Under Articles 114 and 117 of the Insolvency Law, such transactions are presumed fraudulent and automatically voidable if executed within the 270-day retroactive period before insolvency. This creates legal uncertainty and risk for directors, who may face liability for approving guaranties that harm the guarantor’s estate.
Garibay critiques the judiciary’s tendency to prioritize formal compliance (e.g., notarized documents, board approvals) over substantive economic analysis. He calls for a shift toward a functional methodology that emphasizes economic substance, drawing inspiration from comparative legal systems. He also highlights the underutilization of the principle of “realidad económica” in insolvency contexts, despite its broader application in Mexican commercial law.
To address these shortcomings, Garibay proposes several reforms: reinterpretation of “benefit” under Article 1837, expansion of the avoidance regime to capture structurally abusive guaranties, doctrinal development around corporate group dynamics, and enhanced judicial capacity to assess complex financial arrangements. Ultimately, Garibay advocates for a more coherent and economically grounded legal framework that aligns with international best practices and strengthens creditor protections in Mexican insolvency proceedings.
Javier Garibay critically examines the treatment of upstream and cross-stream guaranties in Mexican insolvency law, exposing the doctrinal and practical shortcomings of a formalist legal framework. These guaranties—common in corporate group financing—often become problematic when the guarantor enters concurso mercantil, due to the absence of a clear legal standard for assessing their enforceability.
Central to the issue is Article 1837 of the Federal Civil Code, which distinguishes between onerous and gratuitous contracts. Mexican courts interpret this narrowly, focusing on formal reciprocity within the contract rather than considering indirect or group-level economic benefits. This contrasts with U.S. doctrines like “reasonably equivalent value” and the “indirect benefit” test, which allow for more nuanced evaluations of intercompany obligations.
Garibay argues that this rigid interpretation exposes upstream and cross-stream guaranties—especially those lacking demonstrable benefit to the guarantor—to reclassification as gratuitous. Under Articles 114 and 117 of the Insolvency Law, such transactions are presumed fraudulent and automatically voidable if executed within the 270-day retroactive period before insolvency. This creates legal uncertainty and risk for directors, who may face liability for approving guaranties that harm the guarantor’s estate.
Garibay critiques the judiciary’s tendency to prioritize formal compliance (e.g., notarized documents, board approvals) over substantive economic analysis. He calls for a shift toward a functional methodology that emphasizes economic substance, drawing inspiration from comparative legal systems. He also highlights the underutilization of the principle of “realidad económica” in insolvency contexts, despite its broader application in Mexican commercial law.
To address these shortcomings, Garibay proposes several reforms: reinterpretation of “benefit” under Article 1837, expansion of the avoidance regime to capture structurally abusive guaranties, doctrinal development around corporate group dynamics, and enhanced judicial capacity to assess complex financial arrangements. Ultimately, Garibay advocates for a more coherent and economically grounded legal framework that aligns with international best practices and strengthens creditor protections in Mexican insolvency proceedings.
