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Insolvency Proceedings

Mexico: Insolvency Act amendment – Bill proposes the restructuring of the Mexican insolvency proceedings

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The proposed amendment aims to expand protective measures to ensure the stability of the companies during insolvency proceedings, facilitate access for small and medium-sized enterprises, streamline insolvency proceedings and enhance the judge’s authority for enforcement purposes.

In brief

For insolvent companies, the Mexican Insolvency Act (Ley de Concursos Mercantiles) has been a valuable tool for restructuring their debt or, if necessary, liquidating their assets to pay off their debts if the reorganization is not feasible. Despite being in effect for 24 years, the full potential of this law has not been achieved. Some financially struggling companies still opt not to utilize these tools due to the costs, complexity and time involved in insolvency proceedings. The proposed amendment aims to tackle these issues. If approved, the main changes that this amendment will bring include reorganizing the insolvency process to make it more efficient and allowing for more proactive measures to safeguard the companies’ assets from individual creditors’ actions. The amendment will also introduce a new system for small and medium-sized companies, making insolvency proceedings a more viable option for them due to the high associated costs.

Key Takeaways

The proposed amendment filed on 31 July 2024, would benefit all industries as it implies the implementation of additional mechanisms to address potential insolvency situations. Below are the key takeaways for these proposed amendments:

  1. Seeks to introduce significant changes to the Mexican insolvency system to enhance efficiency and allow an insolvent company to reorganize its debt efficiently.
  2. Seeks to grant insolvent companies subject to insolvency proceedings more effective tools to address their financial challenges and preserve their assets. The new system for implementing preventive measures will facilitate quicker action compared to the current process.
  3. Creditors will face new challenges in insolvency proceedings. They need to not only ensure that their claims are recognized during the proceedings but also analyze the impact that the reorganization agreement would have on their personal or real guarantees if they choose not to execute it. They will also face more court orders aimed at protecting the operation of companies subject to insolvency proceedings.
  4. Small and medium-sized businesses stand to benefit from the proposed changes, particularly in terms of cost reduction. The amendment aims to lower the expenses associated with insolvency procedures, providing these businesses with the opportunity to restructure their debts, sustain operations, and repay creditors.

In depth

The bill seeks to amend the Insolvency Act and the Credit Institutions Act to address the current system’s limitations in protecting insolvent companies. Its purpose is to improve the insolvency proceedings as an effective tool for companies to overcome their insolvency situation, as over the years, only a few companies have benefited from these types of proceedings, which implies that the Insolvency Law has not been utilized to its full potential. As of May 2023, and since the enactment of the Insolvency Act in 2000, there have been only 944 insolvency proceedings in Mexico, averaging 41 companies per year, even though 1.5 million companies closed between May 2019 and July 2021 due to COVID-19.

The main proposed amendments are the following:

  • Restructuring the insolvency proceedings. The bill proposes restructuring the insolvency proceedings into three successive phases, instead of two: the credit recognition stage, the conciliation stage, and the bankruptcy stage. The first new stage aims to provide certainty to the insolvent company’s creditors. Previously, this procedure ran in parallel with the conciliation or bankruptcy stages, leading to inefficiencies due to uncertainty about the creditors entitled to execute the reorganization agreement or to receive the proceeds of the sale of the insolvent company’s assets.
  • Restructuring of Precautionary Measures. The bill proposes to require judges to issue protective measures within 24 hours of receiving an insolvency request to protect the company’s assets and minimize ongoing risks. It also outlines a clear process for reviewing these measures, specifying the actions that can be taken to preserve the state, such as lifting attachments or ensuring the continuation of essential services for the company’s operations. This amendment seeks to clarify the necessity of granting these measures to protect insolvent companies.
  • Differentiated regime for small and medium-sized companies. The bill suggests exempting small and medium-sized enterprises from (i) the visitation stage (this stage helps the judge to assess the company’s insolvency condition), which is a preliminary step before the credit recognition stage and (ii) securing the specialist’s fees for the visitation stage with a bond. These companies are also allowed to take on debt (and credit institutions are now permitted to offer loans to companies subject to an insolvency process). Still, they must agree to undergo the preliminary visitation stage.
  • New mechanisms for enforcing court orders. The bill proposes to vest judges with more authority to ensure that their orders are enforced. These measures include requiring the judge to: (i) notify the Public Prosecutor’s Office if third parties do not follow the protective measures; (ii) initiate enforcement proceedings against the conciliator or receiver responsible for damages in favor of insolvent companies; and (iii) report to the Public Prosecutor’s Office any crimes committed during the insolvency proceedings. The bill also aims to increase the fines that judges can impose on parties.
  • New role of joint obligors and guarantors at insolvency proceedings. The bill proposes that joint obligors and guarantors may now be affected by the judge’s precautionary measures. Besides, if the amendment is approved, guarantors will now have the right to benefit from any debt waiver, remission, or stand-by agreed upon in favor of the insolvent company under the reorganization agreement. This is not the case under the current Insolvency Act unless agreed to by the creditor in the reorganization agreement.

The proposed amendments have been delivered for analysis to the Joint Commissions of Economic and Legislative Studies of the Senate.

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Author

Alfonso Cortez is a member of the Litigation and Government Enforcement Steering Committee for North America and Chair of that practice at the five Mexican offices. He has over 25 years of experience. Also he is highly regarded in a wide range of litigation and arbitration matters. He has been a professor in the law department of the Universidad Cervantina, and is a member of the international law fraternity Phi Delta Phi. He has been first vice president of the National Association of Corporate Lawyers (ANADE-NL), was coordinator of the Constitutional Rights Commission of the Mexican Bar Association, Nuevo Leon Section (BMA – NL), as well as counselor in the steering committee of the BMA – NL. Alfonso specializes in domestic and international litigation and arbitration proceedings. He has experience in administrative litigation, particularly in relation to energy matters, in public tenders. He also handles litigation in the areas of insolvency, civil, commercial, real estate and constitutional law, and frequently advises on alternative means of dispute resolution.

Author

David joined Baker McKenzie in 2001. He is the head of the Dispute Resolution Practice Group in the Guadalajara office. His main areas of practice include civil, commercial, and administrative litigation (including amparo actions), restructuring and insolvency, as well as international procedural cooperation. His practice areas include complex litigation relative to real estate ownership and construction in various fields and jurisdiction levels. Regarding international procedural cooperation, he advises on process and documents, taking of evidence, recognition and enforcement of foreign judgments and awards, and proceedings in connection with international treaties and conventions to which Mexico is a party. David is also experienced in domestic and multijurisdiction restructuring and insolvency proceedings.

Author

Arturo Lara-Hernández is a member of the Dispute Resolution practice group in Mexico City. Arturo is a litigation attorney with experience in complex judicial proceedings in civil, commercial and administrative matters. Arturo has participated in cross-border insolvency proceedings before the federal courts as well as national and international arbitrations. Arturo’s professional practice focuses on dispute resolution. In particular, Arturo has experience representing individuals and national and foreign companies in civil and commercial disputes before judicial courts, such as oral and summary trials, mortgage or pledge enforcement proceedings, precautionary or preventive measures requests, and Amparo trials. Besides, Arturo has participated in national and international arbitrations administered by the International Chamber of Commerce (ICC), the Centro de Arbitraje de México (CAM) and the International Centre for Dispute Resolution (ICDR) in disputes arising from the acquisition and merger of companies and in construction projects in energy matters. Finally, Arturo has represented creditors in insolvency proceedings and served as assistant to the liquidator and conciliator. Specifically, Arturo has participated in bankruptcy proceedings for international companies specialized in oil exploration and extraction.

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