MEXICO: An Introduction to Bankruptcy/Restructuring

Alejandro Sainz, Chairman of the Insolvency and Restructurings Practice Group at Sainz Abogados

Over the last two years, Mexico has suffered serious shifts in the economic, political and social scenarios. Although Mexico had made important structural changes, continuing to be an important manufacturing centre and an active participant in the North American market, in 2019 the performance of the Mexican economy was already considered weak and had contracted by 1.6% approximately. Revenues from remittances, trade, tourism and oil exports had already decreased, and the uncertainty generated by certain investment decisions of the current administration had caused an important investment brake.

In 2020, Mexico, like many other countries, is facing the terrible and unprecedented health and economic consequences of the global Covid-19 pandemic. It is evident that there has been a serious collapse worldwide whose effects have yet to be fully evaluated.

In Mexico, regardless of their size or whether they operate in the formal or informal sector, most companies and industries have been seriously impacted by Covid-19. Certain micro and small businesses, as well as entrepreneurs, may not survive the extended suspension of activities. Activities in the areas of hospitality, retail, restaurants, airlines, entertainment and automobiles have been severely affected and have had a domino effect on other business activities.

Most companies are being affected and most demand and supply chains will suffer due to the current global crisis. As if this were not enough, many experts estimate that the Covid-19 crisis may cause a GDP contraction of 7-12% in 2020. Therefore, the coming months are expected to be much worse.

The decreasing income and, in many cases, the need to continue incurring fixed costs, are causing businesses to struggle financially and to default on their credit payments and commercial obligations.

It is unquestionable that the current worldwide health emergency, and its serious effects on the Mexican economy, will force businesses in various sectors and industries to evaluate their financial liquidity and devise plans to avoid insolvency or even bankruptcy.

The effects of this pandemic, which are expected to be felt for at least an extended period of months (or even years), require that companies look for alternative sources of income and liquidity, organisational restructuring and negotiation with their creditors, both in and out of court.

These turbulent times have already led to, and will certainly continue to create, a waterfall of restructurings and workouts in various industries. Companies will need to identify inefficiencies, suspend non-essential operations, optimise activities and negotiate amendments to their business plans and contractual terms considering the current scenario.

Corporate reorganisations and out-of-court restructurings to stabilise business operations should definitely be considered before opting for an in-court insolvency or liquidation proceeding of any business. We have witnessed willingness from the banking sector to restructure financial terms by giving grace periods and extending maturities. However, when this is not possible, the restructuring and insolvency proceeding known as concurso, which is the only formal insolvency procedure available in our country, will be the alternative for both debtors and creditors.

A concurso proceeding is essentially a court-sanctioned debt-restructuring process for companies that are considered insolvent under the scope and thresholds of the Concurso Law to remain as a going concern. The conciliation phase might be triggered by a voluntary or involuntary petition, or through a pre-packed petition filed by the company (debtor) and the majority of its registered creditors. After exhausting the period for filing proof of claims and recognition of creditors, if the process does not lead, during the phase of reorganisation or conciliación, to the execution and court approval of a binding reorganisation agreement among the debtor and the required majority of creditors (as set forth in the Concurso Law) to reorganise the debtor’s recognised claims, a concurso action may result in the company being declared “bankrupt” or in liquidation phase, known as quiebra.

Our judicial courts were closed for almost three months and, currently, due to the health emergency, the operation of federal courts in respect of insolvency proceedings is limited only to "urgent cases" or cases being heard electronically, but still with many deficiencies. However, the judiciary has been trying to improve its electronic system to provide more certainty to all parties.

Even if a concurso petition is admitted and special measures (stay) are issued with the purpose of protecting and continuing with the ongoing business, avoiding the execution of guaranties, avoiding the transfer or disposal of assets, preserving jobs, among other things, the judges are currently prevented from moving forward in the process and appointing a conciliator or issuing a concurso declaration judgment.

In this regard, many countries have quickly responded by enacting emergency legislation and implementing measures concerning restructurings, creditors' rights and insolvency proceedings.

In Mexico, an initiative from the Mexican Bar Association to modify the Concurso Law was published in the Senate Gazette on 27 April 2020. The initiative intends to include in the Concurso Law an “Emergency Regime” to assist debtors in having quick access to courts on the grounds of unforeseen circumstances, force majeure or emergency declaration, health contingency or natural disaster.

The road ahead to enforce this initiative, or any other, may be a long one. Amendments of this nature will affect all areas of society and of business, but these alternatives are really necessary to provide legal certainty and some relief to businesses and an environment in which to thrive and survive these exceptional times where there will be numerous opportunities for the insolvency and restructurings practice.

In the coming months, insolvency lawyers will be focusing on mitigating the impact of the global pandemic on companies’ operations, finances and disputes. Experts will have to provide, more than ever, creative and agile strategies to adopt responsive actions to the present and future threats that this pandemic could generate in different areas.

The Mexican government should evaluate how to mitigate Covid-19’s impact by enacting extraordinary measures, amending laws and providing some relief to distressed companies through direct or indirect incentives and stimulus. Meanwhile, businesses will have to devise their own plans to face this situation and avoid the risk of collapsing.