MEXICO: An Introduction to Bankruptcy/Restructuring
Creating a Positive Outlook in the Face of Adversity
Mexico, like many other countries, is still recovering from the consequences of the global COVID-19 pandemic and many businesses are still finding it difficult to stay afloat with new economic, political, and social challenges ahead. Mexico’s solid macroeconomic institutions and policy framework have maintained some stability, but, while the economy is better than forecasted, the prospects for 2023 appear to be less promising.
Many people agree that the focus in the short term should be on creating conditions that attract foreign investment and that the most relevant threat to Mexico’s recovery and stability is the current political environment. This administration introduced uncertainty in the investment and business conditions, weakening Mexico’s economy and calling into question the rule of law in our jurisdiction. Mexican President, López Obrador, will most likely continue insisting on making changes to concentrate power and polarise Mexicans. Additionally, elections, limited access to finance, insecurity, informality, and regulatory burdens will continue to drastically impact Mexico.
Inflation is expected to remain above 4%, interest rates will also remain high, affecting credit to the private sector, fiscal austerity will continue to put pressure on the federal budget, and the current slowdown in the US will have evident consequences in Mexico due to the ties between these economies. According to reports, Mexico’s economy is expected to grow between 0.5% and 1.3% this year, which means gross domestic product will not return to pre-pandemic levels until 2024.
On the bright side, Mexico will have an invaluable opportunity with nearshoring that is critical to drive economic growth and boost Mexico’s prospects. Likewise, as expected, many sectors have recovered, while others continue to struggle and businesses in affected sectors and industries will have to continue evaluating their financial liquidity and define restructuring plans or opt for insolvency and bankruptcy. 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.
Insolvency proceedings in Mexico remain underused by debtors and are far less common than in other jurisdictions, as debtors are inexperienced and fearful when it comes to facing insolvency situations. Likewise, insolvency and bankruptcy play very different roles for large and sophisticated corporations compared to small businesses. Big players may be able to turn to insolvency or bankruptcy for protection, while small ones often only see this as a last resort. Insolvency protection is expensive, complex, and intense for small debtors. Furthermore, sophisticated creditors may even choose, if possible, to commence proceedings in US courts (Chapter 11 proceedings) instead of Mexican courts.
However, it is our opinion that the insolvency culture has changed in a number of ways and improved in the aftermath of the pandemic. Debtors and creditors have gained experience in insolvency matters as they responded to corporate crisis in the pandemic, although it will still take time for companies to consider insolvency processes as a corporate rescue. We have also seen that creditors have become, in many cases, more open to negotiations after seeing and experiencing the hardships of some recent insolvency proceedings forcing a re-thinking of out-of-court alternatives and restructuring.
The creation of the first two courts specialised in insolvency and commercial bankruptcy proceedings was initially encouraging, but so far it has failed to meet expectations as the courts have been facing many systematic and structural challenges. There is still a long road ahead to evaluate the full effects of this initiative, but we continue to see this change as beneficial and necessary to begin providing legal certainty and relief to businesses and creditors.
Looking ahead to 2024, the insolvency landscape in Mexico will likely start seeing a rise in proceedings due to the current economic and political situation and the tighter financing conditions, which will become a significant challenge for those businesses that increased their debt during the pandemic. As previously reported, contrary to what was expected, insolvency and bankruptcy cases did not increase significantly during 2020 and 2021 and in many countries business insolvency cases even dropped during that period. However, as predicted by many experts, in 2022 and 2023 the rebound in business insolvencies has picked up speed.
According to the latest report and statistics published by the IFECOM (Instituto Federal de Especialistas en Concursos Mercantiles or Federal Institute of Experts in Insolvency Proceedings), in 2022 the business insolvencies in Mexico registered an increase of 37% compared to the prior year, making 2022 the year with the greatest number of insolvency proceedings initiated in Mexico. During 2022, 66% of the insolvencies filed were voluntary proceedings, and out of the 254 insolvency proceedings active as of 30 November 2022, 14% were at the stage of inspection (visita), 23% in conciliation or reorganisation, and 63% in liquidation.
We expect that debt defaults will continue building up and banks will keep strengthening their provisions for bad debt and increase restrictions on new credits. External shocks will continue to have a negative impact on the Mexican economy. The global economy will persistently suffer due to supply-chain disruptions, world conflicts, the economic slowdown of economies, and high inflation and interest rates.
We strongly believe that, more than ever, the Mexican government must assist by continuing to strengthen the insolvency regime, developing prompt mechanisms and an efficient judicial process, to mitigate some of the pandemic-related and economic effects and provide businesses with an opportunity for survival. Mexico should focus on improving the investment environment and implementing major policy efforts to get the better of this global market fragmentation and assist businesses to thrive and survive this time where there will be numerous opportunities for the insolvency and restructuring practice.
In the coming months and years, insolvency lawyers and tournaround specialists will be focusing on mitigating the relevant external impacts, finances, and disputes. Advisers know they will have to provide, more than ever, creative and agile strategies to adopt responsive actions to present and future threats.