MEXICO: An introduction to Bankruptcy/Restructuring

Creating a Positive Outlook in the Face of Adversity

Economic stability and low growth would be two of the main characteristics that describe recent Mexican economic activity.

However, whether these circumstances will now change is now being widely discussed. Concerns have arisen after the recent elections to the Mexican legislature and the political transition of the federal government. Moreover, recent constitutional reform, which has affected the judiciary, has created uncertainty around both the rule of law and the reliability of law enforcement.

It is yet to be seen whether distortions in the public finances or in the trade balance will affect economic growth in Mexico.

Many consider that the focus in the short term should be on creating conditions that attract and maintain both domestic and foreign investment, reducing Asian imports, increasing sustainable production processes, and capturing the relocation of international investment as part of “nearshoring”. As Mexico transitions to a new Presidential administration, the country is confronted with significant policy challenges that might impact its internal situation and, very significantly, its multilateral relationships, particularly its relationship with the USA.

According to reports, the growth forecast for this year, and the next two years, has fallen due tohigh interest rates, a weaker peso, higher crime rates, weak internal demand and investor uncertainty.

There is, however, also an optimistic view that, as many multinational companies consider relocating their international operations, Mexico will have an invaluable opportunity with nearshoring allowing it to capture unprecedented investment that can accelerate economic growth and boost the country’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 even opt for in-court insolvency proceedings. Companies will need to identify inefficiencies, suspend non-essential operations, optimise activities, and negotiate amendments to their business plans and contractual terms in response to the current economic and business scenario. Companies that proactively anticipate these risks, identify new opportunities and adjust their business plans accordingly will have, notwithstanding the challenges and political concerns, great opportunities for growth and expansion.

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 successfully turn to insolvency or bankruptcy for protection, while small ones often see this as a last resort. Insolvency protection is an expensive and complex proposition for small debtors. Furthermore, sophisticated creditors may even choose, if possible, to commence proceedings in US courts (Chapter 11 proceedings) rather than Mexican ones.

However, it is our opinion that the insolvency culture in Mexico has changed in a number of ways and significantly improved in the aftermath of the pandemic. Debtors and creditors gained experience in insolvency matters through their responses to corporate crises during the pandemic, although it will still be some time before companies come 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. These experiences seem to have forced a re-evaluation of the appeal of out-of-court alternatives and restructuring prior to going into free-fall in-court proceedings, unless a pre-packed petition is feasible.

The creation of the first two courts specialised in insolvency and commercial bankruptcy proceedings has brought greater certainty, clarity and consistency to Mexico’s insolvency system. There is still a long road ahead to reach the full potential of insolvency law, but we continue to see changes that address the current system´s limitations and that provide greater legal certainty and relief to both debtors and creditors.

Global insolvencies are expected to increase in 2025. Various factors have resulted in relatively high insolvency levels in most markets. Looking ahead to 2025, the insolvency landscape in Mexico will likely start to see 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 or after the pandemic. In recent years 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), as of May 2023 (and since the enactment of the Insolvency Law in Mexico), there have been 944 insolvency proceedings in Mexico, averaging 41 companies per year when over a million companies closed between May 2019 and July 2021.

We expect that 2025 is likely to remain challenging for businesses and that debt defaults will continue building up and banks will keep strengthening their provisions for bad debt and increase restrictions on new credit. External shocks will continue to have a negative impact on the Mexican economy. The global economy will suffer due to international conflict, supply-chain disruption, economic slowdowns in key 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, by developing prompt mechanisms and an efficient and specialised judicial process to mitigate some of the post-pandemic economic and political conditions, and by providing businesses with an opportunity for survival. Mexico should focus on improving its investment environment and implementing major public policy and rule of law efforts to get the better of global market fragmentation. It should assist businesses to thrive and survive at a time when there will be numerous opportunities for insolvency and restructuring practice.

It is necessary for the new federal administration to resolve existing political conflicts with the judiciary and to resolve the current impasse over a judicial strike; a strike that has affected the constitutional rights of all stakeholders to have access to justice.

In the coming months and years, insolvency lawyers and turnaround 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 that allow clients to adopt responsive actions to present and future threats.