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 an insolvency proceeding.
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 proceeding 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 proceeding. The bill proposes restructuring the insolvency proceeding 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 proceeding. 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.