Introduction to the New Commercial Bankruptcy Law
In late July, Mexico introduced the new Commercial Bankruptcy Law (LCM), published in the Official Journal of the Federation. This law replaces the outdated Bankruptcy and Suspension of Payments Law (LQSP), which had long governed insolvency proceedings in the country.
The Old Bankruptcy and Suspension of Payments Law (LQSP)
The LQSP aimed to rehabilitate companies facing severe financial issues, potentially leading to bankruptcy if rehabilitation failed. Under this law, a company could be declared bankrupt by a debtor, a creditor, the Public Prosecutor’s Office, or a judge. The law also offered a suspension of payments, exclusively requested by the debtor, as a preventive measure against bankruptcy.
Key figures in this process included the judge, the trustee, the intervention, and the creditors’ committee. The judge played a central role, requiring approval at various stages, while the trustee managed the bankrupt company’s assets. Creditors were represented by the intervention, although their involvement was relatively limited. The creditors’ meeting had four main functions: recognizing credits, approving agreements, directing the intervention, and evaluating the trustee’s performance.
Main Problems with the LQSP
Despite its intentions, the LQSP had significant shortcomings. The distinction between bankruptcy and suspension of payments was often unclear, leading to inefficiencies. Debtors had excessive control over the process, allowing them to manipulate outcomes in their favor. Creditors, on the other hand, faced limited involvement, leading to frustrations and delays.
Additionally, the LQSP lacked adequate mechanisms for the supervision of trustees, who often lacked essential financial expertise. This oversight gap undermined the credibility of the entire process, leading to a lack of confidence among stakeholders.
The New Commercial Bankruptcy Law (LCM): Addressing the Problems
The new Commercial Bankruptcy Law (LCM) was designed to rectify the flaws of its predecessor. It introduces a single, streamlined process with two stages: conciliation and bankruptcy. This approach aims to facilitate voluntary settlements between debtors and creditors, while ensuring the maximum possible value is retained for all parties involved.
Key Reforms Under the LCM
- Clear Conciliation Period: The conciliation period aims to foster agreements between debtors and creditors, with a strict time limit to prevent abuse. If no agreement is reached, the process automatically moves to the bankruptcy stage.
- Suspension of Credit Enforcement: To ensure orderly proceedings, the LCM suspends enforcement actions for secured and tax credits during conciliation. This suspension prevents the disorderly enforcement of guarantees, preserving the company’s value.
- Flexible Solutions: A conciliator is appointed to seek voluntary arrangements between the parties. The law does not impose rigid solutions, allowing for tailored agreements that respect minority rights.
- Tax Benefits: The LCM allows for the cancellation of fines, surcharges, and other tax accessories, making agreements more attractive for creditors. It also provides mechanisms for negotiating tax pardons and authorizations.
- Parallel Credit Recognition: Unlike the LQSP, the LCM introduces a parallel credit verification process during conciliation. This eliminates incentives for delaying the process, encouraging swift resolutions.
- Updated Obligations: The LCM mandates the suspension of payment for all credits upon declaring bankruptcy, with guaranteed credits continuing to accrue interest. Common credits are converted to UDIs to maintain their value.
- Improved Company Administration: During conciliation, debtors typically retain control of their companies. However, in specific cases or during the bankruptcy stage, creditors can intervene in appointing the trustee.
- Precautionary Measures: Judges can request specialists’ opinions on implementing precautionary measures to protect the company and creditors’ interests. These measures may include separating the debtor from administration or seizing assets.
- Extended Workers’ Rights: Workers’ rights are extended to cover wages earned in the last two years, enhancing protection under section XXIII of article 123 of the constitution.
- Federal Institute of Commercial Bankruptcy Specialists: A new body, under the Federal Judicial Council, provides administrative support, accrediting, appointing, and supervising specialists involved in bankruptcy cases.
Conclusion: A New Era
The Commercial Bankruptcy Law represents a significant step forward in Mexico’s legal framework, addressing the inefficiencies of the old LQSP. By streamlining processes and ensuring greater transparency, the LCM aims to provide a fairer, more effective system for handling corporate insolvency.
As businesses and legal professionals adjust to this new law, it’s clear that the changes will bring about a more equitable environment for both debtors and creditors.
360 Business Law offers expert guidance on navigating the complexities of the new Commercial Bankruptcy Law in Mexico. Our team provides comprehensive legal support to ensure your business complies with the latest regulations, protecting your assets and interests during challenging financial times. Whether you’re seeking advice on conciliation, restructuring, or understanding the intricacies of bankruptcy proceedings, 360 Business Law is here to help you achieve the best possible outcome.
Key Takeaway Points
- Streamlined Process: The new Commercial Bankruptcy Law introduces a single, efficient process with clear conciliation and bankruptcy stages.
- Debtor-Creditor Balance: The law provides a more balanced approach, reducing debtor control and increasing creditor involvement in proceedings.
- Precautionary Measures: Judges can implement protective measures to safeguard company assets and creditor interests during bankruptcy.
- Improved Supervision: A new federal institute now oversees the accreditation and supervision of specialists involved in bankruptcy cases.
- Flexible Solutions: The law promotes voluntary agreements and flexible solutions, respecting minority rights while ensuring fairness for all parties involved