7 Key Changes to Mexico's New Bankruptcy Law

21 October 2014 Latin America Legal Insights Publication

Mexico recently amended its governing insolvency, the Ley de Concursos Mercantiles (LCM). The changes were largely an improvement although there is at least one troublesome new provision.

The impetus for the amendments was the accumulation of experience under the LCM, first enacted in 2000 and then amended in 2007, including in the cross-border context the notorious Vitro case involving affiliate debt.

Some of the key changes are:

  • First, the law introduces the concept of a statutory “subordinated creditor.” “Subordinated creditor” is defined in Article 222 to include an unsecured creditor who has the same board members as does the debtor, or who is controlled by the debtor or is controlled by another entity that controls the debtor. Article 157 provides that if “subordinated creditors” hold at least 25 percent of the total of all allowed unsecured claims, including the claims of the “subordinated creditors,” then such subordinated creditor claims are not counted to determine whether the reorganization plan has received the necessary 50 percent approval by the allowed unsecured creditors.
  • The amendments contain provisions for dealing with corporate groups (“grupo societario”). The provisions deal with the administrative, but not the substantive, consolidation of cases involving related debtors.
  • The amendments now permit a debtor to begin a reorganization proceeding (“concurso”) if insolvency is imminent within 90 days. Imminent insolvency can be evidenced either in terms of its balance sheet or inability to generally pay its debts.  Debtors had this ability before the year 2000 and it has now been reinstated.
  • The amendments authorizes the debtor to enter into credit facilities (similar to debtor-in-possession financing) if it is “indispensable” to continue the operation of the debtor’s business.
  • Under the prior law, if the debt of a debtor was reduced or otherwise modified during the course of the proceeding through negotiation or court order, any co-debtor would receive the benefit of such a restructuring or compromise. The amendments now limit the effect of the compromise to only the debtor subject to the “concurso” proceeding.
  • The amendments, provide that the automatic stay is not applicable with respect to real property collateral unless such real property is “strictly indispensable” for the operation of the debtor’s business.
  • A troublesome addition by the amendments is the requirement that the commencement of the proceeding must be authorized by shareholders, not just the board of directors. Mexican corporate law imposes strict procedural requirements to properly call a shareholders meeting, so the process to begin a “concurso” has now been made more time-consuming and expensive.

Conclusion

Legislation is seldom, if even entirely, satisfactory and the 2014 amendments to Mexico’s LCM are no exception. On balance, however, they do improve the administration of cases, provide additional tools for rehabilitation and grant courts the power to issue necessary and appropriate orders to protect the debtor’s assets and promote the prospects for reorganization.

Alfonso Peniche of Guerra Gonzalez y Asociados SC, contributed to this article.

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