The Covid-19 emergency has hit the economy of every country around the world, and Mexico is no exception. Companies will face difficult times, some may even be declared bankrupt, nonetheless, before hitting the point of no return, there are measures managers can take to try to save the company. Fernando Pérez Correa and Zulima González gave Leaders League a run-down of the of the possible solutions for businesses facing insolvency in that country.
Leaders League.It seems that in Mexico you have two options for debt restructuring: a judicial one and an extrajudicial one. When should a company opt for an extra judicial procedure and how does it work?
Zulima González. Yes, in Mexico there are several ways companies can reorganize their debt, they can choose to do it throughout an out-of-court restructuring mechanism, such as workouts or mediation settlements, or opt for the judicial insolvency proceeding, known as “concurso mercantil”. The decision to prefer one way over the other must be based on the company’s necessities, which are specific to each case, hence the importance of carrying out a financial audit of the company, and maybe even consider hiring a financial advisor, as the measures adopted by one enterprise might not be the ideal for another.
Extrajudicial procedures are mostly used by those companies that may only need to restructure one or certain credits, not the totality of their debt, to recover their liquidity, thus, entering a judicial proceeding to deal with all their creditors can be impractical, as an agreement with the main ones is often sufficient.
Fernando Pérez Correa. Furthermore, Mexico’s commercial insolvency law (Ley de Concursos Mercantiles) sets out specific criteria that a company must satisfy in order to be considered insolvent and access an insolvency proceeding. Therefore, if the company does not meet these, but needs to restructure its debt, it must opt for an extrajudicial procedure.
Among these extrajudicial proceedings we find the following options:
Workout: a proceeding used by a debtor faced with a default scenario, allowing it to negotiate with its creditors, without the intervention of the courts, the repayment of debts, either cancelling a portion of the debt, entering a standstill, obtain investments, refinancing or additional collaterals.
Friendly settlement:The commercial insolvency law, which regulates formal and judicial restructuring and bankruptcy procedures in Mexico, provides the possibility for a company facing economic or financial problems, or a creditor who has an overdue loan, to request the Instituto Federal de Especialistas de Concursos Mercantiles (IFECOM) appoint a conciliator, among a list of conciliators registered in with the institution, to act as an impartial negotiator between creditor and borrower.
By choosing to go down this route the parties accept the participation of a third party who will bring the parties together and facilitate negotiation between them. There will be no court intervention. It is important to mention that this kind of proceeding has been used less than five times in Mexico, although the reasons for its under-use have yet to be fully explored.
Private mediation:This alternative dispute resolution procedure is provided for in the alternative dispute resolution laws of each of the Mexican federal states. In Mexico City, for example, it gives parties the support of a neutral an impartial mediator to help them communicate with each other and negotiate an agreement. Furthermore, this voluntary proceeding can conclude with a mediation settlement agreed before a mediator with public faith, which can be immediately executed.
2. Which are the advantages and disadvantages of each option?
Fernando Pérez Correa
Some of the advantages of a workout are as follows:
Privacy: the company does not have to publicly disclose a workout agreement.
Speed: negotiating and entering a workout is usually faster than an insolvency proceeding.
Cost: a workout is generally less expensive than an insolvency proceeding.
Flexibility: agreements between the parties do not need to be approved by a court.
Ambiance: parties can resolve their dispute according to their needs and possibilities in amicable negotiation, instead of taking each other to court to resolve their conflict.
On the other hand, a workout can have its disadvantages, such as the failure to obtain injunctive relief for the protection of the company’s assets and goods. Moreover, interest will continue to accrue throughout the negotiations, which can complicate the company’s liquidity problem. Moreover, the settlement does not bind those creditors that refuse to negotiate with the debtor and the company does not have the possibility to ask tax authorities for condonations.
b) Friendly settlement
The friendly settlement has many of the advantages of a workout, as it is private, quick, usually not expensive and flexible. In addition, a third party will bring the parties together and cooperate to conclude a restructuring agreement.
We also may encounter similar disadvantages to the ones workouts have, there will be no judicial protection against collection actions, interests will continue to accrue, the friendly negotiator can not oblige all creditors to enter the reorganization agreement and the debtor will not be able to obtain tax remissions.
c) Private mediation.
The most relevant advantage of a mediation settlement is that, at least in Mexico’s City, it is equivalent to a judicial judgement and can be immediately executed. Furthermore, it can take place remotely and online, which is quite pertinent in the current global conditions. As with workouts and friendly settlements, mediation is private, quick, flexible and less expensive than litigation or a bankruptcy proceeding.
However, being an out-of-court mechanism, the company will not count with injunctive reliefs, the suspension of interests, tax condonations and the settlement will only be binding to the parties that took part in the mediation. Additionally, some negatives are that the proceeding must be carried out according to the applicable alternative justice law, and, in some cases, the mediator’s fees can be expensive.
3. What about the judicial procedure?
The insolvency proceeding in Mexico is regulated by the commercial insolvency lawwhich considers two options for entities facing liquidity problems and financial distress to reduce and renegotiate their debts: (i) ordinary judicial conciliation and (ii) pre-packaged insolvency.
The choice between these insolvency judicial proceedings must be based on the previous discussions and agreements entered between the debtor and its creditors. In the case where the company has agreed on a settlement with the majority of its creditors, then it can opt to file a pre-package insolvency proceeding, whereas if it has struggled to negotiate the reorganization of its debt, or the creditors have taken legal action against the company, the best alternative is the ordinary judicial conciliation.
Next, we will explain the characteristics of each insolvency proceedings, as well as their advantages and disadvantages.
Ordinary judicial conciliation
This is a court procedure that aims to achieve the conservation of the company’s business through a reorganization agreement between creditors and debtor.
The procedure is filed before a federal court with jurisdiction in the debtor’s domicile and begins with a bankruptcy application filed by the debtor or a claim submitted by one or more creditors.
When the debtor’s bankruptcy is admitted, the Instituto Federal de Especialistas de Concursos Mercantiles (IFECOM), will appoint an examiner, who will review the debtor's accounting and documents to determine if it is in a state of insolvency and will deliver a report to the bankruptcy court.
Subsequently, the court will make an analysis of the arguments and evidence presented by parties, as well as the examiner's report, in order to declare the insolvency of the debtor and initiate the conciliation stage. In the resolution that declares the debtor as insolvent, the court will request the Instituto Federal de Especialistas de Concursos Mercantiles (IFECOM) appoint a conciliator, whose task will be for the debtor and its creditors to enter a reorganization agreement, within the judicial terms under law (maximum 365 days).
Some benefits of choosing an insolvency proceeding to reorganize debt are:
The appointment of a conciliator: a third party brings the parties together and cooperate to conclude a restructuring agreement.
Transparency: the conciliator and the court supervises the company’s administration, operations and accounting.
Injunctive reliefs: the company has with judicial protection against the execution of its goods and assets. Further, the court prohibits the company from paying its matured debt, giving the debtor more control over the deal.
Reorganization agreement: the settlement is binding to all “common creditors”.
Interest will cease to accrue: in general, from the date the company is declared bankrupt, interest will not accrue.
Tax condonation: the company will have the possibility of requesting remissions from the tax authorities once the bankruptcy court approves the reorganization agreement.
There are several disadvantages when filing for an insolvency proceeding under the Mexican commercial insolvency law:
Publicity: according to commercial insolvency law, anyone can have access to the insolvency proceeding. In addition, insolvency proceedings often attract media attention.
Length: the proceeding is subject to statutory terms and deadlines, which may delay the reorganization.
Expense: the attorney’s fees can be expensive, as well as the conciliator’s fees.
Stigma: companies fear their reputation and commercial relationships will be affected by the insolvency proceeding.
Inflexible these proceedings are less flexible than an out-of-court arrangement.
Possibility of bankruptcy: in the event of failure to enter an agreement within the statutory time limit, the company may be declared bankrupt, and its goods, rights and assets be liquidated by a receiver.
The debtor who has agreed a reorganization plan with the creditors representing the majority of its total debt, may file for bankruptcy. The application must be signed by the debtor and the creditors representing the majority of its total debt and must be accompanied by the restructuring plan.
In this type of procedure, the intervention of the examiner is not necessary, however, a conciliator will participate and carry out the tasks foreseen in the commercial insolvency law. Likewise, the conciliator must submit the restructure plan to the bankruptcy court, for it to be reviewed and approved.
The main advantage of the pre-packaged insolvency proceeding is that is much shorter and faster than an ordinary insolvency proceeding, since time is not lost in the examiner intervention and the company will count with a plan approved by the majority of its creditors from the beginning of the proceeding. Besides, with this restructuring option the debtor has the protection of injunctive reliefs, the appointment of the conciliator, the possibility to obtain tax condonations and the cease of the interests of some of its payment obligations.
Nevertheless, just as in an ordinary conciliation insolvency proceeding, it is public, it may be expensive, it can cause stigma, it may be less flexible than an out-of-court settlement, and there is the possibility for the company to be declared bankrupt if the reorganization plan is not approved.
4. Are there any recommendations you would like to give to entrepreneurs currently facing insolvency?
Sure. Companies facing financial distress or a potential insolvency situation looking to restructure their debt or restore liquidity must keep in mind the following:
Be realistic about the viability of your business and possibilities to renegotiate your debts.
Be honest with yourself and your creditors.
Identify the reasons that lead the company to a financial crisis.
Hire lawyers that specialize in restructuring and bankruptcy matters, as lawyers with experience in debt restructuring will prioritize reaching a reorganization agreement over secondary disputes.
Hire a financial advisor to analyze the company’s finances and help you come up with a plan.
Do not be afraid of filing for a judicial insolvency proceeding (concurso mercantil), it is a great mechanism to reorganize the company’s debt.
Do not opt for an insolvency judicial proceeding when it is too late, and the creditors have taken legal actions against the company or have even initiated execution proceeding against the company’s properties or frozen its assets.
Consider the advantages and disadvantages of filing for bankruptcy to liquidate the company.
Distinguish your most indispensable suppliers and creditors and prioritize their payments or negotiations with them.
Detect the goods, assets and properties that are not essential and consider selling them to recover liquidity.
Be aware that certain transactions can be classified as bankruptcy frauds or can even be considered crimes under the insolvency commercial law.
Be conscious that all the shareholders and the board of directors must be on the same page regarding the way the company will reorganize its debt.
Make sure to organize the company’s documents, agreements, accountancy and corporate books.
Cooperate with the examiner, the conciliation and the bankruptcy court, in a case where an insolvency proceeding is chosen.
Prepare a plan that the company can actually fulfill.
Every minute counts.
Keep operations as normally as possible.
Communication with the creditors is vital.
Avoid judicial proceedings outside the insolvency proceeding at all cost, offer to enter a recognition of debt settlement instead.