Bankruptcy and Commercial Insolvency in Mexico

The Ley de Concursos Mercantiles (Commercial Insolvency Law or LCM), enacted in Mexico in the year 2000 and amended on various occasions, is one of the country’s most important legal pillars for the restructuring and orderly liquidation of businesses facing financial difficulties. This legislation was designed to provide merchants and companies with an efficient, structured, and transparent mechanism to manage insolvency, protecting both debtors and creditors, while promoting economic recovery and job preservation.

History and Evolution of Insolvency Law

Insolvency law has roots dating back to Ancient Rome, where rudimentary mechanisms already existed to deal with merchants’ insolvency and ensure some degree of economic stability. During the Middle Ages, Italian city-states such as Venice and Florence developed more sophisticated rules to address insolvency and protect trade. In England, the approach evolved from criminalizing debtors to systems focused on financial rehabilitation. Meanwhile, in France, the Ordonnance du Commerce of 1673 and the Commercial Code of 1807 established structured procedures that influenced many legal systems worldwide.

In Mexico, the growing dynamism and complexity of national and international commerce revealed the need for a modern and clear legal framework. The former Bankruptcy and Suspension of Payments Law proved inadequate for the current business environment, prompting the creation of the LCM—aligned with international best practices.

What Is Commercial Insolvency? Bankruptcy and Commercial Insolvency in Mexico

Commercial insolvency (concurso mercantil) is a judicial proceeding intended to assist insolvent businesses—or those at risk of insolvency—in overcoming their financial problems in an orderly fashion. Its primary objective is to protect merchants, whether individuals or legal entities, so they can restructure their debts. If restructuring is not feasible, the process facilitates an organized liquidation of assets.

Stages of Commercial Insolvency Proceedings

1. Filing and Declaration of Insolvency:The process begins with a petition for insolvency, which may be filed by the company itself or its creditors. The insolvency judge assesses the financial situation and, if requirements are met, declares the business in insolvency proceedings.

2. Conciliation Phase:A conciliator is appointed to act as a mediator between the company and its creditors in order to reach an agreement for financial restructuring. The business continues to operate under supervision, while terms such as debt reductions (quitas) or payment extensions (esperas) are negotiated. This stage has a maximum duration of one year, including possible extensions.

3. Settlement Agreement:If the parties reach a deal, a restructuring agreement is signed and must be approved by the insolvency judge and the majority of creditors. The agreement outlines the terms for debt restructuring and payment.

4. Bankruptcy Phase:If no agreement is reached, the judge declares bankruptcy. A trustee is appointed to liquidate the company’s assets and distribute the proceeds among creditors in accordance with the legal order of priority.

Benefits and Advantages of Commercial Insolvency

Commercial insolvency proceedings offer several advantages for both distressed companies and their creditors:

• Debt Restructuring: Enables negotiation of new terms with creditors under judicial supervision, preventing unilateral decisions or abuse.

  
  

• Temporary Suspension of Payments: Legal actions and foreclosures are suspended, providing breathing room for reorganization.

  
  

• Judicial Protection: Offers a safe environment for negotiation without the risk of immediate legal claims by creditors.

  
  

• Transparency and Fairness: All creditors participate in a single process, ensuring equal treatment and attention to all claims.

  
  

• Preservation of Business and Jobs: Encourages business continuity and protects employment.

  
  

• Maximization of Asset Value: If liquidation is necessary, it is done in an orderly manner to obtain the best possible return.

  
  

• Orderly Dispute Resolution: Prevents multiple simultaneous lawsuits by centralizing proceedings in a single case.

The Key Role of Lawyers in Commercial Insolvency

Lawyers play a crucial role in commercial insolvency proceedings by providing the specialized legal knowledge needed to guide businesses through this critical phase. Their involvement is essential to ensure compliance with legal procedures, protect client interests, and facilitate the best possible outcome. Key functions of lawyers in this context include:

• Early Detection of Legal Issues and Insolvency Risks:Through a comprehensive legal and financial analysis, lawyers identify signs of insolvency and legal risks, allowing timely action—whether initiating insolvency proceedings or exploring legal alternatives.

  
  

• Legal Advice and Preparation of the Insolvency Petition:Lawyers draft and file the petition before the insolvency court, ensuring that all required documentation meets legal standards and that the legal strategy is best suited to protect the company.

  
  

• Design of Restructuring Strategies:In coordination with financial experts, lawyers develop and negotiate viable restructuring plans that comply with applicable laws, protect the company’s rights, and seek beneficial agreements with creditors.

  
  

• Negotiation and Mediation with Creditors:Lawyers act as legal representatives in negotiations, promoting dialogue and proposing solutions to avoid bankruptcy, while advocating for fair and sustainable settlement agreements.

  
  

• Ensuring Transparency and Legal Compliance:They oversee the entire process to ensure full transparency and that the rights of all parties are respected. They also ensure the company fulfills its legal obligations throughout the proceeding.

  
  

• Post-Insolvency Monitoring and Compliance:Once the proceeding concludes, lawyers continue to advise on the implementation of agreements and handle any legal issues that arise, helping to maintain the company’s legal and operational stability.

Conclusion

Commercial insolvency is a vital tool for Mexico’s business ecosystem, especially in times of economic crisis and financial volatility. By providing a solid, transparent, and fair legal framework, the Ley de Concursos Mercantiles not only gives companies a second chance to reorganize and continue operating, but also protects creditor interests and contributes to national economic stability.

For public accountants, a deep understanding of this process and its implications is essential to provide proper guidance to their clients and actively support economic recovery efforts. The effective use of commercial insolvency proceedings strengthens the financial system and promotes a business culture centered on prevention, transparency, and strategic planning.

In times where economic uncertainty threatens the survival of many businesses, commercial insolvency represents a source of hope and a viable path for Mexican companies to overcome financial hardship, protect jobs, and continue contributing to the country’s social and economic development.

Is Your Company Facing Financial Difficulties?

Don’t wait until it’s too late. At UPLAW Abogados, we are experts in insolvency law and can help you assess whether commercial insolvency proceedings are the right solution to protect your company, negotiate with creditors, and avoid bankruptcy.

Schedule a confidential, no-cost consultation with one of our specialized attorneys and receive a legal diagnosis to help you make informed and strategic decisions.

📩 Contact us at contacto@uplaw.com.mx or visit www.uplaw.com.mx for more information.

Restoring your company’s viability is possible. The first step is acting in time.