Mitigating the “Vitro Effect”: Mexican Lawmakers Approved the Most Ambitious Bankruptcy Law Reform Since its Enactment back in 2000, Aiming to Ensure Creditors’ Rights

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On January 10, 2014, the Federal Executive Branch of México published in the Official Gazette the legal amendments to México’s Commercial Bankruptcy Law (Ley de Concursos Mercantiles, or LCM), effecting the most comprehensive set of changes to the LCM since its enactment over 13 years ago, and establishing new rules for bankruptcy proceedings in México with the intent to improve the position of creditors dealing with the insolvency of local companies. The law reform made several major changes to bankruptcy law eliminating long-standing bankruptcy-law loopholes that undermined México’s consideration as a safe jurisdiction for the adjudication of legitimate claims. Among other relevant changes, the LCM now subject intercompany debtholders to stricter rules in forming a sufficient majority for approvals of a reorganization plan in order to minimize the abuse in using intercompany debt to “cramdown” other creditors (as experienced in the case of Vitro, SAB de CV), establishes the subordination of intercompany loans, sets forth clear rules for DIP financing and creates creditor-protection measures that ensure the effective rights to recover claims from financially distressed debtors, among others.

The amendments to the LCM -

The changes to the LCM aim to establish a true balance between the debtor and its creditors, as well as to expedite the bankruptcy proceedings in order to maximize the value of the bankruptcy estate for the benefit of all the stakeholders. The foregoing objectives can be achieved, considering that the legal reform will imply a material reduction on the risk of delayed proceedings and uncertainty as to the application of the law. Minimizing these risks shall result in the benefit of creditor’s rights, which as a consequence will increase the access to loans and credits in better financial conditions.

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Topics:  Bankruptcy Reform, Creditors, Mexico

Published In: Bankruptcy Updates, General Business Updates, Finance & Banking Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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