The Mexican insolvency and bankruptcy law (“Ley de Concursos Mercantiles” or “LCM“) that came into effect on May 12, 2000, abrogated the Mexican Bankruptcy and Suspension of Payments Law. One of the stated purposes of the LCM was to mitigate the impact that globalization and the free market had on Mexican corporations, especially after ratification of the North American Free Trade Agreement in 1994. The LCM, therefore, seeks to preserve businesses facing a general default on the payment of their obligations and thereby preserve jobs in Mexico.
To help preserve a troubled company, the LCM contemplates an initial stage – the conciliatory stage – for corporate restructuring by means of an agreement between the debtor and its recognized creditors. However, if the conciliatory stage does not result in an agreement, the bankruptcy stage begins, the purpose of which is to sell the company’s working unit, and if this is not possible, its productive units or assets that form the company, in order to pay the creditors.
As well as the preservation of the company, the LCM regulates the conduct of a troubled company’s managers and shareholders in order to inhibit irresponsible or illegal actions committed by them. Initially, the LCM did not contemplate effective mechanisms for the protection of the assets of the companies under bankruptcy proceedings, which eventually affected their creditors. As a result, on January 2014 the LCM was amended to recognize that members of a debtor’s Board of Directors and key employees of the debtor may be held civil and criminally liable for economic damages caused to a debtor subject to an insolvency proceeding. This amendment, which corrected a loophole in the LCM, has had a significant impact on the regulation of bankruptcy proceedings in Mexico.
The amended LCM recognizes as managers of the debtor all the persons involved in any action that may affect the assets of the company, including the members of the Board of Directors and key employees of the debtor. The law itself indicates as key employees the CEO and those persons in a position to adopt, order or execute acts that may harm the assets of the company subject to the insolvency proceeding.
Under the amendment, managers of a debtor will be liable for economic damages caused to an insolvent company when they engage in any of the following actions:
- They take actions when they have an existing conflict of interest
- They treat shareholders unequally
- They illicitly obtain benefits from the management of the debtor
- They disseminate information that they know to be false.
- They carry out maneuvers with the records of the operations of the debtor with the purpose of affecting the financial statements of the debtor to inflate or overstate the results
- They register false information in the debtor’s accounting records
- They alter or destroy the debtor’s accounting records
- They carry out illegal acts that cause damages to the debtor
- They carry out any other fraudulent or illicit acts for their own or for third parties’ benefit.
In this way, the amendment recognizes the debtor’s right to collect damages resulting from the wrong administration of its managers. Of course, one clear remedy is that managers who are found to have engaged in these activities may be removed from office. The amendment also imposes damages equivalent to the loss or decrease suffered in the assets of the debtor, as well as the deprivation of the legal earnings that the debtor could have earned. Any liability of multiple managers for damages will be joint and several among the managers. This is designed to facilitate the collection of damages.
The amendment prohibits companies from waiving liability under the amendment in their organizational documents or otherwise. Moreover, any action for damages is not exclusive and does not preclude other available civil or criminal actions against the managers as a result of these prohibited activities.
Although one purpose is to facilitate the collection of damages, the more important purpose of the amendment is to prevent these actions from happening in the first instance and to protect the assets of the debtor. That translates into a benefit for all creditors and stakeholders, and not only for those who filed the suit, and is intended to promote the Mexican bankruptcy principles of transparency and good faith. It still remains to be seen whether the intended protective effect of the amendment will have long-term benefits for companies in Mexico.