Bankruptcy Liquidation

Introduction

The liquidation process, known as quiebra in the Mexican Insolvency Law, represents the second stage of the insolvency proceedings. This stage is initiated if the debtor fails to successfully complete a restructuring agreement during the reorganization stage, or if the debtor requests liquidation either upon its voluntary petition or at any point thereafter. Additionally, a creditor demanding the concurso can petition the court to go straight into liquidation if such a petition goes unopposed by the debtor.

Objective

The primary objective of the liquidation stage is to liquidate the business, either as a whole, by sale of productive units, or through the sale of individual assets, with the goal of repaying creditors according to their statutory priority. This process is overseen by a court-appointed receiver, who takes over the management of the debtor's enterprise.

Debtor Removal

One of the key aspects of the liquidation process is the removal of the debtor's management. Unlike in the reorganization stage where the debtor typically remains in possession, in liquidation the management of the debtor's enterprise is vested entirely in the receiver. This change in control is designed to ensure that the liquidation process is carried out efficiently and in the best interests of the creditors.

Sale of Assets

Value Maximization. The receiver's primary responsibility is to sell off the assets of the estate while attempting to receive the highest possible return. The Mexican Insolvency Law emphasizes the principles of value maximization and preservation of going concern value. If selling productive units as a going concern allows for receiving higher proceeds than piecemeal liquidation, the receiver must consider this option. This approach recognizes that in many cases, the business may be worth more as an operational entity than the sum of its individual assets.

Sales Process. The law generally requires that the sale of assets be carried out through public auction. This requirement aims to ensure transparency and maximize returns. However, the law also provides flexibility in certain circumstances. For perishable goods, alternative sale methods can be employed without prior approval. For other assets, the receiver can seek judicial authorization to use alternative sale methods if these would yield a higher value.

Contract Continuation. An interesting feature of the Mexican liquidation process is the receiver's ability to oppose the foreclosure on estate assets by secured creditors if the receiver deems it beneficial to the estate to sell those assets together with other unencumbered assets. However, to exercise this option, the receiver must adequately compensate the secured creditor in question. This provision allows for potential value maximization while still respecting the rights of secured creditors.

Payment of Claims

The liquidation process also involves the distribution of proceeds to creditors according to the statutory priority of payments established in the law. This priority system is complex, with various classes of claims ranging from privileged labor claims at the top to claims against unlimited partners at the bottom.

No Discharge

One challenge in the liquidation process under Mexican law is the lack of specific provisions addressing discharge and rehabilitation. These concepts, which are fundamental in many insolvency regimes for providing debtors with a "fresh start," are not explicitly recognized in the Mexican system. This gap could potentially impact the ability of individual debtors or entrepreneurs to move forward after a business failure.

Termination

The duration of the liquidation process is not strictly defined in the law, allowing for flexibility based on the complexity of the case and the nature of the assets being liquidated. The process terminates when all recognized creditors are paid in full, all creditors are paid with "bankruptcy currency" and there are no further assets in the estate, if the estate is insufficient to cover the claims against the estate, or at any time the debtor and all creditors agree to such termination.

Conclusions

The liquidation process under the Mexican Insolvency Law represents a structured approach to winding down a business that cannot be successfully reorganized. By emphasizing on value maximization, providing for centralized control under a receiver, and establishing clear priorities for distribution, the law aims to ensure an orderly and fair process for all stakeholders. While challenges remain, particularly in the areas of discharge and rehabilitation, the overall framework provides a solid basis for managing business failures in the Mexican economic context.

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