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What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
Out-of-court liquidation Out-of-court liquidation does not require the filing of a complaint or evidence to demonstrate that the debtor is in payments cessation. It is sufficient that the debtor proves that it is undergoing general, economic or financial difficulties.
Partners may agree on a voluntary dissolution of the company. Such resolution shall be approved at a partners’ meeting (dissolution meeting), in which one or more liquidators are appointed.
Winding-up proceedings begin immediately after the company’s dissolution minutes have been duly registered with the Public Registry of Commerce.
The sole manager must provide all corporate and accounting documents, information and books to the liquidator, which must be registered in an inventory. The liquidator is entitled to act on behalf of the company, acting as legal representative of the partnership, therefore having all the obligations, responsibilities and limitations, as well as the authority and powers of attorney and a of legal representative.
Unless the dissolution minutes or law provides otherwise, the liquidator is obliged to:
- wind up the outstanding transactions and operations;
- collect due payments and pay debts;
- sell the assets;
- distribute to each partner the remaining assets proportionately to their partnership interest;
- draft the liquidation balance sheet; and
- hold the partnership’s documents and corporate and accounting books in deposit for 10 years following the date of the partnership’s winding up.
The final liquidation balance sheet must be approved by partners in a winding-up meeting. Liquidators may then proceed to:
- pay partners’ equity against their corresponding partnership interests;
- give notice of the liquidation to the Ministry of Finance and Public Credit; and
- request the cancellation of the taxpayers’ registry and partnership’s registry in the Public Registry of Commerce.
Partners will decide during the winding-up meeting on the distribution of the remaining assets (distribution agreement) once the liabilities have been paid or their amount has been deposited whenever payment is not possible. The liquidator will determine the amount or assets that each partner is entitled to receive as final payment for its ownership interest.
Court liquidation The debtor company may voluntarily file an insolvency proceeding requesting the liquidation of all its assets, properties, goods and rights. The Federal Institute of Commercial Insolvency will appoint a receiver to manage the company and sell the assets and rights of the company in order to pay the debts recognised in favour of the creditors.
The compulsory liquidation will take place when company creditors request that the court liquidate the assets, or if the company and creditors do not reach a reorganisation agreement during the conciliation stage of the insolvency proceeding (365 days).
The only structural or regulatory difference between voluntary liquidation and compulsory liquidation is that if the compulsory liquidation is filed by the creditors, the company may reject such petition and the insolvency proceeding will begin from the conciliatory stage.
How are liquidation procedures formally approved?
A federal district court must render a judgment after confirming that the legal requirements for insolvency are fulfilled. In other cases, once the legal term ends for the company to subscribe to a reorganisation agreement with its creditors without such an agreement in place, the federal district court will render a judgment declaring the company bankrupt and ordering its liquidation.
What effects do liquidation procedures have on existing contracts?
As a general rule, the validity of the contracts is not affected by the liquidation procedure. However, the Commercial Insolvency Law makes a casuistic classification:
- the validity of the agreements concerning only personal goods will not be affected, as well as inalienable goods, those exempt of attachment and those not subject to a statute of limitation;
- preparatory and definitive agreements must be complied with by the company, unless the liquidator considers that it will harm the estate;
- the seller can oppose delivering goods or property regarding purchase agreements in which the company is the buyer, unless the company pays the full price agreed by the parties or guarantees the payment of the goods;
- deposit agreements, loan agreements and commission and agency agreements will not be terminated for the liquidation procedure, unless the liquidator considers it necessary;
- existing account agreements will be terminated, unless the company states its continuation with the consent of the liquidator;
- securities repurchase agreements will be terminated;
- lease agreements will not be cancelled by the liquidation procedure, unless the company is the lessee and the liquidator considers it necessary, in which case the receiver must pay the penalty agreed in the contract or three months’ rent for the anticipated termination;
- personal service agreements will not be cancelled;
- lump-sum construction contracts will be cancelled, unless the company agrees to comply with the agreement with the liquidator’s authorisation; and
- insurance contracts will not be cancelled if the company is the insured party, but if the company is the insurer, the insured party can choose to terminate the contract.
What is the typical timeframe for completion of liquidation procedures?
It depends on the size of the company, number of creditors and amount of assets, but an approximate timeframe is two years.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
In Mexico the Federal Institute of Commercial Insolvency specialists appoints the liquidators in each bankruptcy proceeding.
The liquidator becomes the manager and director of the company and has all the powers to sell, lease and represent the company.
The liquidator’s main responsibility is to sell all the company’s assets, rights, goods and properties in order to pay off the acknowledged creditors.
The main responsibility of the receiver is to sell the properties and rights of the estate, to obtain the greatest possible return from their sale. Other liquidator responsibilities are:
- filling out monthly reports regarding actions taken and company management;
- following up the lawsuits and actions initiated against the company;
- investing the money obtained with the sale of assets, rights, goods and properties of the company; and
- performing appraisals and reporting in benefit of the creditors.
The liquidator is responsible for the maintenance and conservation of the company’s assets, rights, goods and properties.
What is the extent of the court’s involvement in liquidation procedures?
The court is the director of the procedure. Its involvement is limited to the review of all actions taken by the company, creditors and liquidator (receiver).
The sale of property should be performed by means of a public auction, which is reviewed by the court. The court must also authorise the sale of any property of the estate by means of a procedure other than public auction when the receiver deems that a higher value could be obtained in this way.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
The creditors may file any kind of motion, petition, writ or appeal in order to protect their rights and challenge the liquidator’s performance and the sale of the company’s assets, rights, goods and properties.
The creditors are prohibited from attaching any of the assets that comprise the estate of the company, unless their credit is secured by a mortgage or pledge and there is a final judgment that allows them to continue with the sale of the company’s property.
The creditors are also prohibited from agreeing the payment of their credits outside the liquidation procedure. In such a case, creditors would lose their rights as creditors and the agreement will become null and void.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
As legal representative of the company, the director can also file motions, petitions, writs and appeals concerning the liquidator’s performance and the sale of the company’s estate.
Shareholders are not involved in the liquidation procedure.
What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
The liquidation procedure may be initiated under the following circumstances:
- if the debtor company applies for an insolvency proceeding in the liquidation stage; or
- if two or more creditors request the insolvency proceeding of the debtor in the liquidation stage.
In both cases, it must be demonstrated that the company has defaulted in the payment of its obligations in a general manner. In order to prove this condition of general non-performance, a payment default to two or more creditors should exist alongside the following conditions:
- at least 35% of all company obligations are at least 30 days past maturity; and
- the company has insufficient liquid assets to satisfy at least 80% of its matured obligations on the date of the petition.
The insolvency procedure for mutual insurance companies and insurance institution societies, bonding companies, re-bonding companies and re-insurance companies is regulated by the Commercial Insolvency Law, but governed by the provisions of their special laws.
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