Considered the gateway between the United States and Latin America, Mexico has a large number of resources and robust trade agreements with major international markets. This includes the United States, Mexico and Canada (USMCA) agreement, MERCOSUR and the Pacific Alliance.
Mexico’s GDP reached US$1,224 billion in 2018, growing successively in recent years. The International Monetary Fund (IMF) estimates that this growth should continue at the same rate in 2019.
Despite a growing economy and ever-increasing foreign investment, a business’ operations may not always go to plan. Debts and receivables can accumulate for a business during difficult times, and in some cases the company may no longer able to repay its creditors. Company liquidation occurs when a business closes down and sells its assets to pay these bills. Find out what steps you’ll need to take if you want liquidate your company in Mexico.
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What does it mean to liquidate a company?
Liquidating a company involves shutting down all activities and redistributing the company’s assets (all the company’s holdings) to those people or claimants it owes money to. Most of the time, when the company is no longer able to pay these obligations (debts, loans, or others), it is considered ‘insolvent’.
To summarize this process in a few words, liquidation proceedings consist of the sale of all inventories, physical assets (such as machinery or furniture), and financial assets. Selling or ‘liquidating’ these assets enables the closing company to repay outstanding debts to creditors and shareholders. Once all these assets have been sold, the company closes.
Liquidation procedure in Mexico
There are procedural differences between voluntary liquidation and insolvency procedures. The most significant difference is how each procedure is initiated.
Under voluntary liquidation, the company begins with the process itself. Insolvency procedure can be requested when a creditor takes action against the company for any debt they are owed.
Voluntary liquidation involves your company’s economic or financial difficulties, or the inability to continue with the corporate purpose of the company. This decision must be agreed by all shareholders and validated at a company assembly. During this meeting, one or more liquidators will be appointed.
Once all these internal decisions have been made, you will have to submit the minutes of the assembly of the company’s dissolution and liquidation in the Public Registry of Commerce. After that, you’ll go through the following series of steps:
- Close ongoing transactions and operations
- Make payments on debts to your creditors and suppliers
- Sell your company’s assets
- Distribute the liquidated and remaining assets to those creditors and shareholders who are owed money
- Draw up the liquidation balance sheet.
You must keep the documents of the partnership and the books of account and cooperation on deposit for 10 years after the date of liquidation. It’s key to seek support from expert liquidation services providers for this process.
All insolvency proceedings are governed by Mexican Commercial Bankruptcy Law (LCM). Legal proceedings can be initiated by one of your creditors when you can no longer repay your debts. You will then be considered as the debtor company. The Federal Institute of Specialists in Commercial Bankruptcy Proceedings will be the main authority in these procedures.
Insolvency proceedings consist of two steps: conciliation and bankruptcy. Conciliation has a statutory conciliation time frame of 185 days once the judge ruling (beginning of the insolvency procedure) is published in the Mexican Federal Official Gazette. It’s during this conciliation period that you may prove your solvency and express your desire to continue operating.
During the conciliation phase, the debtor must either try to reach an agreement with its creditors or carry out a reorganization plan. If a reorganization agreement is reached, then the judge issues a resolution. If it approves the agreement, the proceedings are terminated. If no agreement is reached between the two parties, it is then possible to establish a reorganization plan without the vote of all creditors. Only when if certain mandatory conditions and specific percentages of votes are respected, according to the texts of the LCM.
Reorganization agreement and plan
A reorganization agreement is entered into in the event of insolvency procedure when you liquidate a company in Mexico. This agreement must be found between the company (debtor) and the creditors and aims to avoid the bankruptcy or liquidation of the company (debtor). A private conciliator, designated by both parties, will consequently take the role of intermediary between the two parties. During this conciliation period, the aim will be to preserve the operation of the company (debtor). This agreement must contain reorganization plan.
A reorganization plan, therefore, follows a reorganization agreement between the company (debtor) and the creditors. A reorganization plan describes the process of modifying a business to help it pay its debts and receivables and thus continue its activity.
General Corporations Law reform
On 24 January 2018, new provisions concerning company liquidation was published in the Mexican Federal Official Gazette. (Diario Oficial de la Federación de México). These provisions entered into force on 25 July of the same year.
Many provisions of the Mexican General Corporations Law (Ley General de Sociedades Mercantiles) were modified. These amendments aim to simplify the process of dissolution and liquidation of Mexican companies.
The Mexican government seeks to make easier proceedings for those considering their options to liquidate a company in Mexico. This provides legal certainty and a simpler experience for shareholders, partners and third parties, allowing them to close more easily and quickly.
A more straightforward procedure
New, simplified steps for voluntary liquidation include:
- Carry out a shareholders’ assembly to define the resolutions of the liquidation and appoint the liquidators.
- Publish the minutes of the assembly in the publication of commercial entities website (Publicaciones de Sociedades Mercantiles or PSM); no need to formalize them before a notary public.
- With the authorization of the Mexican Ministry of Economy, deliver the liquidation minutes in the Public Registry of Commerce.
- All the company’s assets, property, records, and documents are transferred to the liquidator.
- Distribution by the liquidator of the remaining assets to the shareholders, according to their shares.
- Delivery of share certificates to the liquidator by all shareholders.
- The liquidator publishes the final balance sheet of the company in the PSM.
- The Mexican Ministry of Economy will submit the cancelation of the registration of the company in the Public Registry of Commerce and notify the Mexican tax authorities of it.
Common FAQs for Liquidating an entity in Mexico
Based on our extensive experience these are the common questions and doubts of our clients when liquidating a local entity
Shareholders’ Meeting: The company’s shareholders convene a meeting and approve the decision to dissolve the company and initiate the liquidation process.
Appointment of Liquidator: A liquidator is appointed, who can be a third party or the company’s legal representative. The liquidator is responsible for managing the liquidation process.
Notice to Authorities: Formal notice of the company’s decision to dissolve and liquidate must be sent to the Tax Administration Service (Servicio de Administración Tributaria – SAT) and other relevant authorities.
Publication of Notice: A notice of the company’s dissolution and liquidation is published in a newspaper to inform creditors and other interested parties.
Asset Liquidation and Debt Settlement: The company proceeds to liquidate its assets and settle its debts, ensuring proper distribution of funds to creditors.
Employee Settlement: Settlement of employee obligations, including payment of wages, severance, and other entitlements in accordance with labor laws.
Account Closure and Tax Compliance: Closure of the company’s accounts and fulfillment of tax obligations, including the submission of final tax returns.
The liquidation process will normally take between (12) and (20) months, assuming the entity is in good standing and no rectification work is required.
Need local support? Biz Latin Hub can help
The procedure to properly liquidate your company in Mexico’s ecosystem is complex, and requires due compliance to ensure it’s carried out properly. Liquidation options are important to consider for a business that isn’t succeeding as once hoped, in order to avoid further sunken costs or debt accumulation.
Since this is a judicial procedure, engaging with a local, knowledgeable lawyer is essential. They will accompany you and guide you in your decision-making. At Biz Latin Hub, we provide expert market exit and liquidation services. We work to ensure the best outcomes for you and your business. Our experienced legal team in Mexico can provide guidance during the liquidation process.
Reach out to our team of local experts for advice and comprehensive market exit services.
Learn more about our team and expert authors, and watch our short presentation below on the ways we can help you do business in Latin America.
The information provided here within should not be construed as formal guidance or advice. Please consult a professional for your specific situation. Information provided is for informative purposes only and may not capture all pertinent laws, standards, and best practices. The regulatory landscape is continually evolving; information mentioned may be outdated and/or could undergo changes. The interpretations presented are not official. Some sections are based on the interpretations or views of relevant authorities, but we cannot ensure that these perspectives will be supported in all professional settings.