Mexico: Interim Injunctions in Bankruptcy Proceedings

In summary

This article provides an overview of the standards that applicants for interim injunctions must meet in order to request such measures, and the limitations provided by the Mexican Bankruptcy Law (the Concursos Law).^[1] It also describes the types of interim injunctions that bankruptcy courts have granted in the most important bankruptcy proceedings in recent years. Finally, the article describes the challenges that parties in insolvency proceedings face regarding injunctions.

Discussion points

• The purposes of interim injunctions and the standards that an applicant must meet for their granting
• A brief explanation of the stages of the insolvency proceeding known as ‘concurso’ and applicants of the bankruptcy proceedings
• The benefits of interim injunctions in insolvency proceedings according to the Concursos Law and its bill
• Recent insolvency proceedings in Mexico in which the courts have granted interim injunctions and their implications
• Scope and challenges of interim injunctions in Mexican insolvency proceedings

Referenced in this article

• The Concursos Law and its accompanying bill
• Federal Institute of Commercial Insolvency Proceedings Specialists (IFECOM)
• Mexico’s Federal Judicial Branch
• General Agreement 4/2020 of the Plenary of the Federal Judiciary Council)
• The human right to access justice
• Precedents issued by the Federal Judicial Branch regarding interim injunctions
• Generic creditors of the debtor

Introduction

Insolvency proceedings (concurso proceedings) have increased in Mexico in recent years. Although, from 1 January 2000 to 30 November 2021, only 846 insolvency proceedings were heard (an average of 38 per year), in the past two years, particularly since the beginning of the pandemic, the number of proceedings has increased.^[2] In 2021, the annual average of filed bankruptcy proceedings increased to 44 motions.^[3] However, the dismissal rate is also very high since, out of 161 proceedings filed in 2021, 118 cases were dismissed.^[4] The dismissals, the low number of cases processed over 22 years and the increasing migration of cases to the United States has been the subject of criticism, particularly because unnecessary bureaucracy and formalities are a constant practice of the bankruptcy courts, which denotes the need for judges to be more sensitive and specialised.

Fortunately, specialisation is a trend in the Federal Judicial Branch, given that specialised bankruptcy courts have been created. On 4 March 2022, the Plenary of the Federal Judiciary Council published General Agreement 4/2020 in the Official Gazette of the Federation, through which it ordered the establishment of the First and Second District Courts in Bankruptcy Matters.^[5] These specialised bankruptcy courts began functioning on 7 March 2022. They have their residence in Mexico City and jurisdiction throughout the country to hear all insolvency proceedings and amparo indirecto (constitutional protection) claims related to this matter.^[6]

According to General Decree 4/2020, the purpose for these courts is that bankruptcy proceedings are highly specialised. With the creation of specialised courts, parties in insolvency proceedings will receive prompt justice. As a result, the Mexican economy benefits through the preservation of sources of employment, companies and production chains.

The Mexican Federal Judicial Branch has made an effort to improve insolvency proceedings, for example, through specialised courts and court clerks, the courts’ reduced response times and training for court personnel. Specialisation is beneficial to the parties that participate in insolvency proceedings, particularly, since, in addition to legal issues, insolvency proceedings involve administrative, accounting and financial matters.

The complexity of insolvency proceedings is relevant to the topic of this article. It is important that the court in charge of deciding the insolvency case has the knowledge and sensitivity to deal with the financial and administrative issues of an insolvent company, particularly when it has to grant injunctive relief to preserve the company’s operations.

As explained below, the main purpose of an interim injunction is to guarantee the right to access justice. Specifically, the aim of interim injunctions in insolvency proceedings is to preserve the feasibility of companies, protect their assets and ensure that they continue with daily operations during the course of the proceedings. Hence, interim injunctions are essential in concurso proceedings.

Under article 1 of the Concursos Law:

it is in the public interest to preserve companies and to prevent generalised non-compliance with payment obligations from jeopardizing the viability of such companies and others with which they maintain a business relationship.

Thus, the Concursos Law seeks reorganisation to achieve the conservation of insolvent companies and of those with which they do business: it seeks to avoid a domino effect in the economy.

This recognition of public interest in the preservation of companies is central to the concept of insolvency proceedings. To achieve this purpose, the Concursos Law allows all types of companies to request interim injunctions that adapt to their necessities, corporate purpose and daily operations. However, the applicant for the interim injunction must meet the doctrine’s standards on injunctions and respect the Concursos Law’s limitations and goals.

In recent years, companies that have initiated insolvency proceedings (including debtors, creditors and federal institutions with standing) have requested interim injunctions that allow the debtor to continue with its daily operations. These include:

• the stay of seizures over the company’s assets;
• restrictions to pay that is due and payable obligations; and
• prohibition to revoke agreements that allow the company to fulfil its corporate purpose.

Purposes of the interim injunctions and standards an applicant must meet for their granting

The main purpose of an interim injunction is to protect and ensure citizens’ human right to access justice (as provided in the Political Constitution of the United Mexican States and the American Convention on Human Rights).

The Political Constitution of the United Mexican States provides that federal and state laws must grant the enforcement of decisions rendered by courts. The Supreme Court of Justice has entered binding precedents defining the aspects that configure the right to access justice, which confirm that one of its fundamental characteristics is that court decisions are enforceable.^[7]

Under binding precedents entered by the Collegiate Courts, the purpose of interim injunctions is to ensure the enforcement of decisions. Therefore, interim injunctions are intrinsically related to the right to access justice.^[8]

Also, interim injunctions seek to preserve the applicant’s claims during the course of judicial proceedings. Judicial proceedings must follow certain phases:

• the service of process to the defendant;
• the offering and hearing of evidence;
• the submission of closing arguments; and
• the rendering of a decision on the merits.^[9]

During the course of judicial proceedings, the applicant’s claims can suffer irreparable harm, in other words, the defendant has disposed of all its assets by the time the court enters a decision in which the plaintiff prevailed. Thus, the court can grant an interim injunction to preserve the applicant’s claims and ensure the enforceability of the decision on the merits.

For the purposes mentioned above, the court can grant interim injunctions to preserve the status quo, modifying it to prevent irreparable harm to the parties, or to (preliminarily) satisfy the applicant’s claims.

The doctrine on interim injunctions has defined four admissibility standards:

• urgency;
• reasonable probability of success on the merits of the case;
• positive balance of interests; and
• a guarantee.

Urgency

Urgency is defined as the existence of harm against the disputed interests in the proceedings. This harm arises from the period in which the court will enter a decision on the merits. Urgency consists of the risk that the final judgment may not be enforceable due to the amount of time entailed by the proceedings.

Reasonable probability of success on the merits of the case

Interim injunctions do not require a certainty test on the applicant’s alleged claims and interests. For the court to grant interim injunctions, it must preliminarily consider that the plaintiff has a probability of success on the merits of the case.

Positive balance of interests

The court must weigh the interests at stake that are disputed in proceedings underlying the request for interim injunctions. The court shall analyse if the urgency that justifies the requested interim measure is more significant than the harm that the party that experiences the effects of the injunction will suffer. If the harm prevented by the interim injunction is indeed more significant, then the interim injunction will be admissible.

Guarantee

The applicant for the interim injunctions must guarantee the potential damages that the party or third parties who will experience the effects of the injunction may suffer if they prevail in the decision on the merits.

Brief explanation of the concurso stages and applicants of the insolvency proceedings

The insolvency proceedings must be filed before a specialised bankruptcy court, which will carry out the proceedings.

Under the Concursos Law, there are general commercial insolvency proceedings and four different kinds of special proceedings:

• concurso with a pre-pack or pre-filed restructuring plan;
• concurso of debtors that provide public services under a concession;
• concurso of financial entities; and
• concurso of auxiliary credit organisations.

Different insolvency experts will aid the bankruptcy court through the course of the proceedings, (ie, visitor, conciliator and receiver).

Insolvency proceedings are divided into three stages: the preliminary stage, which involves the declaration of the concurso, followed by the conciliation stage and the liquidation or bankruptcy stage. The Concurso Law only formally identifies the conciliation and the liquidation or bankruptcy stages.

The concurso declaration stage starts with a motion filed by the debtor (who is not obliged to file for concurso), two creditors, the Federal Attorney General’s Office or the Asset Management Institute. The court will appoint a visitor to analyse the company’s books and records.

The visitor then has the task of making a report for the court establishing whether the company meets insolvency standards (under Mexican law: ‘general default of the company’s payment obligations’) for the bankruptcy court to declare the company to be in concurso.

After the visit, the bankruptcy court enters a decision on whether the company meets the insolvency standards. After this judgment, the proceedings finish, or the debtor enters either the conciliation stage or the liquidation stage.

The conciliation stage has the purpose of restructuring and preserving the company through a settlement agreement between the creditors and the debtor. In this phase, the court enters a decision recognising the creditors and their class. Alternatively, the liquidation stage aims to liquidate the company’s assets to pay the creditors.

The benefits of interim injunctions in insolvency proceedings according to the Concursos Law and its bill

As previously mentioned, under article 1 of the Concursos Law, the objective of insolvency proceedings is to preserve the feasibility of companies and avoid their failure to meet obligations. The Concursos Law also protects companies that maintain commercial relations with the debtor.

The Concursos Law’s bill provides that the following objectives justify the enactment of the Law:^[10]

• maximising the value of companies;
• preserving the balance between creditors and debtors. The rights of both parties must be equally respected;
• respecting and preserving agreements that are in force;
• providing ways for debtors and creditors to enter into a voluntary settlement; and
• encouraging an extrajudicial solution.

In summary, these objectives tend to protect the parties and their interests in insolvency proceedings. Also, the Law seeks to reach a settlement.

To ensure the fulfilment of the objectives, interim injunctions are important tools, particularly to preserve the operations of the insolvent company and protect its assets – which will be used to pay creditors in the liquidation stage. Thus, interim injunctions shall comply with these objectives and be consistent with the Concursos Law. In other words, they must meet the standards mentioned above. When granting interim injunctions on insolvency proceedings, bankruptcy courts must analyse and justify that the requested injunction meets the described standards.

Interim injunctions under insolvency proceedings and the standards that the applicant must meet for their granting

Under the Concursos Law, the debtor, the claimant requesting the concurso declaration stage and the visitor are entitled to request interim injunctions. Also, the court may grant them ex officio. The supervising authority in the concurso of financial entities and auxiliary credit organisations may request interim injunctions as well.

The debtor can request interim injunctions to preserve the company’s feasibility, which may suffer harm due to the insolvency proceedings or the visit stage.

The claimant that files a motion requesting the concurso declaration stage may also request interim injunctions or their modification. Under binding precedents entered into by federal collegiate circuit courts, other creditors who did not request the concurso are not entitled to apply for interim injunctions until the court enters a decision declaring the debtor’s failure to meet obligations – a decision declaring the debtor in concurso.^[11]

The bankruptcy court, as leader of the concurso proceedings, may issue interim injunctions ex officio at any stage of the proceedings.

Regarding insolvency experts who participate in the concurso proceedings, the Concurso Law authorises the visitor to request interim injunctions with the aim of protecting the debtor’s estate and the creditor’s rights.

There is debate concerning whether the conciliator and the receiver are entitled to request interim injunctions. The Concursos Law only specifically authorises them to do so in the case of recognition of foreign bankruptcy proceedings. However, to correctly execute their functions and comply with the purposes of the Concursos Law, the conciliator and the receiver might request interim injunctions from the bankruptcy court.

Finally, the supervising authority in the concurso of financial entities and the auxiliary credit organisations may request interim injunctions.

Separately, the Concursos Law does not provide a catalogue of standards that the applicant must meet. However, the bankruptcy court must analyse the standards applicable to all interim injunctions defined by precedents and doctrine.^[12]

The bankruptcy court must also take into account if the request for interim injunctions achieves the objectives of the Concursos Law and respects its limitations, regardless of the identity of the party that is requesting the interim injunctions. If the court grants interim injunctions ex officio, it also must analyse these standards.

Regarding the limitations provided by the Concursos Law, if the debtor requests interim injunctions, they must tend to protect the company’s feasibility, which may suffer harm due to the filing of the insolvency proceedings and the visit stage. If the visitor or creditors request interim injunctions, they must have the purpose of protecting the debtor’s estate and the creditor’s rights.

Specifically, regarding the concurso of financial entities and auxiliary credit organisations, interim injunctions aim to protect the institution’s employees, its facilities and the creditor’s interests.

In all cases, interim injunctions granted in bankruptcy proceedings must achieve the objectives provided under article 1 of the Concursos Law, namely, preserve the companies and avoid the failure to meet obligations, and avoid any compromise to the companies’ feasibility.

The Concursos Law’s limitations and standards are broad. These limitations and requirements adapt to debtors’ necessities and circumstances to preserve its feasibility and protect the creditor’s interests.

Recent bankruptcy proceedings in Mexico in which the courts have granted interim injunctions

Between 2020 and 2022, companies in the oil and gas industry, telecommunications sector and aviation field have initiated insolvency proceedings. In these cases, bankruptcy courts have granted interim injunctions.

Two creditors of one of the most important companies in the oil and gas industry filed a motion requesting the commencement of the concurso declaration stage. The debtor answered the creditors’ motion and requested the court for interim injunctions.

Among the granted interim injunctions were the following:

• stay of seizures over the company’s assets;
• restriction to pay due and payable obligations –unless they are necessary for the daily transactions of the company;
• prohibition to revoke agreements that allow the company to fulfil its corporate purpose; and
• the prohibition to retain or seize machinery that the company employs to perform its daily operations.

In a similar fashion, a creditor requested the concurso declaration stage of one of the most important airlines with operations in Mexico and Latin America. The court granted an injunction that ordered the stay of the enforcement over the company’s assets, any guarantee or lien submitted by the debtor.

Separately, a company in the telecommunications sector filed a motion requesting the concurso declaration stage due to its failure to meet obligations. The debtor requested the following interim injunctions from the bankruptcy court:

• the company’s suppliers should maintain the provision of services to maintain the network coverage; and
• trust funds that receive payments should continue providing them to the company.

The second interim injunctive relief is probably the most relevant since it orders the debtor’s suppliers to keep providing services without the payment of overdue debts.

Another relevant example of the effects of an interim injunction comes from the insolvency proceedings of Oceanografía, SA de CV and Grupo ICA, in which the bankruptcy courts granted injunctive relief preventing the government from terminating its contracts with the debtor.

It is important to note that, although the companies mentioned above belong to different industries, all of the interim injunctions that were requested tend to protect the assets of the companies, their corporate purpose and the performance of their daily operations.

Scope and challenges of interim injunctions in Mexican bankruptcy proceedings

Under the Concursos Law, companies under concurso proceedings may obtain interim injunctions that permit them to continue with their daily operations, preserve the creditors’ interests and protect their assets. As explained above, the standards and limitations provided in the Concursos Law adapt to the necessities and circumstances of each company.

However, there are debatable issues regarding interim injunctions and the recognition of creditors, appeals against the order that grants them and their scope before and after the bankruptcy court declares that the debtor meets the insolvency standards.

There are two other important challenges regarding interim injunctions. The first challenge is that authorities and institutions seldom enforce them promptly. The second challenge consists of the need for the debtor to define ‘daily operations’ in each case.

Recognition of creditors in the concurso proceedings

Creditors who did not file a motion requesting the concurso declaration stage (generic creditors) are often affected by interim injunctions. For example, the court may grant an interim injunction that forbids the debtor to pay due and payable obligations. These kinds of injunctions may affect generic creditors.

In practice, Mexican courts do not recognise generic creditors as parties in concurso proceedings, and as a consequence they do not grant access to the case records until they enter a decision that declares that the debtor meets the insolvency standards. This logic finds its legal grounds in a binding precedent that commands that generic creditors shall only participate in concurso proceedings after the court has entered its decision declaring that the debtor is in concurso.^[13] Under this precedent, only after the bankruptcy court has entered such decision may the generic creditors suffer harm and be considered parties in the concurso proceedings.

Under the precedent mentioned above, generic creditors are only entitled to file an appeal against the order that grants an interim injunction after the debtor is declared in concurso.

In contradiction with the first precedent, a second binding precedent orders that any individual – regardless of whether they are a party in the concurso proceedings or not– that is affected by an interim injunction shall file an appeal before the concurso court.^[14]

The contradiction between these precedents can be an issue as it is an obstruction to the right to access justice: generic creditors are not entitled to file an appeal before the bankruptcy court until it has entered the decision declaring the debtor in concurso. However, bankruptcy courts may grant interim injunctions that affect generic creditors before entering such decision. What is the generic creditor’s applicable appeal against such interim injunctions?

In practice, generic creditors usually challenge the bankruptcy court’s denial to appeal the interim injunctions as well as the denial to grant access to the case records through amparo indirecto claims.

In these cases, federal district courts (which hear amparo indirecto claims) must weigh the human right to access justice and the generic creditor’s procedural requirements to appear before the bankruptcy court.

For example, in the concurso proceedings of the oil and gas company mentioned above, the court did not recognise the generic creditors as parties in the proceedings until it rendered the decision declaring that the company was in concurso.

Scope on the interim injunctions before and after the debtor is declared to be in concurso

As explained above, the bankruptcy court can grant interim injunctions during any phase of the proceedings. However, it is debatable whether the effects of the interim injunctions are the same before and after the court issues a decision declaring the debtor in concurso. The Concursos Law does not clarify this matter.

When granting interim injunctions, bankruptcy courts must define the effects and the length thereof – in other words, if an interim injunction shall be in force until the court declares the debtor to be in concurso or during the whole insolvency proceedings.

The decision that declares that the debtor meets the insolvency standards has effects that often concur with the interim injunctions granted in the concurso declaration stage. For example, the restriction to pay due and payable obligations – unless they are necessary for the daily transactions of the company – and the stay of seizures over the company’s assets.^[15]

Nevertheless, there are other interim injunctions that may vary from one stage of the concurso to another, namely, the right of the debtor to sell assets. Thus, the bankruptcy court has to define the effects and duration of the interim injunctions to preserve the parties’ right to legal certainty.

A company’s daily operations and interim injunctions

Bankruptcy courts shall identify and understand the company’s daily operations to grant interim injunctions that serve their purpose. This need reflects the importance of court specialisation.

In practice, courts seldom define what the parties in the concurso proceedings must understand by ‘daily operations of the company’. This affects interim injunctions that forbid the debtor to pay due and payable obligations unless they are necessary for daily operations. Companies must define if the payments are needed for the daily operations to continue in each specific case.

Institutions and authorities compelled by interim injunctions

Authorities and institutions such as banks, local courts and government agencies should recognise and comply with interim injunctions to be effective. These institutions sometimes do not comply with the order entered by the court granting the interim injunctions.

For example, in the concurso proceedings of the oil and gas company mentioned above, banks refused to comply with the interim injunctions until their supervising authority directly issued the order. Also, local courts required that the bankruptcy court that ordered the injunctions notified them to affected parties and the local courts. The debtor filed a motion before the bankruptcy court and requested that the local courts and the banks enforce the interim injunctions. After the debtor filed the motion, the local courts and banks enforced the interim injunctions.

The promptness with which institutions and authorities comply with the order that grants interim injunctions is essential for the company’s feasibility. It is crucial that authorities comply with interim injunctions as early as possible. For example, quick enforcement is essential in the case of an order to lift a seizure on bank accounts so the debtor can continue its daily operations, (ie, pay its employees).

Conclusion

The Concursos Law allows companies to request interim injunctions that adapt to their necessities and circumstances. Interim injunctions are essential in concurso proceedings – proof of this is that almost every party who intervenes in the insolvency proceedings is entitled to request them. Even the bankruptcy court can grant them ex officio.

As explained above, interim injunctions aim to preserve the company and its daily operations, for example, by permitting the debtor to continue with the possession of machinery to perform such activities. These decisions may harm third parties, namely, the machinery owners who seek to recover possession. The bankruptcy court must perform a positive balance of interest analysis.

The Concursos Law protects the debtor and provides instruments to protect its feasibility. However, the Law does not provide clear rules for appeals and remedies for third parties that are harmed by interim injunctions. The generic creditors are one of the groups most affected by interim injunctions.

Due to population growth, globalisation and covid-19’s pandemic havoc, the number of insolvency proceedings will increase. It is essential that the legal instruments that regulate insolvency proceedings contain clear standards for the granting, enforcement and appeal against interim injunctions.

Notes