The start of a bankruptcy proceeding: recent lessons from the TV Azteca case

Executive Summary:

• The application for bankruptcy does not imply its declaration or the automatic suspension of creditor actions, but it does mark the beginning of a procedure that can redefine its legal and economic position.

• The eventual declaration of bankruptcy activates a structured legal framework, including the suspension of individual executions, the intervention of a conciliator, and a formal process for the recognition of claims.

• The initial stages of the procedure are critical: early and strategic action can significantly influence the protection of rights and the recovery of debts.

As is public knowledge, TV Azteca, SAB de CV recently filed for bankruptcy protection in a Federal Court in Mexico.

Beyond the specific case, this type of situation is particularly relevant for creditors and others stakeholders, insofar as it allows us to illustrate what such a request for bankruptcy entails, at what stage of the procedure a company is in this case and what are the practical considerations that must be taken into account from an early stage.

What does it mean to file for bankruptcy protection?

The application for bankruptcy proceedings constitutes the beginning of a universal judicial procedure whose objective is to determine whether a company is in a state of generalized non-compliance with its payment obligations, derived from insolvency, illiquidity or both.

It is important to note that simply filing the application does not imply a declaration of bankruptcy, nor does it automatically lead to a suspension of payments or a halt to creditor actions. However, the judge may order precautionary measures at this stage to preserve the company's operations and protect its assets.

In this initial phase, the judge analyzes the merits of the request and, if appropriate, orders the verification of the company's financial situation, which gives rise to the so-called visit stage.

At what stage of the procedure is the company?

After the application is submitted, the procedure typically follows these stages:

• Admission of the application by the competent judge and, in certain cases, the issuance of precautionary measures;
• Appointment of an inspector by the Federal Institute of Commercial Bankruptcy Specialists (IFECOM), who reviews the company's financial and accounting situation;
• Visit stage, in which the company's financial and operational situation is analyzed;
• Issuance of the inspector's report; and
• Judicial resolution, by which the declaration of bankruptcy is declared or denied.

During the visit stage, the specialist evaluates, among other aspects, the existence of widespread payment defaults according to the parameters established in the Commercial Bankruptcy Law.

Approximate times for the visit stage

While each case depends on its particularities, in practice:

• The visit stage usually takes place over a period of 2 to 4 months, depending, among other factors, on the size, complexity and cooperation of the company;
• Once the report has been submitted, the judge has a relatively short period of time to issue the corresponding resolution;

What does it mean for a company to be declared bankrupt?

The declaration of bankruptcy by a federal judge marks the beginning of the conciliation stage, during which the company has a legal framework to negotiate with its creditors the restructuring of its obligations.

As a general rule, from that declaration onwards, individual enforcement actions regarding previous obligations are suspended and the payment of prior liabilities is restricted, allowing only those necessary for ordinary operation, which orders the negotiation within the same procedure.

At this stage, a conciliator is appointed, whose main functions include supervising the administration of the company, facilitating negotiations with creditors, and seeking to reach a bankruptcy agreement that allows for its restructuring and continued operation.

Likewise, creditors must request recognition of their claims within the procedure, in order to be included in the list of creditors and, subsequently, be considered in the judgment recognizing claims and be able to participate in the negotiation of the insolvency agreement.

The goal is to preserve the operation of the business and, where appropriate, restore its financial viability, not to bankrupt or liquidate the company.

Approximate times for the conciliation stage

The conciliation stage lasts up to 185 calendar days, with the possibility of two extensions of 90 days each, reaching a maximum duration of up to 365 calendar days, subject to compliance with certain legal requirements.

Is there immediate protection for the company?

The legislation provides for the possibility that the judge may issue precautionary measures from early stages, in order to preserve the operation of the company and avoid effects that compromise the viability of the procedure.

These precautionary measures may include, among others, restrictions on executions against the company or limitations on the payment of certain obligations.

However, these measures are not automatic and their scope will depend on the specific circumstances of the case and what the judicial authority determines.

Does the company's procedure affect the corporate group?

The application for bankruptcy proceedings generally refers to a specific entity, and does not necessarily imply that other companies in the same corporate group are in the same situation.

However, depending on the group's structure, there may be indirect effects that need to be analyzed on a case-by-case basis, particularly in relation to guarantees, operational flows, or contractual relationships between different entities.

What should creditors and others do? stakeholders at this initial stage?

The initial stages of the procedure are particularly relevant for defining the creditors' strategy. Among other considerations, the following is recommended:

• Actively monitor the procedure, including the admission of the application, the appointment of the visitor and the eventual declaration of bankruptcy;
• Review the contractual documentation and verify the obligated legal entity to identify if it is the company that requested its bankruptcy proceedings, as well as the existence and scope of guarantees;
• Evaluate the legal and economic position, including the amount and nature of the debt;
• Analyze possible effects of precautionary measures on the contractual relationship;
• Determine whether the contractual relationship can be considered essential or whether there are obligations in progress;
• Prepare for credit recognition; and
• Evaluate strategic alternatives, including coordination with other creditors.

Early action can be crucial in protecting the position of creditors and others stakeholders.

The filing for bankruptcy proceedings is only the beginning of a process that can significantly redefine the position of creditors and others stakeholders.

A correct understanding of these initial stages, as well as the adoption of an informed and timely strategy, is often a key factor for the protection and eventual recovery of loans.

In scenarios with international elements, these considerations can be complemented by the analysis of possible actions and effects in other jurisdictions, which will be the subject of further comment.

If you find yourself in a similar situation, an early assessment of the scenario can be key to defining the most appropriate strategy.