The following questions have been answered concerning asset-based lending in Mexico:
1. Overview. Please discuss the asset-based lending environment. For example:
a. To what extent are asset-based lending structures used (e.g., revolving and term loan facilities secured by present and future accounts and inventory, with the amount of loans available at any time based on the value of such assets)?
Asset-based lending structures are widely used in Mexico whether in the context of acquisition financing or working capital facilities for established businesses. Usually these loans are secured by personal property (such as accounts receivable, inventory, machinery and equipment and shares of stock of the loan parties) and owned real estate. Increasingly, asset-based lending transactions involve cross-border guarantee and collateral issues when US lenders grant credit facilities to US borrowers that have Mexican subsidiaries.
The following two asset-based lending structures are typically regulated under Mexican law as credit operations. The main advantages of these two structures is that they are secured by certain statutory liens (limiting the need for separate collateral documents). Similar structures may be used by non-Mexican lenders and secured by the security devices described in Section 3 below (e.g., pledges, trusts and mortgages) instead of the statutory liens.
1. Crédito de habilitación o avío (Working Capital Loans): These loans are normally made by a Mexican lender to finance the acquisition of raw materials and consumables, payment of salaries and wages, and other direct operating expenses of a Mexican borrower. Pursuant to Mexican law, these loans are statutorily secured by the assets acquired with the proceeds of the loans, including future products obtained by the borrowers by virtue of the loans.
2. Crédito refaccionario (Fixed Asset Loans): These loans are normally made by a Mexican lender to a Mexican borrower to enable the borrower to acquire fixed assets such as machinery and equipment, including its installation, or for the construction works necessary for the promotion of the business. These loans are also used to finance any tax liability the borrower. These types of loans are statutorily secured by the real estate, constructions works, and personal property of the business (machinery, equipment, including present and future goods) obtained by the borrower by virtue of the loan.
As noted above, it is common for US lenders to make loans to Mexican borrowers pursuant to loan agreements governed by US law and secured by collateral documents governed by Mexican law. The exact structures of such loans vary depending on the strategy of the lender and the business needs of the borrower.
b. What other forms of working-capital lending are customarily used?
Line of credit, bridge loans, stand alone mortgage loans, factoring and financial leasing.
c. Is factoring prevalent in your market? Is it generally done on a recourse or non-recourse basis?
Yes, factoring is commonly used in Mexico either on a recourse or non-recourse basis; however, the consideration for the factoring company will vary if it is carried out on one or the other basis. On April 27, 2006 a new Bill was approved by the Mexican Congress providing that financial leasing and factoring operations should no longer be considered as activities reserved for Mexican Financial Institutions, and allowing any commercial entity to carry-out said activities without any authorization from Mexican financial authorities. After this amendment, financial leasing and factoring operations are considered as general credit operations on the General Law of Negotiable Instruments and Credit Transactions.
d. Who are the main players in the lending marketplace (e.g., domestic relationship-based banks, non-bank lenders, foreign lenders)?
Domestic and foreign financial institutions, commercial banks, investment funds, non-bank financial institutions and multiple purpose financial entities (or SOFOL –which shall disappear or convert into SOFOM the latest on year 2013- and SOFOM respectively, after their acronyms in Spanish), and leasing and factoring companies.
Sofoles do not take deposits and are licensed by the Secretariat of Finance and Public Credit (SHCP) to grant credit to specific segments of the economy.
More and more often, we are seeing US asset-based lenders making direct loans to Mexican subsidiaries of US companies that are predicated on the value of the accounts receivable, inventory and equipment owned by the Mexican subsidiaries.
Some of the more active lenders that we have seen in Mexico are: BBVA Bancomer, Banamex, Santander, HSBC, Scotiabank Inverlat, Inbursa, ING Bank, J.P. Morgan, Bank of America, IXE, American Express, Invex, GE Capital, Monex, Autofin, among others.
2. Regulatory Issues.
a. Are any special licenses or regulatory approvals required for a foreign lender to (i) make loans, (ii) take liens on collateral or (iii) use the court system?
(i) Make loans- As long as the foreign lender does not receive funds or deposits from the general public in Mexico, their activities will not qualify as banking activities and thus will not require any license or regulatory approval to make loans. However, in order to qualify for the reduced withholding tax rates, as mentioned in Section 2 item b. below, registration with the Mexican Ministry of Finance is required.
(ii) Take liens on collateral- Generally speaking there are no regulatory requirements, however in case of an industrial mortgage, it can only be granted in favor of a Mexican bank, a financial organization classified as auxiliary of credit or a SOFOM. In this case, foreign lenders would have to take liens through the use of any of such financial institutions as collateral agent for the benefit of the foreign lenders acting as the mortgagee under the mortgage agreement. The other security devices described in Section 3 below do not require any regulatory approvals.
(iii) Use the court system- No requirement whatsoever. However, a foreign lender would have to submit documentation to the court evidencing its legal existence. Additionally, a foreign lender must demonstrate that its representatives have sufficient authority to act on its behalf in such court proceedings by submitting notarized and apostilled/legalized (as applicable) documents evidencing such.
b. Is interest payable by a domestic company to a US lender subject to withholding tax?
Yes, there is an income tax withholding on interest paid by a Mexican borrower to a non-resident lender. Different withholding rates may apply depending on the underlying transaction, the characteristics of the lender, and the applicability of a double taxation treaty. Normally, the withholding rate is 28%. However, due to a double tax treaty between the US and Mexico, this rate is reduced to 10% with respect to US lenders. Additionally, according to Mexican Federation Revenue Law in force for 2009, this rate is further reduced to 4.9% if the lender is registered before the Department of Finance and Public Credit (so long as such lender is a resident of a country that has a double taxation treaty executed with Mexico (such as the US)).
3. Creating Liens on Assets.
Mexican law allows the creation of security interests over almost all types of assets and rights, including personal property (such as accounts receivable, inventory, equipment and intellectual property) and real property.
Pledges (as described below) are often used to secure account receivables, movable property (such as inventory and machinery) and shares of stock or partnership interests. As further described below, pledges may either be possessory pledges (where the lender or a third party is required to maintain possession of the collateral) or non-possessory pledges (where the borrower keeps possession).
Mortgages (as described below) are typically used with respect to real property (including land, buildings and fixtures), ships and airplanes.
Both pledges and mortgages grant in-rem rights in favor of the pledgee/mortgagee, as well as priority rights in bankruptcy proceedings. Both pledges and mortgages must be enforced through the Mexican judicial system.
Guaranty trusts (fideicomisos de garantía) are also common. Under a guaranty trust, the settler transfers title to a series of assets and rights to a trustee (normally a Mexican bank, as only certain financial institutions may act as trustees under Mexican law), who holds title to the relevant assets and rights (i.e., the trust estate). Meanwhile, the settler retains a beneficial interest to use and benefit from the assets and rights contributed to the trust estate, for as long as it complies with the terms of the trust agreement and guaranteed loan.
One of the main advantages of a guaranty trust is that it allows for non-judicial enforcement. The trust structure also removes assets from the bankruptcy estate and may isolate them from priming claims, such as labor claims (discussed in more detail in Section 6 item d. below).
On the downside, the guaranty trust is a relatively new security device (due to several law amendments) and its enforcement has not been well tested. Also, the use of a guaranty trust may jeopardize the tax treatment of a Maquiladora (as explained below). Finally, there is concern that if the grantor challenges the enforcement, the trustee may be reluctant to act. To mitigate this risk, it is important that detailed non-judicial enforcement procedures are set forth in the trust agreement and that a competent and trusted trustee is selected that can be trusted to follow those procedures and not back down if the settler challenges the enforcement. Trustee’s fees can be significant and should be considered at the outset of the transaction. The amount of fees depends on the value of the assets being granted on trust and the activities that the trustee will be expected to perform. In general terms trustee’s charge consist of the following three components:
a. Initiation fee (within a range from US$3,000 to US$6,000);
b. Annual fee (from US$3,000 to US$20,000); and
c. Enforcing fee (approx. 1.5% of the value of the trust assets)
3(b) Special considerations with respect to Maquiladoras:
In transactions that involve foreign and Mexican operations, oftentimes the Mexican operations are conducted by a Mexican subsidiary of a foreign parent, and the main purpose of the Mexican subsidiary is to process inventory on behalf of the parent company for eventual sale out of Mexico. When this is the case, it is common that the Mexican subsidiary will operate under the IMMEX program (commonly referred to as the "Maquiladora" program), which permits the easy importation of assets into, and their exportation out of, Mexico, generally without incurring custom duties or value added taxes.
When a Maquiladora structure is used, typically the parent company retains ownership of the inventory and the resulting receivables. The fixed assets located in Mexico may be owned by the parent company or by the Maquiladora or by another party which is requesting the contract manufacturing services. It is critical to determine which entity actually owns the assets to so that liens on such assets may be properly obtained.
With regard to tangible property (such as equipment or inventory) located in Mexico, regardless of whether a foreign or Mexican entity owns such property, liens on such property should be perfected under Mexican law. The applicable law for perfection of liens on intangible property (such as accounts receivable) pertaining to Mexican operations will depend in part on whether the foreign or Mexican entity owns the property. If the Mexican entity owns the accounts receivable, liens on such receivables should be perfected under Mexican law. If the foreign entity owns the accounts receivable, liens on such receivables should usually be perfected the law where it is domiciled. If there is any uncertainty as to ownership, consideration should be given to perfecting under both laws.
As noted above, if a Maquiladora structure is used, certain collateral is located in Mexico under a temporary duty-free program. As such, various taxes and custom duties would need to be paid before the collateral could be "naturalized" and permitted to be sold in Mexico. Without doing this, the collateral would need to be exported to the country of origin for sale out of Mexico.
If part of the lender's exit plan involves selling the collateral in Mexico, the lender should consider these costs when structuring the transaction and make sure it is in a position to be able to pay these costs and take the other required steps to "naturalize" the collateral for sale in Mexico.
a. Is it possible to obtain a lien on all existing and future assets of a business entity with a single security document, such as an enterprise mortgage?
Yes, as mentioned above in Section 2.a.(ii) above, the Law of Credit Institutions (LIC) and the Law of Auxiliary Credit Institutions and Operations (LGOAAC), provide that an industrial mortgage may be granted in favor of these types of financial institutions on the complete unit of a company, providing a "floating lien" over all the assets, operational cash and account receivables of an industrial or commercial unit. However, in most cases, industrial mortgages are only available for duly chartered Mexican institutions, or for foreign financial entities using a Mexican bank as an agent. Industrial mortgages must be formalized by means of a public instrument and recorded before the Public Registry of Property. By using a combination of the security devices described in this Section 3, non-Mexican lenders may obtain the functional equivalent of an industrial mortgage.
b. How is a lien on receivables created? Can future receivables be covered in the initial grant of security or are periodic updates to the documentation necessary? Is it necessary to notify account debtors in order to create the lien, or is it advisable to give such notice? Is a notice required for each receivable from the same account debtor, or is a single notice sufficient for all present and future receivables from the same account debtor? Are restrictions on the creation of liens on receivables enforceable?
Liens on receivables are often created through a non-possessory pledge. A non-possessory pledge may be used to obtain a security interest in almost all personal property, including but not limited to accounts receivable, inventory, machinery and equipment, negotiable instruments and future proceeds or products. The debtor may retain possession of the pledged assets. The non-possessory pledge is comparable to a floating lien under the Uniform Commercial Code of the US.
If the non-possessory pledge extends to future receivables, there is no need to make periodic updates to the pledge documentation as such future receivables are generated.
It is not necessary to notify account debtors of a lien created under a non-possessory pledge, provided that it is duly registered in the Public Registry of Commerce of the domicile of the grantor.
Restrictions on creation of liens on receivables are not enforceable against good faith third parties, such as lenders.
c. How is a lien on inventory created? Must the lender have possession of the inventory? Can future inventory be covered in the initial grant of security or are periodic updates to the documentation necessary? Are retention of title claims by suppliers commonplace? If so, do they extend to proceeds of the inventory?
Liens on inventory are often created through a pledge. As the grantor normally needs to retain possession of inventory so that it can sell the inventory in the ordinary course of its business, generally a non-possessory pledge is used. In a non-possessory pledge, future inventory can be covered without need to make periodic updates to the documentation, provided that any changes to existing inventory occur as a result of the normal day-to-day operations of the grantor.
Suppliers may reserve title to goods they supply on credit until duly paid. However, similar to US law, the supplier's retention of title claim would need to be registered with the Public Registry of Commerce for it to be effective against third parties, such as inventory lenders and other creditors. If the vendor's claim was so registered, it would automatically rank ahead other creditors since title has not been transferred to borrower. As such, inventory lenders should periodically conduct lien searches throughout the term of their loan facilities to determine if any retention of title claims are registered.
d. How is a lien on equipment created? Must the lender or its agent have possession of the equipment? Can after-acquired inventory be covered in the initial grant of security or are periodic updates to the documentation necessary?
In most cases through a pledge. The lender can choose to have possession of the equipment –traditional pledge- or it can be agreed that debtor keeps possession of the same – non-possessory pledge. In a non-possessory pledge, there is no need to make periodic updates to the documentation if the pledge covers future inventory in equipment, provided that the future equipment results from the normal day-to-day business operations of debtor.
e. How is a lien on shares created? Are there any issues related to share pledges of which foreign lenders should be aware?
Liens on shares and other equity interests are often created through a pledge. With respect to shares, in addition to the execution of the pledge agreement, the lien is perfected by completing the following two steps: (i) delivery from the pledgor to the pledgee of duly endorsed share certificates indicating that such shares have been pledged in favor of the pledgee; and (ii) registration of the pledge in the Shareholders Registry Book (Libro de Registro de Accionistas).
Pledges of partnership interests or quotas (as opposed to pledges of shares), such as partnership interests in a limited liability company (Sociedad de Responsabilidad Limitada), only requires registration of the pledge in the Partners Registry Book (Libro de Registro de Socios).
It is important to review the bylaws (or other similar organizational documents) of the company whose shares or other equity interests are being pledged to determine if additional formalities are required, such as prior approval of the shareholders or partners.
It is important to mention that in case of pledges of shares or other equity interests, Mexican law does not require that the pledge agreement be legalized before a Notary Public nor filed before Public Registry of Commerce.
f. Formal Requirements: Must security documents be notarized? Translated?
Mortgages and guaranty trusts encompassing real estate are perfected upon execution of the relevant deed of mortgage or deed of trust, notarized by a Mexican Notary Public, and its registration at the Public Registry of Property of the location of the property.
Guaranty trusts for most forms of personal property (such as accounts receivable, inventory and equipment) are perfected by executing the corresponding trust agreement and having the rights to the property transferred to the trustee.
Regular commercial pledges are generally perfected by the delivery of the pledged assets to either the secured creditor or a third-party depositary. However, since non-possessory pledges were introduced in 2000 it is no longer common to see regular commercial pledges being used in asset-based loan structures. Instead, lenders typically use non-possessory pledges, where the pledge is perfected upon registration with the Public Registry of Commerce and if the secured obligations exceeds a certain threshold (US$80,000 approximately) it also needs to be signed before a Mexican Notary Public. Perfection of pledges with respect to shares and other equity interests are discussed in item e. above.
Filing before Public Registry of Property and Commerce is for public notice purposes (enforceable against third parties), which is one of the key elements determining the priority among security interests. First in time- first in right.
Security documents that need to be filed before the Public Registry of Property and Commerce must be translated to the Spanish language, usually a side by side English/Spanish version is used; however, in case the security documents are to be used in court or before a Mexican authority, the Spanish version shall control.
Failure to adhere to all formalities (including without limitation original signatures, completing the notary process, etc.) could jeopardize enforceability and recovery.
4. Priority.
a. How does your legal system establish the priority of the rights of a secured creditor relative to other secured creditors?
Priority rights are regulated by the date of filing in the Public Registry of Commerce/Property of the security agreement when the filing is required/made. If filing is not required, as the case of pledge of shares, by the date of granting. First in time- first in right.
b. If there is a registration system for liens, is it necessary to register the entire security document or merely a notice of the lien? Are receivables, inventory and equipment all covered by this system? How reliable is the filing system? Is the registry available to be searched by prospective lenders? Does the date of registration establish the date of priority relative to other secured claims? Are there costly registration fees? If there is no filing system, how is priority determined?
Registration of liens is made before the Public Registry of Property for real estate or the Public Registry of Commerce for personal property. The entire security document must be recorded. The system is reliable, although efficiency on operation of the registries varies from State to State. The registries are public, therefore, anyone can perform a search.
In all cases registration fees must be paid. Registration fees are usually based on the amount of debt being secured (generally 0.4%), however, in some States registration fees are capped. In some States, in addition to registration fees, other taxes on formalization of the security documents are also applicable (e.g. "impuesto de negocios juridicos") which can also be capped or not. As these fees and taxes may be significant, they should be considered at the earliest stages of the transaction. To limit filing costs, the lender may want to consider capping the amount of debt that is secured by the applicable Mexican assets or having the Mexican grantor change its State of domicile to a State with capped filing costs.
5. Guaranties.
Are there any restrictions on the ability of a domestic company to guaranty a loan made to its parent or affiliate?
Generally there are no legal restrictions, however the Mexican company must provide in its bylaws the ability to guarantee loans or secure obligations in favor of third parties.
6. Enforcement.
a. Please describe the procedure by which an asset-based lender would realize upon its security. Is a court proceeding required or is a non-judicial proceeding available? What is the typical timing for an enforcement proceeding?
The enforcement process varies depending on the security device selected, the assets against which enforcement will be made and the courts (or lack thereof) involved in the process.
Pledge. Upon an event of default, the pledgee will have the right to initiate the enforcement process by making a demand for payment of the secured obligations or repossession of the pledged goods before a Notary Public. If the debtor, however, refuses to pay or deliver the pledged goods, or it disputes the maturity of the credit, the owed amount or the right to obtain delivery of the pledged goods; the pledge will then have to be judicially enforced through a summary procedure.
Guarantee trust. As discussed above, the law establishes that the parties may agree on an out-of-court procedure to enforce the trust in the event of the debtor's default. In cases where the parties expressly agree on such an out-of-court procedure, a special provision must be included in the trust agreement detailing such procedure and must be signed by the settler (in addition to its signature of the trust agreement). If this special provision is not included or it is not signed by settler, the out-of-court procedure would only take place if the debtor does not oppose the payment of the secured obligation or the repossession of the assets held in trust. In the event of such opposition, the trust will have to be judicially enforced through a summary procedure. If, on the contrary, the special enforcement provision is included in the trust agreement and signed by settler, the trustee may enforce the trust and, to avoid that, the debtor may only (i) pay the trustee the amount of the secured obligation then due or (ii) demonstrate that such amount has already been paid or is not then due.
As such, as noted in Section 3 above, it is critical to carefully select the Mexican bank that will act as trustee, since each bank has its own policies as to the protection of the trust's assets and enforcement of the trust.
Mortgage. Foreclosure of a mortgage will have to be done through a judicial procedure. This is a very well tested and reliable procedure.
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The time elapsed to enforce also depends on the type of security device selected (i.e., pledge, trust or mortgage), on whether and which courts are involved, and on the State where the enforcement proceeding is being conducted. It can be expected that an enforcement processes would take from eight to thirty months.
The use of personal guaranties and the availability of criminal laws may help to exert pressure and facilitate enforcement. Out of court settlements are common in Mexico.
It is highly recommended that the lender develop a detailed exit plan at the outset of the transaction and be prepared to move quickly on the Mexican collateral in the event of enforcement. The exit plan should, among other things, provide for (i) periodic reviews of the lender's collateral (including appraisals and determination of potential priming claims), (ii) the selection of an alternate site for storage of collateral, and (iii) the identity of security companies, auctioneers, lawyers and potential purchasers in the event of enforcement.
b. How reliable is the court system? Does this vary by state or region? Are foreign lenders treated the same as a domestic lenders in court proceedings?
In general terms the Mexican court system has improved in recent years and is now more reliable. Federal courts are often viewed as more reliable than State courts. The reliability and efficiency of State courts varies significantly from State to State. Usually the courts in States with larger cities are more experienced in enforcement procedures involving secured commercial loans. Lenders should carefully consider, at the outset of the transaction, which Mexican court would most likely be involved in the event of enforcement. Foreign lenders (as any other foreign entity or individual) and Mexican lenders generally are treated equally.
c. Do insolvency proceedings contemplate reorganization, or merely liquidation? Is an asset-based lender's lien recognized in an insolvency proceeding? Is there a stay or moratorium on the exercise by an asset-based lender of its remedies? Is the borrower permitted to use the lender's collateral during the insolvency proceeding, and if so, is the lender compensated? How do companies finance themselves during an insolvency proceeding? What are potential theories for the insolvency official or other creditors to seek to void or invalidate the lien or claim of an asset-based lender?
Yes as per the Commercial Insolvency Law ("CIL"), insolvency proceedings contemplate both reorganization and liquidation.
Reorganization: If the entity or individual (“Merchant”) is declared commercially insolvent, the conciliatory stage is activated in order for the Merchant and its acknowledged creditors to be in a position to reach a Reorganization Agreement providing the terms and conditions according to which the Merchant will pay its debts. In this stage, a specialist called a Conciliator, who is appointed by the IFECOM (Federal Institute o Specialists in Bankruptcy), has the task to coordinate the execution of the Reorganization Agreement between the Merchant and its creditors.
Furthermore, during this stage, the Conciliator must prepare the list of creditors of the Merchant (including any asset-based lender), and determine the amount, order, and level of preference of their credits.
Among the effects of the declaration of commercial insolvency are:
(a) Suspension of the payments of the debts contracted prior to the date of the declaration (except for those that are indispensable for the day-to-day operation of the Merchant). However, the declaration of commercial insolvency will not interrupt the payment of labor, tax or social security contributions, which should continue to be paid in due course.
(b) Stay of attachments and foreclosures. No attachment or foreclosure order may be executed against the assets and rights of the Merchant, except for those conducted to secure or pay, as applicable, accrued wages or salaries and labor compensation (including severance payments) for the period of two (2) years prior to the date of declaration of commercial insolvency (“Preferential Labor Credits”).
During the insolvency proceedings, the Merchant will be permitted to use the lender's collateral as agreed upon in the corresponding security agreements.
The suspension and stay mentioned in (a) and (b) above last until the conciliation stage is terminated (180 calendar days, which, under certain circumstances, may be extended by the judge up to an additional 180 days).
During the conciliatory stage, the Merchant may seek financing as usual but any new credit and security agreements must be approved by the Conciliator, subject to input by the Interventors as indicated in (c) below.
Administrative enforcement proceedings of tax credits will be suspended. Notwithstanding the foregoing, the competent tax authorities may continue the necessary acts for determination and securing of tax credits against the Merchant.
(c) Management. During the conciliatory stage the management of the company will correspond to the Merchant (the person or entity managing the company), although the Conciliator will supervise the books and all of the operations performed by the Merchant and will decide on the termination of pending contracts and will approve, with the prior input of the "Interventors" (persons appointed by creditors with oversight capacity), if any, the contracting of new credits, the establishment or substitution of guaranties and the sale of assets when these are not inherent to the day-to-day running of the Merchant's business.
The main cause for the insolvency official or other creditors to seek to void or invalidate the lien or claim of a secured lender are the "Acts in Fraud of Creditors". If it is resolved that an act was performed to dispose of the secured assets against the interest of creditors, it will be void in respect of the estate.
(a) Date of Retroaction. The law refers to a concept called "date of retroaction", (also known in English as the "suspicious period") for the purpose of defining a period of time, prior to the declaration of commercial insolvency, which may be subject to examination to determine if during such period acts in fraud of creditors were performed or are presumed to have been performed. As a general rule, the date of retroaction will be the two hundred and seventy (270) calendar days prior to the date of the declaration of commercial insolvency; however, the judge, at the request of the Conciliator, the Interventors or any creditor, may establish a prior date as the date of retroaction.
(b) Absolute Acts in Fraud of Creditors. Irrespective of the date on which they have been performed (except for the general commercial rule that sets the statute of limitations at ten (10) years), acts in fraud of creditors are those that meet the following requirements: (i) that they were performed prior to the declaration of commercial insolvency, (ii) that through them the creditors were knowingly defrauded, and (iii) that the third party involved in the act was aware of the fraud, provided that, the latter requirement will not be necessary in respect of acts of a gratuitous nature. Acts that meet this standard may be voided even if they occurred prior to the date of retroaction.
(c) Specific Relationship in Acts in Fraud of Creditors. In addition to the provisions of paragraph (b) above, the following are acts in fraud of creditors, so long as they have been performed after the date of retroaction: (i) gratuitous acts; (ii) the acts and sales in which the Merchant pays a clearly higher price, or receives clearly lower value than, the considerations offered by its counterpart; (iii) transactions performed by the Merchant, the terms and conditions of which are significantly worse than the then prevailing market conditions; (iv) payments of unmatured obligations made by the Merchant; and (v) the discounting made by the Merchant of its own effects, after the date of retroaction.
d. What claims of other creditors (e.g., costs of insolvency, fees and expenses of insolvency administrators, taxes, employees, landlords, environmental claims, suppliers, unsecured creditors) may have priority over the claims of an asset-based lender in an insolvency proceeding? Does the law provide for a carve-out from the lender's collateral in favor of other creditors?
The Acknowledged Creditors are classified into ranks, according to the nature of their credits and the Commercial Insolvency Law ("CIL") contemplates that the payment of these credits is made based on their level of preference.
No payment may be made of a credit of one rank without previously having liquidated those from the previous ranks, according to the priority established for them.
With regard to Credits with Collateral (Secured Credits), only the following Credits against the Estate will have preference: (i) the Preferential Labor Credits (as described below); (ii) legal fees incurred for the defense or recovery of property subject to guaranty or on which the privilege falls; and (iii) the necessary expenses for the replacement, conservation and sale of such property subject to guaranty.
Preferential Labor Credits as mentioned above are accrued wages or salaries and accrued benefits (including vacation and severance payments) for the period of two (2) years prior to the date of declaration of commercial insolvency. The lender should carefully monitor these potential priming labor credits throughout the life of its loan and strongly consider instituting borrowing base reserves in the amount of these potential credits.
It is common practice in Mexico to have a separate Mexican employee company. Under this structure, the Mexican employee company would provide the labor force to the Mexican operating company for a fee. This structure might help mitigate potential priming employee claims (which, as noted above, can be significant) that could otherwise apply with respect to the Mexican operating company. While this structure may be helpful, is could be subject to challenge.
If the value of the entire estate that is not subject to a lien is insufficient to pay the full amount of the Preferential Labor Credits, then the guaranteed creditors will contribute, with the amount obtained from the sale of their guaranties, to the payment of the Preferential Labor Credits. This contribution will be made by each secured creditor based on the percentage that the value of such creditor's collateral represents compared to the value of the other collateral.
Secured Creditors: The following are considered as secured creditors, as long as their guaranties are duly structured pursuant to enforceable pledges or mortgages. In case of guaranty trusts, since the settler transfers title to the goods in favor of the trustee, in case of an insolvency proceeding, the trust estate will not be part of the bankruptcy estate.
Secured Creditors will receive payment of their secured claims from the proceeds of the assets subject to their liens, with the exclusion of the other creditors, except for the aforementioned exceptions for Credits against the Estate; provided that, if two or more creditors share the same guaranty, the order of payment of their credits will be determined based on applicable provisions regarding the registration date of the respective guaranty.
When a Secured Creditor considers that the value of its guaranty is less than the principal amount and accessories of its credit on the date of declaration of commercial insolvency, the creditor may ask the judge to consider the creditor as a Creditor with Collateral for the value that the creditor attributes to its lien, and as a Common (Unsecured) Creditor for the balance.
7. Recent Developments.
Are there any recent or pending developments in the legal or business environment that affect asset-based lending?
During the last years, there have been a number of important amendments to financial laws in Mexico, which have significantly improved the legal framework for lending:
On April 24, 2003 amendments to seven laws improved the execution procedures related to the trust, the security trust, the non-possessory pledge, and several credit transactions including commercial and mortgage loans and also provided that trusts and non-possessory pledges no longer had to be non-recourse devices (e.g., the holder or the beneficiary of the non-possessory pledge or trust, as applicable, is no longer required to waive any deficiency that exists after enforcing the trust or non-possessory pledge). The reform also includes new provisions regarding financial leasing, factoring and pledge on securities. This reform was aimed at promoting bank lending by reducing transaction costs and improving the current judicial procedures and recognizes that non-judicial execution procedures for security trust and non-possessory pledge are agreed by the parties.
On April 27, 2006 amendments to a wide range of laws to deregulate financial leasing and factoring operations and create the SOFOMs were approved by the Mexican Congress. After such reform financial leasing and factoring operations should no longer be reserved activities allowing any commercial entity to carry-out said activities without any authorization or supervision from Mexican financial authorities.
On June 15, 2007, a bill of amendments to several special laws that regulate financial services was published, including the following laws: (i) the Law of Transparency and Regulation of Financial Services, (ii) the Protection and Defense Law for Users of Financial Services and (ii) a special law that regulates secured credits relating to acquisition, construction, remodeling or refinancing of residential real estates to promote transparency. These laws, among other issues, establish several minimum requirements that shall be complied by entities that on a regular basis grant loans and credits to Mexican clients in order to protect the right of the borrower of having sufficient information about the terms and scope of its contractual rights and obligations.
The above has been provided as general information prepared by professionals with regard to the subject matter. This document only refers to the applicable law of the jurisdiction referenced herein. While every effort has been made to ensure accuracy, no responsibility can be accepted for errors or omissions. The information contained in this document should not be relied on as legal, accounting or professional advice being rendered.
