Security interests and guaranteesCollateral and guarantee support
Which entities in the organisational structure typically provide collateral and guarantee support for bank loan financings? Are there limitations on which entities in the organisational structure are permitted to provide such support?
Collateral and guarantee support for bank loan financing is normally provided by entities in the organisational structure (ie, parent, holding and sister companies). There are no limitations on which entities are permitted to provide such support. However, special consideration from a local tax perspective should be given to ensure arm’s length terms and conditions (and by foreign lenders if guarantees provided by domestic guarantors are collected). Guarantees granted before insolvency scenarios are subject to close review under fraudulent conveyance rules.
What types of obligations typically share with the bank loan obligations in the collateral and guarantee support? If so, are all such obligations equally and ratably covered by the collateral and guarantee support?
Collateral and guarantees normally cover all obligations of the debtor, including payment of principal or interest, fees, expenses, indemnification obligations and basically any other obligation of any nature as long as it is not illegal. Unless otherwise agreed among the relevant lenders and secured and guaranteed parties, all secured and guaranteed obligations are equally and ratably covered by the collateral and guarantee support.Commonly pledged assets
Which categories of assets are commonly pledged to secure bank loan financings? Describe any limitations on the pledge of assets.
Collateral is classified in two general types: real estate property (interests in land, constructions on land and fixtures) and movable property (all physical property that is able to be moved and that is not otherwise regarded as real property, including machinery and equipment, shares and other equity interests, securities and intangible property, such as intellectual property rights, claims, receivables, credit rights and bank accounts).Creating a security interest
Describe the method of creating or attaching a security interest on the main categories of assets.Real estate collateral
Real estate assets can be used as collateral through the creation of either a mortgage or a security trust.Mortgage
This is perhaps the most widely used form of security over real estate property. Domestic regulated financial entities (and in a few states, any lenders) are afforded the possibility under applicable law allowing debtors to grant in their favour a variant type of mortgage, called an industrial mortgage, over the entire business unit of a debtor company, including any concession, permit or licence, and all real estate and movable assets considered as a whole.Security trust
As opposed to a mortgage, the creation of a security trust implies a true transfer of the real property by the party granting the security (the settlor) to the trustee, for the benefit of the secured party. The parties can freely agree on the possession of the assets being contributed, although it typically remains with the settlor.Movable assets collateral
Movable assets can be used as collateral though the creation of a pledge (possessory or non-possessory), a security trust or, in specific cases, a mortgage.Possessory pledge
As a general rule, the pledgor must transfer possession of the pledged asset to the pledgee or a third party for the benefit of the secured party. Additional special requirements must be met for perfection depending on the type of movable asset being pledged.Non-possessory pledge
As opposed to a possessory pledge, possession and operation of the pledged asset remains with the pledgor.
This type of pledge affords the possibility of creating a floating security interest over present or future movable assets, whether identified individually, generically or by categories thereof. This type of pledge is typically used to create a pledge over claims, receivables, credit rights, bank accounts and other intangible assets incapable of being actually possessed, such as intellectual property.Security trust
The creation of a security trust implies a true transfer of the movable property by the party granting the security (the settlor) to the trustee, for the benefit of the secured party. The parties can freely agree on the possession of the assets being contributed, although it typically remains with the settlor.
A security trust is typically used to take security over claims, receivables and credit rights, and can provide for the opening and management of trust-specific bank accounts that afford the parties the ability to agree upon the handling of funds for both security and management purposes (eg, cash flow waterfalls, lockbox accounts and payment sources).Mortgage
Other than real estate property, a mortgage can also be granted over ships and aircraft pursuant to specific regulations on each matter. There are no legal restrictions on creating other types of security interests over ships and aircraft (such as possessory and non-possessory pledges and security trusts (subject to regulatory requirements)), but long-standing legal practice makes a mortgage the preferred alternative.Perfecting a security interest
What steps are necessary to perfect a security interest on the main categories of assets? What are the consequences of failing to perfect a security interest?
Perfection requirements of security interests depend on the type of assets being encumbered as outlined in the table. Failure to meet perfection requirements can cause the security interest to be null and void, and the secured party will lose all preference rights over the collateral with respect to other creditors.
|Asset type||Form of security||Perfection requirements|
|Real estate property||Mortgage or industrial mortgage|
A mortgage (whether industrial or not) must be signed in writing before a Mexican notary public. The mortgage instrument should precisely identify the real property being mortgaged and must be physically recorded with the relevant real property public registry.
Additionally, an industrial mortgage must be electronically recorded with the Sole Registry of Security Interest over Movable Property (RUG) for the relevant mortgaged movable assets.
|Security trust||A security trust must be signed in writing before a Mexican notary public. The trust instrument should precisely identify the real property being contributed to the trust and must be physically recorded with the relevant real property public registry.|
|Movable property||Tangible movable property||Possessory pledge||A possessory pledge must be signed in writing and as a general rule the pledged assets must be delivered to the pledgee or a third party for the benefit of the pledgee. Additional special requirements must be met for perfection depending on the type of movable asset.|
|Non-possessory pledge||A non-possessory pledge must be signed in writing before a Mexican public attester and electronically recorded with the RUG.|
|Security trust||A security trust must be signed in writing before a Mexican public attester. The trust instrument should precisely identify the movable property being contributed to the trust and must be electronically recorded with the RUG.|
|Industrial mortgage||See above.|
|Aircraft and ships||Mortgage||See above. The mortgage instrument should precisely identify the ship or aircraft being mortgaged and must be physically recorded, as appropriate, with the Mexican Maritime Registry or the Mexican Aeronautic Registry (and in the latter case, the mortgage must also be electronically recorded with the International Registry under the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment).|
|Shares and financial instruments||Possessory pledge|
See above. Depending on the type of instrument being pledged, additional special requirements must be met, including:
|Non-possessory pledge||See above.|
|Securities pledge||Securities traded in the Mexican stock exchange are pledged through a special variant type of pledge, called a securities pledge, which requires the participation of a regulated depository clearing agency and the appointment of a foreclosure agent (normally a Mexican brokerage firm).|
|Security trust||See above.|
|Claims, receivables, bank accounts and credit rights||Possessory pledge||See above.|
|Security trust||See above. Depending on the type of rights being contributed to the trust, additional special requirements must be met, including delivery of a notice to the underlying counterparty or debtor.|
|Securities||Securities pledge||See above.|
|Intellectual property||Non-possessory pledge||See above. The non-possessory pledge instrument should precisely identify the intellectual property rights being pledged and must be physically recorded with the National Copyright Institute or the Mexican Institute of Industrial Property, as applicable (in addition to electronic registration with the RUG).|
Can security interests extend to future-acquired assets? Can security interests secure future-incurred obligations?
The non-possessory pledge, the security trust and the industrial mortgage afford the right to cover future-acquired assets. In the case of security interests created in the forms of pledges and mortgages under specific forms of loans regulated under Mexican law (ie, credits on equipment and credits on repairs), a security interest can also cover future-acquired assets. Enforcement is dependent on the future-acquired encumbered asset coming into existence and compliance with certain formalities for perfection.
Security interests can secure future-incurred obligations under the same facility (eg, post-closing drawings under term or revolving credit facilities). Enforcement is dependent on the future-incurred secured obligation becoming due and payable.
An existing security trust or mortgage may also be used to secure future-incurred obligations under a different facility as long as negative pledge and similar provisions are observed or waived, and ranking rules are provided in the security documentation. With limited exceptions, a non-possessory pledge may not be used to secure future-incurred obligations under a new facility.Maintenance
Describe any maintenance requirements to avoid the automatic termination or expiration of security interests.
Only security trusts require amendments to extend their term within a period of 50 years as all trusts are subject to a mandatory term of 50 years. Special caution must be taken when completing the electronic forms for registration of security interests in the RUG as it is necessary to include a term for the registration that must be extended beforehand in order to avoid automatic deregistration of the security interests.Release
Are security interests on an asset automatically released following its sale by the debtor? If so, are the releases mandated by law or contract?
No, the general rule is that security interests are regarded as ancillary to the obligations being secured and that a lien follows its asset, regardless of any transfer of title thereto (ie, the fact that the underlying asset is transferred by the debtor does not release the security interest created). Furthermore, the transfer of encumbered assets is forbidden by law in some cases (eg, a non-possessory pledge, unless made in the ordinary course of business, where the lien prevails over the collection right or the consideration payable itself), and security documents would normally incorporate a prohibition on the debtor selling an encumbered asset, without the prior consent of the secured party.
Mandatory releases are provided by law upon compliance in full of secured obligations by the debtor.Non-fulfilment of guarantee obligations
What defences does a guarantor have against claims for non-fulfilment of guarantee obligations? Can such defences be waived?
Guarantors are afforded all defences inherent to the underlying guaranteed obligation, most of which can be validly waived except for a few dealing with the exercise of basic defence rights. Defences personally inherent to the debtor are not available to the guarantors. Guarantors are also afforded special defences pertaining to the need to demand payment and obtain collection from the debtor in the first place, all of which can be and are, typically, waived.
Although not a defence per se, long-standing and diligent legal practice requires the guarantor’s by-laws to specifically provide for the right to guarantee third-party incurred obligations. The lack of such express provisions in a guarantor’s by-laws can afford it defences that would not be otherwise available. Similar basic practice applies in the case of individual guarantors.Parallel debt requirements
Describe any parallel debt or similar requirements applicable in a secured bank loan financing where an agent acts for multiple investors.
Parallel debt arrangements are not usual in Mexico as there are no restrictions for a collateral agent to hold security for multiple investors changing from time to time.Enforcement
What are the most common methods of enforcing security interests? What are the limitations on enforcement?
Security interests are ancillary to the obligations being secured (whether payment or performance obligations) and, thus, may only be enforced upon default of the secured obligation. Insolvency scenarios may also limit enforcement.
Most security interests entail special foreclosure proceedings that would normally require the judicial sale of secured assets to repay secured creditors out of sale proceeds.
Non-judicial foreclosure is available for non-possessory and securities pledges and for security trusts. Applicable rules are normally incorporated in the security document itself.
Insolvency rules include statutory rankings for secured and unsecured creditors of an insolvent debtor.
Judicial declaration of insolvency does not prevent a secured creditor from enforcing its rights on the relevant security interest, as long as the collateral is not indispensable for the normal operation of the debtor’s business as previously confirmed by the bankruptcy conciliator. Security interests created during the look-back period are subject to close judicial review and can be voided under fraudulent conveyance rules.
Having enforced a security interest, a creditor is entitled to collect any outstanding balance not covered by security proceeds as an unsecured creditor.Fraudulent conveyance and similar doctrines
Describe the impact of fraudulent conveyance, financial assistance, thin capitalisation, corporate benefit and similar doctrines on the structure of bank loan financings.
Bankruptcy and insolvency applicable regulation sets forth fraudulent conveyance rules, which include the granting of security during a look-back period of up to three years before a judicial bankruptcy declaration. These rules generally void all acts knowingly committed to defraud creditors and other acts carried to their detriment, such as transactions at undervalue, debt remissions and payments of debt not yet due.
The concept of unlawful financial assistance is not recognised in Mexico; however, a company’s ability to acquire its own shares or equity interests is limited to a few specific scenarios, and the acquisition of shares or equity interests between related companies must follow arm’s length and fair consideration principles to avoid tax issues or potential voidance under fraudulent conveyance rules in bankruptcy and insolvency scenarios.
Thin capitalisation is only regulated from a tax perspective, preventing debtors from deducting interest payments under loans granted by foreign-related companies if the applicable debt-to-equity ratio is not met.
The concept of corporate benefit is not recognised per se in Mexican law. However, the granting of upstream security interests and guarantees by a subsidiary company to its holding and parent companies is generally valid, subject to arm’s length and fair consideration principles.
Law stated dateCorrect on
Give the date on which the above content is accurate.
6 June 2020.