Mexico: Keeping debt secure

Author: | Published: 1 Jul 2008
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In an acquisition of a company by a private equity fund, often one of the issues to be addressed at the same time as or immediately after closing the transaction is the financing or refinancing of the acquisition. It is also common that private equity firms choose to do a combination of equity investment and lending.

As a result, the issue of how to structure the security package that will be part of the acquisition financing becomes important. Lenders will seek to obtain a lien on the entire business to be acquired, sometimes referred to as a blanket lien. There are different alternatives in Mexico for structuring such security interests.

The two basic choices when taking security in a company involve a decision on whether to take a security interest in the assets of the business or an equity interest in the company. Under Mexican law, even in the case of a transfer of assets, in certain specific cases liabilities vis-à-vis certain creditors are still enforceable if the acquisition of assets involves assets that are essential for the conduct of the business.

In the authors' experience, financing entities often prefer to use belt-and-suspenders, and take a security interest both in the stock of the acquired company and its assets. In Mexico, the security interest in the assets presents certain questions about the best way to achieve the desired result; and some of these issues are related to the different mechanisms for the perfection of such security interests.

Different types of security interest may be implemented, mostly depending on the nature of the asset involved, and sometimes on the nature of the creditor. Below is brief description of the legal mechanisms available in Mexico to take lien in the assets of the acquired company.

Limits on foreign lenders

In general terms, an industrial mortgage is a legal mechanism under which a lender can take a security interest in all the assets comprising a business, including the industrial facilities, equipment, raw materials, work in progress, cash and accounts receivable – all of the assets that make up the business as a going concern. It is a right in rem that comprises all real estate, buildings, equipment and hard assets, as well as a floating lien on inventories, work in progress, cash and receivables. Perfection for this type of lien requires formalisation before a Mexican Notary Public, and filing with the Public Registry of Commerce for this security interest to become effective vis-à-vis third parties.

Questions have been raised in Mexican legal practice about the availability of this mechanism for non-Mexican lending institutions, since the mechanism is provided for in Mexican statutes regulating banks and other lending institutions. However, mortgages with the same purpose and scope as industrial mortgages provided for in such statutes have been created and registered in favour of non-Mexican credit institutions. There is still little precedent, though, for the enforceability of industrial mortgages in favour of non-Mexican credit institutions. They are perceived as being reserved for Mexican lending institutions, as opposed to other types of lenders.


A pledge under Mexican law is only available for personal property. A pledge constitutes a right in rem over the subject personal property. Generally, in commercial transactions, the pledge requires for its perfection:

  • That the pledged assets remain in the possession of pledgee.
  • That the pledged assets be stored in a location available to the pledgee or with a depository appointed by both parties.
  • In the case of negotiable instruments, delivery by the secured party of the negotiable instruments duly endorsed in the pledge (endoso en garantía).
  • In the case of other receivables, by delivery of the documents evidencing the debt obligations to pledgee and registration of the pledge in any registry kept for the issuance of such debt obligations, if applicable, or by providing notice to the respective obligor.

In other words, the traditional pledge requires actual or virtual possession of the pledged assets by the lender, therefore limiting the pledgor's ability to use such assets in certain cases. However, it is often used to create a security interest in the shares of stock or other equity interests representing the capital of commercial companies.

The most important feature of the pledge in the pledgor's possession is the ability for the pledgor to create this lien for the benefit of lenders while maintaining the use of the pledged assets. It can be said that this type of security interest is similar to a security interest created in the US under Article 9 of the Uniform Commercial Code.

This new type of security interest may cover all types of personal property, including raw materials, inventories, work in progress, and cash and accounts receivable from their sales. Implementation of this type of collateral would require a written agreement, and if certain amounts provided by the statute are exceeded, it must be notarised and recorded in the public registry of commerce of the pledgor's domicile.

The pledged assets may be transformed and even sold in the ordinary course of the pledgor's business. According to the Mexican General Law of Negotiable Instruments and Credit Transactions, the items covered by the pledge do not have to be specifically described if the pledge is intended to cover all assets involved in a specific business or company. Mexican law makes it a criminal offence for the pledgor to create another pledge or security interest in the same assets without the creditor's consent.

Upon default by the pledgee, the pledgor can foreclose on the assets without court intervention to the extent the pledgee does not object to such proceedings.

Guarantee trust

The guarantee trust has been used in Mexican practice for many years. Under this legal arrangement, the debtor transfers fiduciary title to certain assets to a trustee that is traditionally a Mexican bank. The trustee preserves and holds title to such assets and, eventually, proceeds with foreclosure for the benefit of the secured party, in the terms provided for in the trust agreement to be negotiated to that effect.

The guarantee trust allows the flexibility of conveying any kind of real or personal property and permits the debtor to remain in possession of and continue using such assets, while title to them is held by the trustee for all legal purposes. Once the assets have been conveyed into a guarantee trust, the trust constitutes the equivalent of a security interest over the assets, and would protect the beneficiaries/secured parties against other creditors of the settlor.

One of the most important features of the guarantee trust is that it gives the secured party the option to foreclose on the collateral without resorting to the courts, pursuant to the rules negotiated in the trust agreement. Nonetheless, disposal of a guarantee trust's assets in the event of default in the secured obligations may require certain procedures to be followed by the trustee, including notice to the debtor, an opportunity to remedy and, if the debtor objects to the foreclosure, court approval.

A trust agreement would need to be negotiated with the trustee, in addition to the debtor, and thus could involve additional expense and timing concerns compared with other alternatives. Guarantee trusts that include real estate property must be notarised and registered before the Public Registry of Property. If the guarantee trust covers only personal property, in certain cases it shall also be be notarised, following the same rules discussed in connection with the pledge in the pledgor's possession, and will be recorded in the Public Registry of Commerce.

Debt repayment mechanism

There are other types of trust agreements that can be used in implementing secured transactions, such as trust agreements for the administration of cash flows and payment of specific obligations provided for in the trust agreement out of such cash flows. This type of arrangement would also give the secured party a mechanism for the repayment of debts that is almost automatic. In this structure, the trust agreement typically provides that its purpose is to implement a direct mechanism for the payment of certain obligations, which is not contingent on a default by the debtor.


The topic of foreclosure with respect to the different types of security interests described above is broad enough to be discussed in a separate article, but it should be said, for the purposes of this analysis, that Mexican law generally does not provide for self-executing liens. With the exceptions mentioned above, foreclosure requires the filing of a request to the relevant court and a court order so that the foreclosure procedures can be initiated.

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