Banking and Finance legal considerations in Mexico: Crossborder Collateral - Pledge

Property that constitutes movable tangible or intangible assets of the borrower, including shares or equity interests in any company or partnership, can be pledged in favor of a creditor by means of a pledge agreement.? The pledge would provide a first priority security interest on the pledged assets in favor of the creditor, subject only to the rights of mandatory preferred creditors, such as employees of the borrower and tax authorities. This pledge would cover the machinery, equipment, receivables and other valuable movable assets owned by the borrower.

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Pursuant to Mexican applicable laws, it is necessary to dispossess the pledgor of the pledged assets in order to perfect the security interest created by the pledge agreement.? This can be achieved by delivering the pledged assets to the creditor or to a third party acting as depository for the benefit of the creditor – this depository would have criminal liability to the extent that assets do not become available –.

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Mexican law also provides for pledge without transfer of possession by the borrower of the pledged assets, in which the borrower may retain possession of its assets and would be allowed to use them it the ordinary course of its business. This pledge provides for the circumstances under which the assets that comprise the security could be sold or in any other way disposed by the borrowers and the manner in which the proceeds of such sale or disposition would be treated.

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Although the pledge is perfected between the parties by the delivery of the assets, it is necessary to formalize it before a Notary Public and register it with the Movable Assets Public Registry (Registro único de Garantías Mobiliarias) in order to have preference in payment over other creditors, except for other mandatory preferred creditors such as the employees of the borrower and the tax authorities.

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The purpose of both types of pledges is to secure the obligations of the borrower through the creation of a security interest over movable assets of the borrower. In this regard, the creditor would follow the foreclosure procedure set forth in the pledge agreement in case of any breach of the secured obligations.

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The procedure to foreclose a pledge is specifically regulated under Mexican law and provides for a summary process to obtain an authorization from the court to sell the pledged assets.

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The creditor is entitled to request the court to authorize the sale of the pledged assets if any of the following occurs: (i) a default in the secured obligations; (ii) the price of the pledged assets is reduced to an amount not sufficient to equal the amount of the underlying obligation plus twenty percent; and (iii) the borrower fails to provide the creditor the necessary funds to pay any required installments under negotiable instruments on time.

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Borrower may to oppose to the sale of the pledged assets only by payment of the amounts due or enhancing the security interest by increasing the pledged assets or reducing the underlying obligation.

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Please note that the sale of the pledged assets does not prevent the borrower from initiating a trial for determining the enforceability of the underlying obligations.