As a general rule, personal property located in Mexico or originating in Mexico may be granted as a guaranty in accordance with Mexican laws and regulations (Mexican guaranties) or in accordance with the laws and regulations of other countries (non-Mexican guaranties). That will be dependent on, among other criteria, the agreement by the parties as to what property will be subject to the guaranty and the venue where the actions to enforce said guaranty could be taken.
Mexico’s General Law of Negotiable Instruments and Credit Transactions (“LGTOC”) establishes different alternatives for granting guaranties over personal property. The LGTOC provides for the real guaranty, called a “pledge”, which can be either a “traditional” pledge, or a floating “non-possessory” pledge. It is possible to say that the material difference between both types of pledge has to do with the possession of the collateral. In a “traditional” pledge the asset is delivered to the pledgee, and, in a “non-possessory” pledge, it is not.
The granting of non-possessory pledges has increased exponentially as reported by Mexico’s Department of Economy on multiple occasions and in numerous forums. The reasoy may be that pledgor can continue to use the pledged asset to generate income, and the fact that the existence of the guaranty can became public and effective against third parties through the registration with the electronic registry called the Sole Registry of Personal Property Collateral (“RUG”).
The granting of pledges become more complex when they are part of international or cross-border transactions, since such typically involve parties of different nationalities, laws of various countries, and international treaties. A common international transaction often involves a financial institution formed in Canada or the United States that grants a line of credit to a company with operations in Mexico, whereupon compliance with the obligations related to said line of credit are secured with its assets located in Mexico or of Mexican origin. Another example of a common international transaction is a Japanese company that seeks to sell certain machinery to a company in the United States, importing such to Mexico for use in said territory under a financing structure.
In reviewing the use of guaranties in Mexican financing transactions, one should take into account the following:
1. Type of personal property. A Mexican guaranty may be granted on different types of personal property, including machinery and equipment, vehicles, livestock, agricultural products, consumer goods, inventory, stocks and obligations, bonds, option and futures contracts, rights, including collection rights, trademarks, and others. It is advisable to make a careful evaluation of the Mexican guaranty to be granted depending on the type of personal property, its origin and its location.
2. Origin of the guaranty. A guaranty granted under the laws of a country other than Mexico does not, as such, constitute a Mexican guaranty. The foregoing does not mean that Mexican law prohibits the creation of security interests in personal property located in Mexico or of Mexican origin, or that such guaranties are illegal under Mexican law; however, the fact that the collateral is located in Mexico, or has a Mexican origin should not be ignored. Such situation may result in the need to involve a Mexican court in case of enforcement on a guaranty. In each particular case, one should carefully evaluate the venue for any potential foreclosure on the guaranty.
3. Formalities. Generally, a traditional pledge is granted by delivery of the collateral, while the non-possessory pledge is granted by means of a written agreement, ratified before a notary public in Mexico and registered with the RUG. In principle, granting a traditional pledge requires fewer formalities than granting a non-possessory pledge. The particular suggestion is to review the advantages and disadvantages of each type of pledge in light of the formalities that each option involves.
4. Safekeeping and possession of the property. It is advisable in each case to carefully understand the responsibility for the safekeeping and possession of the collateral in both types of pledge, since in one type of pledge the collateral is delivered while in the other it is not delivered.
5. The existence of a guaranty can be made available to the public. One of the advantages of the non-possessory pledge is that this guaranty is made available to the public by the publication through the RUG. This should be taken into account when one analyzes the convenience of granting one type of pledge over the other, including finding adequate means to make public a traditional pledge.
Experienced Mexico legal advisers are necessary to consider many of the above issues. Such issues include the loan terms and type of guaranties to document, as well as the advantages, disadvantages and actions of the various options to take into account.