Loans and Economic Overviews in Mexico

The law recognises that all legitimate debts are valid obligations of any debtor. The debtor shall fulfill its obligation, using all its assets where necessary.

Securities in México are legislated by the Law of Securities and Credit Operations (Ley de Títulos y Operaciones de Crédito). According to this law securities can be nominatives or to the bearer.

Usually, if debt is incurred in the ordinary course of business, and is not executed in the form of a security (“título de crédito”) such as a promissory note, the creditor will need to demand payment through an ordinary commercial procedure. In such procedure, the creditor must prove the existence of the debt and the fact that the debt has matured but has not been paid.

If there is evidence that the debt is secured, the creditor could try an executive commercial procedure before the court. Under this alternative, when the court receives the claim, it not only informs the debtor about the procedure but also requires the debtor to either: (i) make the payment to the court or (ii) immediately produce evidence to the court official that payment has been made.

If the debtor does not do either (i) or (ii), then the assets would be seized by the court to ensure and guarantee that if at the end of the trial the debt has to be honored, the court has enough assets upon which to collect and recover the debt.

In the situation where the debt has been executed in the form of a security the procedure varies, depending on the type of security as follows:

Trust Arrangement – At the time when the debtor incurs the debt, it transfer certain assets to a third party (a trustee), which is usually a bank, with irrevocable instructions. These instructions provide that if payment is not made, the trustee can liquidate the assets and make the payment. This mechanism has proved to be very successful, although there are some precedents, where the courts have issued injunctions to trustee to prevent them form liquidating assets until the court has had time to review the fairness of the arrangement.

Mortgages – There is a separate court procedure for mortgages. The court verifies that the payment is due and authorises the sale of the asset. The sale is made through public auction carried out by the court itself. Payment is made from the proceeds. If proceeds are insufficient to pay the debt, the balance will be an unsecured claim.

Lien – The law allows liens on goods to be created; there are two alternatives:

i) The possession of the goods is transferred from the debtor to a third party, or under certain circumstances, to the creditor. In the event of default, the creditor may ask the court to approve the sale of the goods under lien. In such case, the judge notifies the debtor and gives them a 15 days to show evidence of the payment. If no evidence of payment is produced, the judge will approve the sale of goods. The corresponding consideration or price will be kept under lien until the judge approves the payment.

If the proceeds are insufficient to pay the debt, the balance will be an unsecured claim.

ii) In the case of a grant of a lien without the transfer of goods to either a third party or the creditor, the debtor can continue to enjoy the possession and the use of goods.
The debtor would then be able to continue its business operation, while simultaneously being able to grant a security to its creditor.

Corporate Bankruptcy and liquidation processesAs in many other jurisdictions, informal processes may be negotiated to rescue a company or to liquidate it.

In Mexico, the majority of restructuring processes are actually out of court. Usually, the different interested parties organise themselves into a committee. The committee works among the different creditors in order to effectively negotiate with creditors.

The negotiation attempts to estimate the scenario in which the debtor can recover its financial debt and in which creditors maximise recovery and limit their losses. If the debtor is not financially viable, then the committee may agree to an orderly liquidation.

When an informal process is unsuccessful, the different parties related to the company can initiate a formal procedure. Formal procedure can also be initiated if the financial condition of the debtor has deteriorated significantly.

In May 12, 2000, a new Law on Mercantile Insolvency Proceedings (“LMIP”) was issued and published in the official Journal of the Federation, thus becoming effective in May 15, 2000.
The LMIP states a one full process in two main phases:

Conciliation – The first phase provides the basis for the mercantile corporate entity to attempt to reach a restructuring agreement with its creditors. Although any creditor that enters this type of agreement will loose its rights during the insolvency proceedings. The figure of conciliator may disrupt the conciliation phase and commence the bankruptcy/liquidation phase, when no agreement has been reached by both parties.

Conciliation agreements are only effective when approved by the Debtor and more than 50% of the total sum of creditors.

Bankruptcy/liquidation – The second phase provides for the liquidation of the company if it is unable to conclude an agreement with its creditors during the conciliation phase.

Three suppositions have to occur before declaring the bankruptcy, which include that the debtor requests bankruptcy, that the time limit for reaching an agreement in the conciliation phase has past and that the Conciliator requests for bankruptcy after considering that no agreement will be reached.

When bankruptcy is declared, management will be taken by a trustee-in-bankruptcy and a Judge will make orders to occupy property and business. The Conciliator, when authorised by the Federal Institute of Specialist in Mercantile Procedures, can act as the trustee-in-bankruptcy.

The liquidation must be agreed with the company’s creditors and all the liquidators actions would be coordinated by a creditor’s committee. The liquidation actions and transactions should be approved by the creditor’s committee but also by the liquidators appointed by the company’s shareholders. In some cases approval from the shareholders must also be obtained.

If the liquidators are actually trustees appointed by the court and are acting in a formal procedure, the liquidation has to be approved by the court. The trustee must submit details of the sale of goods, the condition of the assets still owned by the company and the relation of those creditors who will receive payments. This report has to be presented to the court at least every two months. Key players in an insolvency procedureThe key players and their responsibilities are as follows:

Visitor: Which once an action for mercantile insolvency has taken place will be designated by the Institute when requested by a judge.

Conciliator: Once a sentence has been issued regarding an insolvency procedure the judge will request from the Institute to designate a Conciliator to be in charge of the Company’s management and recognition of unidentified creditors. Another task of the Conciliator will be to rearrange options for a new agreement.

Trustee-in-bankruptcy: Once a bankruptcy is declared the judge will request the Institute to designate a Trustee or confirm the Conciliator as trustee-in-bankruptcy for the Company’s appraisal and sale of assets.

Interveners: This is designated by the creditors to supervise the conciliator and the trustee.
Hierarchy in the payment of creditsCreditors are paid over any other credits when:
Are part of the credits listed in the article 123 paragraph A, section XXIII of the Mexico’s Political Constitution

Credits incurred during the control of the conciliator with previous authorisation
Credits used for the protection of the properties
For the paying of Inspector’s fees and credits resulting from judicial proceedings for the benefit of the Company in control of a Conciliator

The rest of the credits are paid in the following order:

Creditors used for funeral or illness expenses

Creditors with warranties or pledges

Special privilege creditors

All other creditors not mentioned above

Information for bankruptcy/liquidation process

Information available in a corporate bankruptcy/liquidation, formal or informal rescue includes the financial statements for the last 3 years, memorandum of events that caused breach between creditors and the debtor, a schedule of the Company’s debtors and a inventory of all the Company’s assets.

Insolvency procedures in foreign jurisdictionsIn the case that insolvency procedures are started in another jurisdiction, a Mexican court will recognise the effect of any proceeding initiated in a foreign jurisdiction, if such foreign jurisdiction recognises the procedures initiated in Mexico. The foreign court or the foreign trustee of the foreign proceedings should request recognition and assistance from the Mexican courts in any proceeding.


In 2004, the Mexican economy grew a 4.4% as result of greater demand. The outlook for the following year is similar with an estimated 4.0% growth derived from the economic activity driven by consumption, investment and a moderate behaviour of exports. Exports would be affected from the USA expected slim economic slowdown during 2005. The Mexican economic growth would be based in accessible international financing, income from oil exports and family remittance, thus providing some resources to support the aggregate expending. It is important to acknowledge that the growth would be limited until the structural reforms take place.

However, in the short term analyst do not see any important reform to take place as the current political interests are focus in the 2006 elections. The Mexican economy is closely related to the USA economy. Mexican inflation is expected to be stable; however, not at the 3% yearly goal due to the fact that the USA Federal Reserve will continue increasing its interest rates, thus increasing the inflationary pressures to the Mexican economy. Other factors to consider are those within the Mexican economy such as the price of goods and services. The prices of goods are expected to remain stable. However, the prices of services are expected to increase as some of them have fall behind in the last couple of years, therefore increasing inflationary pressures. The exchange rate is expected to remain stable with a light depreciation to a real level. The strength of the Peso is based by oil exports and remittance Mexicans working in the USA.

Another factor that would contribute to the peso stability is the devaluation of the dollar against other currencies.An important factor to consider is the elections campaign. Analysts do not expect great changes in the Mexican economy over the following months since the early campaigns would lessen the uncertainty of the candidates contending. Unfortunately, the uncertainty would increase as the July 2006 elections get closer and the candidate of each party is defined.

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