Financial reform: amendments to ease loan collection
November 2013 | PROFESSIONAL INSIGHT | FINANCE & INVESTMENT
Financier Worldwide Magazine
The Executive Branch recently submitted a bill to the Mexican Congress which, if approved, would result in a significant overhaul of the Mexican financial regulation. The bill has already been approved by the Mexican House of Representatives, with some amendments, and is now being discussed by the Mexican Senate. Although the bill has several objectives and entails the amendment to more than 35 federal laws, we will centre our analysis on one of these objectives: to reduce borrowing costs by easing loan collection and, consequently, to expand credit. To this end, we will discuss in the following paragraphs the most important amendments that the bill proposes with respect to commercial judicial proceedings and with respect to the creation and enforcement of security interests.
One of the major procedural reforms sought by the bill is facilitating the granting of provisional relief in commercial judicial proceedings, particularly the attachment of assets. The importance of provisional relief is that it may be granted ex parte prior to commencing judicial proceedings. In this way, creditors can ensure that debtors do not dispose or hide assets in anticipation of a legal battle.
If the bill is passed, the requirements to attach assets as a provisional remedy will be simplified and clarified. An affidavit in support of a reasonable doubt that the debtor may unlawfully dispose of its assets may satisfy the requirement of proving ‘grounded fear of asset disposal’. Furthermore, there will be a statutory presumption that debtors may dispose of cash and bank accounts, so in these cases not even the affidavit will be required. Consequently, the attachment of cash and liquid assets may be faster and easier to accomplish. Another important aspect is that the requirement to post a bond before securing the provisional relief – as a guaranty for potential damages sustained by the debtor, is scaled down from a ‘sufficient bond’ to a ‘reasonable bond’. Both of these amendments will prove to be effective to ease and make loan collection faster – when and if correctly implemented – as debtors will have less incentive to pursue dilatory tactics during the proceedings.
Judicial interpretation will be key for the effectiveness of the new rules for provisional remedies. Particularly, it will be important for judges to interpret that not only the granting of the provisional measures should be ex parte but also the execution and perfection thereof. Though we believe allowing ex parte execution and perfection to be complicated based on Mexican legal tradition, it could importantly foster lending activity.
One issue to note is that the bill does not extend the list of provisional relief that may be granted in commercial proceedings. On the contrary, after the comments from the House of Representatives, the bill provides that the list is limitative. The provisional relief is currently limited to attachment of assets and orders not to abandon certain jurisdiction. However, for many cases, this relief may fall short. Why not include preliminary injunctions and preliminary restraining orders?
The bill also seeks to facilitate service of process. When the address of the defendant is unknown or when the defendant cannot be found, plaintiffs need to request, through the judge, information on the defendant’s address to government authorities before serving process through publications. The bill seeks to limit the time for the authorities to respond to 20 days (currently there is no term for the authorities to respond). If the authorities fail to respond within this term, process may be served through publications. This will shorten the duration of proceedings when the address of the relevant debtor is unknown. However, it may be argued that the debtor is being unfairly punished by a failure of authorities to timely answer the court’s request. Consequently, this provision may be held unconstitutional.
Another proposed reform to the Commercial Code worth noting is the possibility of registering the attachment of real property with the attachment deed. Currently, in executive proceedings, plaintiffs may serve process and simultaneously attach assets. However, in order for the attachment to be effective, it needs to be registered and a court order secured to request registration. This gives some time for the defendant to dispose or hide the attached asset while the attachment is still ineffective. If the reform is passed, then no court order will be required to perfect the attachment over real property and the attachment deed served on the defendant will be enough to register the attachment. It is not clear why the bill does not include the same possibility for attachment of personal property.
Particular attention should be given to the right to inspect attached assets ‘at any time’ that the reform seeks to implement. Inspection rights are positive but we believe they deserve clearer regulation. It is unclear, for instance, if plaintiffs may use this right to appoint a full-time inspector to be present at the defendant’s facilities all the time.
Perhaps one of the most important proposals being made consists of the creation of special federal courts for commercial matters. The bill seeks to reform the Federal Judiciary Law (Ley Orgánica del Poder Judicial de la Federación) to create these courts. Currently, commercial matters may be brought both at local courts and at federal courts. However, federal courts generally dislike commercial matters because they are more specialised in solving constitutional claims (juicios de amparo). Creating special courts for commercial matters would certainly reduce the workload of federal courts and help with the judges’ ‘learning curve’ with respect to commercial matters. Naturally, this may cause speedier proceedings and faster loan collection. A caveat: this proposal may prove effective to achieve speedier proceedings but cannot be implemented if it is not coupled with an increase in the budget of the federal judiciary. How is the federal judiciary going to create more courts if its budget is not increased?
We turn now to the proposed amendments to create and enforce security interests. A number of amendments in this respect are necessary. However, the Executive Branch decided instead to include only a provision that cash-collateralised loans may be enforced without judicial intervention. Simply put, if a creditor has a security interest over cash, the creditor will be able, upon the borrower’s default, to apply such cash to the payment of its loan without judicial authorisation. Was this amendment really needed? Creditors were already able to include in their credit agreements an authorisation to offset cash held as security against monies owed to them, so the amendment does not seem to create a ‘new enforcement tool’. But, more importantly, we believe that this specific amendment will not foster credit expansion to medium and small size companies as the government announced. The number of debtors that can grant cash as collateral over their loans is very small. Hence this amendment may not necessarily be effective in expanding credit.
We believe other amendments to the rules for the creation and enforcement of security interests would be more useful. For instance, why not consider the creation of a federal registry for mortgages? The federal registry for security interests in personal property has been effective in reducing the time and cost for the registration of pledges or other charges to personal property. But there is nothing similar for mortgages, which still need to be registered at the public registry of the jurisdiction where the real estate is located. We understand that creating a federal registry of mortgages may pose some questions about federal invasion into state powers, but we believe the idea is worth exploring.
Other less ambitious amendments required for the creation of security interests are allowing non-possessory pledges over a specific category of assets without having to produce an itemised description of the pledged assets. Currently, the law only contemplates two kinds of non-possessory pledges: a general pledge over all the assets used for the main business of the pledgor or a pledge over itemised assets. There is no possibility to create a pledge over ‘all the accounts receivables’ of the pledgor or ‘all the inventory’ of the pledgor. Lawyers spend a lot of time designing ways to pledge a specific category of assets without pledging the remainder of the assets and without having to produce a specific list of pledged assets.
The financial reform submitted before Congress and approved by the House of Representatives is a comprehensive reform of various financial laws and an ambitious reform in its scope and objectives. Although the reform can be improved, we believe that it may mean a positive step towards better regulation of the financial sector. Specifically, with respect to the goal of easing loan collection, we believe the reform brings improvements to the current framework of commercial procedural law but the reform will not be effective if judges do not assist in their implementation through judicial interpretation. This requires training and specialisation of judges, which also raises the need to increase the budget allocated to the federal judiciary.
Ramón Bravo H. is a partner, and Federico De Noriega O. and David García L. are lawyers, at Barrera, Siqueiros y Torres Landa. Mr Bravo can be contacted on +52 55 5091 0162 or by email: firstname.lastname@example.org. Mr Noriega can be contacted on +52 55 5091 0154 or by email: email@example.com. Mr García can be contacted on +52 81 8220 1507 or by email: firstname.lastname@example.org.
© Financier Worldwide
Ramón Bravo H., Federico De Noriega O. and David García L.
Barrera, Siqueiros y Torres Landa