Latin America - Trade Creditors' Rights and Protection

The Mexican Case

The Road to Maximizing Recovery

• The End Game. Making sure there are assets.

• The Process. Making sure the collection process is as painless and efficient as possible.

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The End Game - Common hazards

• The poor company, rich businessman conundrum. This is true in Mexico and generally throughout Latin America.

• No corporate veil piercing or equivalent theories are generally available. This is true in Mexico and generally throughout Latin America.

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Doing The Homework

• Due diligence

• Due diligence

• Due diligence

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Collateral Options

• Personal guarantees• Mortgages• Pledges• Trusts in guarantee• Letters of credit

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The Process – Navigating through the Mexican Legal System

• Federal system• Convergence in commercial disputes of

Federal and State courts• No jury• Very limited discovery available• Reliance on documentary evidence• Very formal. Favors originals, not copies

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The Right Paperwork• Always aim to document the credit,

and if possible, with so- called “títulos ejecutivos,” i.e. executive titles

• Títulos ejecutivos → right to collect via summary proceedings

• Preeminent examples: promissory notes, letters of exchange, agreements certified before Notary Public with amounts quantified, due and payable.

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Advantages of Summary Proceedings

• Prejudgment attachment of assets• Limited defenses available to the

debtor• Shorter procedure

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Tips to Draft an Enforceable Promissory Note

• The express statement that the document is a pagaré.

• The unconditional promise to pay a certain amount of money.

• The name of the company or individual to whom the payment is to be made.

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Tips to Draft an Enforceable Promissory Note

• The time and place where the payment is to be made.

• The time and place where the note is subscribed.

• The original signature of the issuer of the note.

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Tips to Draft an Enforceable Promissory Note

• When the issuer/debtor is a corporation, make sure:– that the individual signing the note has express

authority to sign or issue credit instruments (títulos de crédito) on behalf of said corporation

– that the act of signing promissory notes or credit instruments is provided for under its corporate purpose

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Enforcement of Foreign Judgments

• Service of process properly done? • In rem action?• Did the foreign court had jurisdiction?• Res judicata?• Pending parallel action in Mexico?

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The Arbitration Alternative• Mexico has a modern arbitration law

and a generally pro arbitration judiciary.

• Mexico adopted in 1993 the United Nations Commission on International Trade Law (Uncitral) Model Law on International Commercial Arbitration.

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The Arbitration Alternative

• Mexico is party to:–The Convention On The Recognition And

Enforcement Of Foreign Arbitral Awards -- New York Convention (1958).

–The Inter-American Convention on International Commercial Arbitration -- Panama Convention (1975)

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Advantages of Arbitration• Avoidance of local courts• Easier to enforce arbitral awards in

comparison to foreign judgments• Ability to choose decision maker• Proceedings can be in English• Seat of arbitration can be the US• Governing law can be US law

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Drafting the Arbitration Agreement

• Bind the parties • Exclude judicial intervention• Empower the arbitrators• Establish a procedure for airing the

dispute

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Pathological Clauses• Equivocation

– “in case of dispute, parties agree to submit to arbitration, but in case of litigation, Mexican courts shall have jurisdiction.”

• Over-Specificity– Including too much detail which makes

impossible to put into practice. E.g.: “Arbitrators shall be experts in nanotechnology.”

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The Case of Insolvency“When?”

• Debtor has “generally defaulted on its payment obligations”:– (1) default vis-à-vis at least two creditors;– (2) payments are past due for more than 30

days and represent 35%+ debtor's payment obligations; and/or

– (3) the debtor does not have liquid assets to pay at least 80% of the obligations past due.

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The Case of Insolvency “Who can file it?”

• Debtor, creditors, or the Attorney General can file.

• Debtors can file if conditions are imminent.

• Creditors need to meet all three conditions or will have to pay all attorneys' fees and other expenses incurred by the debtor.

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The Case of Insolvency “How?”

• Two consecutive stages:–the conciliation stage akin to Chapter

11.–the liquidation stage akin to Chapter

7.

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The Case of Insolvency“Who gets paid?”

1. Wages for the last two working years prior to the date of the declaration of insolvency and employees’ severance claims.

2. Claims related to the administration of the estate.

3. The fees and expenses charged by the Auditor, Conciliator, Trustee and their assistants in the performance of their duties.

4. Funeral expenses and medical expenses incurred with respect to illness leading to death, when the debtor is a natural person.

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The Case of Insolvency“Who gets paid first?”

5. Secured creditors.

6. Tax Claims.

7. Creditors with a special privilege. Creditors with special statutory privileges such as a "right to withhold."

8. General unsecured creditors.

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Latin America - Trade Creditors' Rights and Protection

The Mexican Case