Does the current Mexican legal framework protect investors’ rights? (Part One)

Introduction

Private capital will flow to markets that protect investors’ contributions. If states want that their economies receive domestic and foreign investment, they must have a solid legal framework that grants certainty to investors.

Both the law itself and the efficient enforcement of the law create an attractive environment that encourages capitalists to invest in a country. (See Millstein Ira M. Et Al, Enforcement and Corporate Governance; Three Views. The International Bank for Reconstruction and Development, 2005, at 2).

Preferably, a solid legal regime should include as investors’ protective measures, a corporate governance system that contemplates, among other aspects:

(i) provisions establishing clear duties for directors,

(ii) remedies available to shareholders and partners to claim liability from directors should they fail to carry out their duties.

(iii) rights granted to minority shareholders and partners.

In addition, in case that lenders are willing to invest by making available credits to borrowers, the law should include, at least, the following legal provisions:

(i)  A well-developed and modern security interest regime that includes the possibility for borrowers to continue operating with the secured assets while complying with their business purpose. (See the “Doing Business in Mexico 2007” published by the World Bank at 13).

(ii) An effective and quick proceeding that allows lenders to enforce security interests, should borrowers become insolvent or in default.

(ii) Public registry provisions that make effective a security interest vis-a-vis third parties and establish its priority ranking against the rights of other claimants.

Let us analyze briefly the above principles in Mexico.

How were things going in Mexico back in 2007?

The World Bank (“WB”) published in its “Doing Business in Mexico 2007” report (pages 13 and 14) that Mexico earned a grade of 2 out of 10 regarding the set rights of lenders and borrowers that facilitate lending. Just a half of the 4.5 Latin American and Caribbean grade average. The lack of an efficient security interest regime created uncertainty for lenders to grant credits to Mexican companies at competitive rates.

The WB also revealed that concerning the registration of security interests over movable assets, it took a borrower in Mexico an average of 17 days to sign and register a collateral agreement whereas in Minas Gerais, the best performing Brazilian state on this indicator, it took borrowers only two days to perform the same proceeding.

The reasons that explained the delay in registering a security interest in Mexico were based on the inefficient, nonuniform and costly registration system that included notary fees and the payment of registration duties.

On the other hand, the WB criticized the difficulties experienced by lenders in Mexico to enforce secured obligations. Although the law already contemplated out-of-court proceedings that allowed lenders to seize movable assets and sell them extrajudicially; in practice, if debtors opposed to non-judicial orders arguing the violation of their constitutional rights, typically the parties ended up in a court to settle their disputes.

The WB suggested that a reform was needed to (i) make security registration more efficient by harmonizing criteria and concluding the digitalization process of the register offices of all the states of the Mexican Republic, and (ii) enable out-of-court enforcement by limiting the involvement of courts in the enforcement of security interests and institutionalizing summary trials that reduce the timeframe to enforce a security interest.

What did Mexico do to improve its corporate governance and security interest systems?

On June 13, 2014, a decree was published in the official gazette announcing that certain commercial laws were amended (the “Reforms”), including the Commercial Code (“CC”), the General Corporations Law (“GCL”), and the General Law of Negotiable Instruments and Credit Transactions (“GLNICT”).

The explanatory statement of the Reforms claimed that the main purpose of the amendments was to implement in Mexico the best international practices recommended by the WB to boost competitiveness and productivity in the country by reducing administrative burdens…

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