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backLATINtalk May, 2012

How to Protect Industrial Equipment Consigned to Mexican Companies

There are many circumstances and industrial manufacturing models pursuant to which industrial equipment owned by a foreign company is delivered to a Mexican company as a necessary means to provide manufacturing or assembly services in Mexico.

The most common case is that of bailment or consignment of industrial equipment agreements, which serve to supplement a maquiladora, assembly or manufacturing services agreement.

Such case is more common today given the globalization of industrial manufacturing and the search for competitive manual labor markets. A Mexican company that is in possession of industrial equipment not owned by it is exposed to risks related to operation of such industrial equipment. While there are many types of risks for a Mexican company in such a situation, the main risks are labor/employment related risks, exposure to creditors, tax and customs risks, and risks which may arise in the event of bankruptcy proceedings of the Mexican company.

What happens in the event that one of these risks becomes a reality and leads to an attachment of the industrial equipment?

Whenever industrial equipment is subject to attachment or enforcement of judgment proceedings and forced sale this may result in the foreign owner's loss of the equipment. Mexico's Federal Labor Law has a specific provision stipulating that a transfer of ownership of industrial equipment occurring as a result of a judicial sale related to an attachment carried out for the protection of labor rights is made free of all liens or limitations of ownership to the buyer. On other occasions, as a result of tax or customs audit proceedings, it is common for tax authorities to temporarily or permanently attach industrial equipment in the possession of Mexican companies due to defects in the importation procedures of industrial equipment or as a result of tax liabilities pending payment by the Mexican company. In purely civil and commercial lawsuits, many cases exist in which the court orders the attachment of the Mexican company's property, and these attachment proceedings may result in the attachment of industrial equipment owned by foreign companies.

Lastly, in the event of a bankruptcy filing by the Mexican company, industrial equipment consigned by foreign companies may be subject to restrictions and the jurisdiction of Mexican bankruptcy courts.

The most common and critical case is that of legal restrictions in the event of labor strikes, where the employees and the union exercise physical control over everything located at the domicile of the company subject to the strike, including foreign owned industrial equipment.

How can industrial equipment owners protect their equipment and what defense mechanisms exist in Mexican legal provisions allowing the exclusion of such industrial equipment from judicial and administrative proceedings initiated against the Mexican company that possesses or consigns industrial equipment?

In order to answer this question, it is necessary to distinguish the following two fundamental aspects:

(i) provisional measures necessary for the protection of industrial equipment; and

(ii) the administrative and judicial defense mechanisms available to industrial equipment owners in order to exclude industrial equipment owned by foreign companies from such proceedings. As far as the first item, the implementation of provisional measures is essential to properly protect industrial equipment ownership. The existence of a written agreement is necessary; and such agreement may be a bailment agreement or a consignment agreement, which clearly establishes that the foreign company has title to the industrial equipment and expresses acceptance by the Mexican company in the sense that the industrial equipment will only be possessed and not owned by it.

Furthermore, in some cases and in accordance with certain rules of the Public Registry of Property and Commerce, it is necessary to register a document at the Public Registry of Property and Commerce stating that a foreign company has title to the industrial property. It is also necessary for the foreign company that consigns industrial equipment that will be operated in Mexico to obtain authority for inspections and physical verifications of the industrial equipment at its location in Mexico, preventing the Mexican company from changing the physical location of the industrial equipment unless it receives express authorization to do so from the foreign owner of the equipment. An indemnification clause and a liability for damages and losses clause are recommended in these cases.

Finally, it is convenient to require the Mexican company possessing the industrial equipment to defend the industrial equipment and retain attorneys necessary to protect the foreign company's title to the industrial equipment.

A fundamental aspect of industrial equipment protection is the existence and formalization of documentation that represents title to such equipment. Mexico requires the existence of a suitable document that evidences title to the industrial property. Only the documents specified by the applicable legal provisions will suffice to evidence title. The best document to evidence title of the industrial equipment is the commercial invoice issued by the commercial establishment or company that sold the industrial equipment.

On many occasions, it is difficult to find these commercial invoices, or such invoices do not contain detailed information on the equipment that evidences ownership, resulting in a possible controversy over the existence of the document that evidences the ownership rights to the industrial equipment. On other occasions, the industrial equipment is the product of assembly or industrial manufacturing, and does not necessarily derive from a purchase of already manufactured equipment. The latter cases represent significant obstacles for proving ownership to the industrial equipment. Commercial customs importation invoices are not suitable documents to evidence title to industrial equipment. Another problem is the diversity of documentation generated in the respective country of origin in accordance with local rules and legislation.

As far as defense mechanisms used to protect ownership of industrial property that has been attached while in possession of or consignment to a Mexican company, generally speaking, two basic defense mechanisms exist:

(a) acts and proceedings excluding property, also known as intervenor's claims (proceedings by which a third party seeks to exclude property not belonging to the obligor from being attached and sold at auction by the court); and

(b) amparo actions commenced by third parties foreign to the judicial proceeding that resulted in the attachment of industrial equipment. Both cases are sensitive and require the participation of attorneys specializing in such areas. These are complex processes and require showing evidence to prove the existence of title to the industrial equipment by its owner. Any error or deficiency in the proceeding may result in the loss of the industrial equipment, which would significantly impact the foreign entity.

On the other hand, these proceedings require the existence of international powers of attorney for the representation of foreign company interests. In Mexico, these powers of attorney must be express and written.

The correct preparation of such international powers of attorney is an indispensable requirement for the defense of industrial equipment that has been attached in Mexico. Without such, judicial authorities will not commence an analysis regarding the origin of the controversy.

It is very important for foreign companies to retain competent attorneys, with experience in these types of commercial transactions and in the type of administrative and judicial proceedings previously mentioned, in order to plan for the prevention of industrial equipment being attached, when such is not possessed by the owner.

Source: CCN Mexico Report - GAI

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