United States: Lockbox Accounts In Mexico

A party extending a loan to a Mexican borrower might require that the borrower's accounts receivable be paid directly into a blocked bank account, frequently referred to in U.S. parlance as a "lockbox account," at a commercial bank. In such an arrangement, the lender usually requires the borrower to issue a standing instruction to the effect that funds in the account are automatically transferred to the lender for application to payments due on the loan.

This practice is intended to reduce the risk that the borrower will use payments on its receivables for purposes other than servicing the loan. This type of arrangement also reduces the risk that the borrower's other creditors will attach payments on such receivables and apply them towards the borrower's other obligations. Lockbox arrangements are often linked to collateral arrangements under which the borrower grants the lender a security interest in the borrower's accounts receivable and, where appropriate, in other assets of the borrower.

In the U.S., establishing a lockbox account at a commercial bank involves entering into a relatively simple agreement under which the bank agrees with the borrower and the lender that amounts deposited into the designated account will be transferred by the bank to the lender for application to payment of the loan. In Mexico, the process of establishing lockbox accounts is considerably more complicated. Under Mexican law, the depositary bank would be deemed a "trustee." The borrower will need to establish a trust pursuant to a trust agreement, which will be considerably more complex than a lockbox agreement in a similar arrangement in the U.S.

The trust agreement will contain extensive provisions relating to:

  • The trustee's duties;
  • Investing the account's funds until transfer to the lender;
  • Fees payable to the trustee;
  • The order of application of funds deposited into the account;
  • Currency conversion provisions in cases where the receivables are payable in one currency but the trustee is to remit payments in another;
  • Borrower and lender indemnification of the trustee against any liability or loss suffered in performing its duties; and
  • Recitals of applicable law and regulations and other standard provisions for trust agreements, including the required appointment of a "technical committee" to manage the trust.

The creation of a "technical committee," whose members usually include representatives of the settlor of the trust (the borrower) and the first beneficiary (the lender), is required for a Mexican trust. The trust agreement will include provisions relating to the structure and operation of the technical committee and requiring the trustee to obtain instructions from the technical committee before it can act.

These provisions are designed to reduce the trustee's risk of incurring liability to one or more parties by carrying out particular actions. Even the trustee's payment to the lender of funds deposited in the lockbox account may require formal instructions from the technical committee. The trustee may insist on separate instructions each time a payment or transfer to the lender is to be made. This creates the risk that one or both of the parties' intentions in establishing the lockbox arrangement will not be respected in practice.

The presence of the borrower's representative on the technical committee creates an obvious risk that such representative will block the issuance of the payment instructions, thereby thwarting the entire purpose of the lockbox arrangement. Even if the lender has appointed a majority of the members of the committee, the trust agreement may imply (or expressly provide) that the committee members must unanimously approve the issuance of the instructions.

Typically, this risk can be reduced by having the trust agreement-or unanimous resolutions adopted by the technical committee upon signing of the trust agreement-delegate the task of issuing instructions on behalf of the committee to specified members (i.e. the members appointed by the lender). This step should substantially reduce the risk of the borrower blocking transfers to the lender. If the trustee requires that the committee issue separate instructions for each transfer from the lockbox, then (depending on the frequency of transfers desired by the lender) it may be necessary to have instructions issued multiple times during the life of the lockbox account.

Although the lender will be the first beneficiary under the trust agreement, it will normally not be a party to the agreement.

The trust agreement, technical committee resolutions, and instruction letters must be in Spanish. In order to understand the operative documents, lenders based outside of Mexico should be prepared to work with Spanish language documents, and it is advisable to obtain trustworthy translations into the lender's working language.

Also, as first beneficiary of the trust, the lender will have to satisfy the trustee bank's "know your customer" (KYC) requirements. Mexican bank regulators have mandated stringent KYC procedures to reduce the risk of money laundering. Compliance with such requirements may involve completing the trustee bank's Spanish language questionnaires, providing certified copies of its certificate of incorporation or other constitutive documents and evidence of the signing authority of its officers.

If the lender is based outside of Mexico, such documents must bear an apostille or, if the lender's country is not a party to the  Apostille Convention,  a Mexican consular certification of the authority of anyone (such as a State's Secretary of State) who signed an official certificate, including any notary who acknowledged the signature of any corporate officer. Some trustee banks may require translations into Spanish of documents that are in another language.

The process of establishing a lockbox account in Mexico is more complicated than the equivalent process in the U.S. However, in appropriate cases a lender may find it worthwhile to navigate the process in order to obtain the substantial advantages of a lockbox account with respect to a borrower's accounts receivable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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