Canada: The Québec Court Of Appeal Renders A Judgment On Financing By Means Of Mining Royalties In The Context Of A Bankruptcy

On August 6, 2013, the Court of Appeal rendered a judgment regarding financing through mining royalties in the context of a bankruptcy. This was the first time that the Court of Appeal considered the nature of mining royalties (better known as Net Smelter Return) granted to lenders and the treatment of the latter in bankruptcy. This judgment establishes a legal framework governing the characteristics of unnamed real rights in Québec and clarifies the legal publicity regime relating to real mining rights as well as the scope of vesting orders in the context of the sale of assets by a receiver.

The parties in this case were Anglo Pacific Group PLC ("Appellant"), a natural resources royalty company, and Ernst & Young Inc. ("Respondent"), the receiver of the assets of the debtors, Northern Star Mining Corp. and Jake Resources Inc. ("Debtors")1. Davies successfully represented the Respondent both at trial and on appeal.

The Superior Court's Judgement

In 2009, the Appellant and the Debtors entered into a debenture, under which the Appellant made a loan to the debtor Northern Star Mining Corp. Considering that the assets of the Debtors were already charged with security in favour of the first ranking secured creditors, the Appellant required that the Debtors grant it a net smelter return. Under this royalty, the Appellant was to be paid a percentage of the profits of the Debtors' future mineral production. Additionally, two universal second-rank hypothecs were granted by the Debtors to guarantee their obligations under the debenture.

Following the bankruptcy of the Debtors in 2011, the Debtors' assets were sold by the Respondent, who obtained a vesting order permitting the transfer of certain assets to the intervenor, 9261-0690 Québec inc. Under this order, the trial judge authorized the sale of assets and released the latter of the charges encumbering them, notably the debenture, the net smelter return agreement, and the universal hypothecs concluded in favour of the Appellant.

Moreover, the trial judge held that a real right confers upon the holder a direct right over property and that it is impossible for a conventional hypothec to encumber mineral substances found in the subsoil as they belong to the State. The trial judge also concluded that the registration of the debenture and of the net smelter return agreement in the mining registry does not render it opposable to third parties and that the effect of a vesting order is the same as that of a sale by judicial authority.

The Court of Appeal's Judgement

The Appellant appealed the vesting order and the Court of Appeal was asked to consider three questions.

The first question concerned the characteristics of an unnamed real right. To that end, the Court of Appeal determined that the holder of an unnamed real right must necessarily and inevitably justify a direct right in the property, the right to pursue the property and the right of abandonment. In this case, the Court of Appeal held that the debenture and the net smelter return agreement did not confer on the Appellant an unnamed real right, but rather a right to receive a percentage of the profits from the sale of minerals extracted from the subsoil.

The second question considered by the Court of Appeal concerned the opposability to third parties of acts published in the mining registry. The Court of Appeal held that the mining registry is only opposable to the State and that consequently, it does not constitute a valid mode of publication permitting third parties to be informed of the existence of a real right. As such, in order to be opposable to third parties, real mining rights that are not subject to an exemption under the Mining Act must be published in the land registry.

The third question considered by the Court of Appeal concerned the effect of a vesting order. The Court of Appeal held that the operation authorized by the trial judge constituted a sale and that it had the same effect as a sale by judicial authority. Thus, the vesting order discharged the sold assets of all rights charging them to the extent provided by the conclusions of the vesting order as well as by article 696 of the Code of Civil Procedure. In this case, supposing even that the Appellant's rights were real rights, a hypothesis which was explicitly rejected by the Court of Appeal, such rights were not mentioned in the vesting order as being rights which would survive the sale, nor did they fall under the enumerated exceptions in article 696 of the Code of Civil Procedure.


1. Anglo Pacific Group PLC v. Ernst & Young inc., 2013 QCCA 1323

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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