Canada: Harmonization And Simplification Of Quebec’s Security Regime (Amendments To The Civil Code Of Quebec)

On November 26, 2014, the Quebec minister of finance tabled Bill 28, An Act mainly to implement certain provisions of the Budget Speech of 4 June 2014 and return to a balanced budget in 2015-2016 (the Bill). The Bill, which implements certain measures announced in the June 4, 2014, Budget, also amends certain provisions of the Civil Code of Quebec (CCQ) pertaining to hypothecs (i.e. security interests). For readers outside Quebec, a hypothec is the legal concept by which a person may grant a security interest on personal or real property in Quebec. The most significant amendments are divided into three components:

  1. clarifying that a partnership within the meaning of the CCQ (such as a limited liability partnership or limited partnership) may grant a hypothec;
  2. simplifying and clarifying the process for putting in place security in favour of multiple creditors; and
  3. introducing new provisions regarding hypothecs on bank accounts, margin deposits and other monetary claims.

The Bill was passed on April 20, 2015, and the provisions discussed in this bulletin came into force on April 21, 2015, except for the provisions discussed in point 3 above, which will take effect on January 1, 2016.

A partnership may grant a hypothec

There was some debate as to whether a partnership within the meaning of the CCQ (such as a limited liability partnership or a limited partnership) could grant a hypothec. The lawmakers deemed it prudent to clarify the situation by amending Articles 2684 to 2686 CCQ. From now on, a partnership (not only a person or a trustee) carrying on an enterprise may grant (i) a conventional hypothec on a universality of property, movable or immovable, present or future, corporeal or incorporeal, (ii) a hypothec on a movable represented by a bill of lading, or (iii) a floating hypothec on the property of the enterprise.

Hypothecs in favour of multiple creditors

Established industry practice when financing is secured with hypothecs in favour of multiple present and future creditors (such as a syndicate of lenders on a bank loan) is based on the current provisions of Article 2692 and the appointment of the person holding the power of attorney of the creditors. However, Article 2692 CCQ has been substantially revised under the Bill to simplify the taking of hypothecs in these circumstances. Until now, a hypothec taken in accordance with Article 2692 CCQ was granted in favour of the person holding the power of attorney of the creditors, in order to secure the issuance of titles of indebtedness (usually called "debentures" or "bonds") of the grantor. The titles of indebtedness secured by the hypothec were, for their part, issued in favour of one of the creditors (usually the administrative agent of the syndicate of lenders) and then hypothecated with delivery (pledge) in favour of the present and future creditors to secure the performance of obligations under the syndicated loan agreement.

Because of the amendments to Article 2692 CCQ, it will now be possible to grant such a hypothec directly in favour of the person holding the power of attorney of all present and future creditors of a legal person, partnership or trustee (the person holding the power of attorney is appointed by the debtor or grantor or by one of the creditors). It is therefore no longer necessary to proceed by way of the issuance of a title of indebtedness followed by a pledge, as described in the previous paragraph. However, the hypothec must still be granted by notarial act in minute, regardless of the nature of the obligations whose performance is secured, unless the hypothec so granted is a hypothec with delivery.

It should also be noted that the coming into force of these amendments is not expected to have the effect of invalidating security structures that draw on former Article 2692 CCQ.

Hypothecs with delivery on bank accounts, margin accounts and other monetary claims

Lastly, the Bill introduces a new concept: the hypothec with delivery on certain monetary claims, the most frequent of these being bank accounts and collateral accounts. Such a security ranks ahead of a hypothec without delivery. One of the objectives underpinned by the introduction of this concept is to align the applicable rules in this area with, among other things, the rules applicable under the U.S. Uniform Commercial Code.

These changes will also affect the establishment of margin deposits for derivatives because the lawmakers are simultaneously repealing Sections 11.1 and 11.2 of the Derivatives Act, which permit a set-off between the margin deposit and the obligations owed under the terms of a derivative instrument.

Although, in practice, this type of security is likely to be applied primarily to bank accounts, the concept is broader. The second paragraph of Article 2713.1 specifies that a monetary claim is:

any claim requiring the debtor to reimburse, return or restore an amount of money or make any other payments in respect of an amount of money, except:

  1. a claim represented by a negotiable instrument;
  2. a claim that is a security or security entitlement within the meaning of the Act respecting the transfer of securities and the establishment of security entitlements (chapter T-11.002); and
  3. a claim resulting from the delivery of certain and determinate currency whose repayment, in accordance with the parties' manifest intention, must be made by restitution of the same currency.

It is now expressly stipulated that a creditor may obtain control of a monetary claim that the grantor of the hypothec has against him or against a third party. A bank, for example, could obtain control of the amounts deposited by the grantor in a bank account opened with it if the grantor consents to such deposited amounts being used to secure the performance of the grantor's obligations to that bank. Moreover, and if all the conditions set out in Article 2713.4 are met, that same creditor could also obtain control of a monetary claim that the grantor of the hypothec has against a third party (for example, in a bank account opened with another financial institution).

It is important to note that the control of a monetary claim that a creditor obtains in its favour creates a super-priority over any other hypothec on the same claim of which the creditor has not obtained control, regardless of when the other hypothec is published.

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