Canada: Amendments To Québec Law Concerning Hypothecs; Québec Adopts New Rules

The Act mainly to implement certain provisions of the Budget Speech of 4 June 2014 and return to a balanced budget in 2015-2016 (the "Act") was adopted by the Québec National Assembly on April 20, 2015 and received assent the next day, on April 21, 2015. We have already shared our comments on the related Bill in our February 2015 newsletter and wish to take this opportunity to highlight the amendments made to the Civil Code of Québec (the "CCQ") concerning hypothecs which result from the Act receiving assent.

By way of introduction, the Act proposes two innovations with respect to security: (i) first, it simplifies the regime applicable to hypothecs granted in favour of the representative of a group of creditors, called a hypothecary representative (fondé de pouvoir in French), and (ii) second, it permits the creation of movable hypothecs with delivery on bank deposits and certain other monetary claims.

Québec will thus become the first province in Canada to offer a security regime which facilitates the taking of security on bank deposits.

1. Hypothecs constituted in favour of hypothecary representatives

The new Article 2692 CCQ, which came into force on April 21, 2015, allows a hypothec to be granted directly in favour of a hypothecary representative, acting as the representative of creditors.

This legislative amendment simplifies the former structure of Article 2692 CCQ, which, in the case of syndicated loans made by several lenders, required the issuance by the debtor of a title of indebtedness, called a bond or debenture, which was pledged in favour of the lenders, represented by an agent of the banking syndicate. We note, however, that the new Article 2692 CCQ does not invalidate security granted under that former structure.

Article 2692 sets forth certain principles surrounding the appointment and replacement of a hypothecary representative. It specifies that the hypothecary representative may be one of the lenders, even the sole lender, or a third party, and that he is appointed by the debtor, the grantor or one of the lenders.

We must recall that a hypothec granted in favour of a hypothecary representative remains subject to the requirement of being granted by notarial deed, on pain of absolute nullity, unless it is a hypothec with delivery (a pledge).

2. The new concept of movable hypothecs with delivery on monetary claims

The Act provides new rules in the CCQ permitting the creation of movable hypothecs with delivery resulting from the creditor's control over certain monetary claims, including bank deposits.

We take this opportunity to set forth once more the methods by which, under the new regime, a creditor may benefit from a movable hypothec with delivery over bank deposits:

  1. If the bank deposits are maintained by the creditor who seeks to obtain a hypothec over them, control is automatically conferred on the creditor, to the extent the debtor has consented to the bank deposits securing the performance of an obligation towards the creditor.
  2. If the bank deposits are maintained by a financial institution other than the creditor seeking to obtain a hypothec over them, the depositary financial institution, the creditor and the debtor must enter into a control agreement, under which the depositary financial institution agrees to comply with the creditor's instructions without the consent of the debtor. A financial institution may not, however, be required to enter into such a control agreement in favour of a creditor.
  3. The Act specifies that a creditor may obtain control of a bank deposit if such creditor becomes the account holder.

Bill 28 required a written instrument for the first two methods set forth above. The Act as adopted does not require that degree of formalism, although it is preferable to evidence the obtaining of control in writing.

Control obtained according to the methods described above allows the granting of a security having a super priority and ranking, as soon as control is obtained, ahead of any movable hypothec charging the deposits over which another creditor has not obtained control, without it being necessary to register the security in the Register of Personal and Movable Real Rights.

Lastly, it is important to note that the new CCQ provisions permitting the granting of movable hypothecs with delivery effected by way of control over monetary claims will come into force on January 1, 2016. However, the transitional provisions of the Act specify that such hypothecs effected by the creditor's control over a monetary claim cannot be cancelled or declared unenforceable against third parties on the grounds that control was acquired prior to that date. In other words, it is henceforth possible for a debtor to grant a movable hypothec without delivery on bank deposits and monetary claims contemplated by the new regime. Only as from January 1, 2016, however, will the validity and enforceability of such security against third parties be acquired.

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