Canada: Québec's New Regime Concerning Security On Monetary Claims

On April 21, 2015, Bill 28, which amends certain provisions of the Civil Code of Québec (the "CCQ") in order to allow the creation of movable hypothecs with delivery (pledges) on certain monetary claims, was assented to. These amendments will come into force on January 1, 2016.

These new rules will enable a creditor to obtain, under certain conditions, a hypothec with delivery on a monetary claim without having to publish its security at the Register of Personal and Movable Real Rights of the Province of Québec (the "RPMRR"). Such hypothec with delivery will be constituted and perfected against third persons by the creditor obtaining control of this claim. It must be noted, however, that it will still be possible to constitute a hypothec without delivery on monetary claims, as this new regime supplements the former, without replacing it.

Québec is the first province in Canada to adopt this regime, which is inspired by the American regime established under Article 9 of the Uniform Commercial Code (the "UCC").

Monetary Claims :

According to the CCQ, a "monetary claim" is a claim requiring a debtor to reimburse, return or restore an amount of money or make any other payment in respect of an amount of money. However, a claim represented by a negotiable instrument or one that is a security or security entitlement within the meaning of the Act respecting the transfer of securities and the establishment of security entitlements (Québec) is not a monetary claim within the meaning of the CCQ. A bank deposit in a financial institution receiving deposits from the public (a bank, a financial services cooperative, a savings company, etc.) is a monetary claim. Our comments are focussed on such bank deposits, since these amendments will be most relevant when security is taken on such claims.

Constitution and Perfection of the Pledge :

This new regime basically provides three ways for a creditor to obtain control over bank deposits:

  1. If the debtor maintains bank deposits with the creditor who seeks to obtain control over them, such control will automatically be granted to the creditor provided the debtor consents to the bank deposits' securing the performance of an obligation to such creditor.
  2. If the debtor maintains bank deposits with a third party other than the creditor who seeks to obtain control over them, then the third party depositary, the creditor who seeks to obtain control over them and the debtor will be required to enter into a control agreement under the terms of which the third party depositary agrees to comply with the creditor's instructions without the consent of the debtor. It should be noted, however, that a third party depositary is not required to enter into any such control agreement in favour of a creditor.
  3. If the debtor maintains bank deposits with a third party other than the creditor who seeks to obtain control over them, then the creditor can obtain control by becoming the holder of the account where the aforementioned bank deposits are maintained.

Control will render the hypothec with delivery on bank deposits opposable against third parties (similar to the UCC's notion of "perfection") without being required to publish it at the RPMRR.

Ranking :

As regards priority ranking between two or more hypothecs (with or without delivery) relating to the same bank deposits, the following general rules shall apply:

  1. A movable hypothec with delivery on bank deposits shall, from the time when control is obtained, rank ahead of any hypothec without delivery affecting these same bank deposits, regardless of when the hypothec without delivery was published at the RPMRR.
  2. If two or more hypothecs with delivery encumbering the same bank deposits have been granted in favour of different creditors, each of whom has obtained control of the claim under a control agreement, then the hypothecs shall rank among themselves according to the date the third party depositary has agreed to comply with the instructions of each of these hypothecary creditors.
  3. If two or more hypothecs with delivery encumbering the same bank deposits have been granted in favour of different creditors, one of whom is the third party depositary, then the hypothec in favour of the third party depositary shall rank ahead of any hypothec granted in favour of a creditor who will have obtained control of the claim.
  4. A hypothec with delivery on bank deposits maintained by a creditor who has obtained control over them by becoming the account holder shall rank ahead of all other hypothecs affected by control encumbering such bank deposits.

Since these amendments will come into effect on January 1, 2016, there is a risk that a creditor who currently holds a first-ranking hypothec without delivery on bank deposits may lose its priority of rank if another creditor obtains control of such bank deposits. In order to avoid this, the creditor who currently holds a first-ranking hypothec should obtain control of such bank deposits on or before January 1, 2016.

What a Control Agreement should contain:

In addition to granting control over bank deposits to the creditor seeking such control (which is a prerequisite for the creation and perfection of hypothecs with delivery), control agreements shall contain provisions that will enable such creditor to ensure the rank of the security when the control agreement is entered into and to ensure that such rank will be maintained in the future.

It is important to note that control over bank deposits will not be affected by the fact that the debtor retains the right to give instructions as regards the deposits. In addition, should the creditor wish to withdraw such debtor's right to give instructions, such withdrawal shall not be subject to any registration or notification formality for purposes of publicity.

Although these amendments will only come into force on January 1, 2016, this new regime gives effect to control obtained before that date. Accordingly, any control agreement affecting bank deposits entered into before January 1, 2016 will become, on this date, a hypothec with delivery on these bank deposits, provided the rules of the new regime regarding the constitution and perfection of the security are met.

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