Canada: Recent Amendments To Provisions On Hypothecs Under Civil Code Of Québec

INTRODUCTION

Bill n°28 titled An Act mainly to implement certain provisions of the Budget Speech of 4 June 2014 and return to a balanced budget in 2015-2016 (Act) passed on April 20, 2015 and received assent the next day. The Act made changes to hypothecs in the Civil Code of Québec (CCQ), including the amendment of Article 2692 in order to simplify the holding of a hypothec through a hypothecary representative called the fondé de pouvoir and the introduction of a new legal regime regarding pledges on certain monetary claims. Quebec becomes the first Canadian province to enact such legislation in order to facilitate the granting of pledges on monetary claims.

This bulletin provides an overview of these changes, as well as an analysis of the new regime and its most innovative aspects.

FONDÉ DE POUVOIR: FLEXIBILITY OF CCQ PROVISIONS

Under the regime prior to the Act, a person could not hold a hypothec in favour of a third party, with the exception of a hypothec in favour of a fondé de pouvoir granted in compliance with certain stringent conditions set forth in Article 2692. The new Article 2692 simplifies this regime and allows a grantor to grant a hypothec in favour of one of the creditors or the only creditor, or a third party representing the creditors of the underlying obligations secured by such hypothec. The hypothecary representative is appointed by the debtor or grantor or one of the creditors. It is the holder of the hypothec and has the power to exercise all of the rights thereunder. It can be replaced in accordance with the conditions and subject to the terms specified in the agreement appointing it in the first place or, in the absence of such an agreement, as determined by the creditors.

Moreover, the wording of the new Article 2692 shows great flexibility with respect to the identity of the grantor, the fondé de pouvoir and the type of obligations that can be secured under such a hypothec. Such obligations can be of any nature, present and future of a legal person, partnership or trustee. The secured obligations are no longer restricted to the payment of bonds or other titles of indebtedness. Hence, the legislator confirms that the granting of a hypothec in favour of a fondé de pouvoir in accordance with Article 2692 is optional for a single creditor, even when the hypothec of such creditor secures the payment of a bond or another title of indebtedness. Despite this high wind of change, the legislator opted for the preservation of the formalism imposed on such hypothecs which must, on pain of absolute nullity, be granted by notarial act, except in the case of pledges.

NEW REGIME FOR PLEDGE ON CERTAIN MONETARY CLAIMS

The Act also implements a new regime for hypothecs with delivery on certain monetary claims that are covered in the definition of the new Article 2713.1 (Claims). These Claims include, for instance, bank deposits, deposits subject to an escrow agreement, balances of sale, margin deposits or settlement (cash collateral).

The new regime is similar to the one applicable to securities and security entitlements under An act Respecting the Transfer of Securities and the Establishment of Security Entitlements. In both cases, the establishment of such a regime was needed to circumvent the requirement of a physical delivery in order to obtain a pledge on claims not represented by a negotiable instrument under Article 2702. This regime goes beyond Article 9 of the Uniform Commercial Code by its broader scope as it is not limited to deposit accounts.

Essentially, the new articles establish the requirements for control in order for a pledge on a Claim held by the grantor of the hypothec against the creditor or against a third party to be constituted and set up against third parties. In the first instance, in the event that the Claim is held by the grantor of the hypothec against the creditor who is also the holder of the hypothec, a simple consent of the grantor is sufficient to obtain control of such Claim by the secured creditor. In the second instance, in the event that the Claim is held by the grantor against a third party, control is obtained inter alia by a written agreement called a "control agreement" entered into by and between the grantor, the secured creditor and the third-party debtor of such Claim. However, this second instance is only applicable to Claims that relate to the credit balance of a financial account maintained by the debtor on behalf of the grantor or to an amount of money paid to the debtor to secure the performance of an obligation towards the creditor. Moreover, in this second instance, a creditor may also obtain control of a Claim on the credit balance of a financial account if it becomes the holder of that account.

Pursuant to Article 2713.7, the hypothec of a secured creditor that obtains such control takes—from the time that such control is obtained—precedence over any other hypothec on such Claim, regardless of the time of publication of the hypothec. If two or more movable hypothecs with delivery are granted on the same Claim in favour of creditors—each of whom has obtained control through a control agreement—the hypothecs rank among themselves according to the time when the third party has agreed to comply with the instructions of the creditor. It should be noted that Article 2714.2 has also been amended by the Act to provide the same priority rule between two hypothecs with delivery on security entitlements in favour of creditors, each of whom has obtained control through a control agreement to the time when the securities intermediary has agreed to comply with the orders of the creditor. These new provisions of Article 2714.2 are declaratory and therefore retroactive. The hypothec held by a creditor who is also the debtor of the Claim charged under the said hypothec will, however, always take precedence over the other hypothecs unless the Claim relates to the credit balance of a financial account and another creditor obtains control by becoming the account holder, in which case the hypothec of that other creditor shall prevail.

Specific conflicts of law rules are included in the Act under Article 3106.1 for the validity of such security, as well as the publication of the security and its effects. Publication of the security by registration is, in all cases, governed by the law of the jurisdiction in which the grantor is domiciled.

TRANSITIONAL PROVISIONS AND COMING INTO FORCE

The Act provides that the new Article 2692 has entered into force on the date of its assent, which was April 21, 2015. The hypothecs granted in favour of a fondé de pouvoir in accordance with the previous regime remain valid.

With respect to pledges on Claims, the new provisions shall come into force on January 1, 2016. However, pursuant to the transitional provisions, pledges made by a creditor that has obtained control in accordance with the new provisions—even if such control was obtained before January 1, 2016—may not be cancelled or declared unenforceable against third parties for that reason alone. Therefore, it is possible to obtain control over the Claims in accordance with the new regime and have a pledge on such Claims as of today since the creditor's rights will be recognized as valid and opposable against third parties upon the entry into force of the regime.

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.