On November 26, 2014, Bill 28, entitled An Act mainly to implement certain provisionsof the Budget Speech of 4 June 2014 and return to a balanced budget in 2015-2016, was introduced in the National Assembly of Québec by the Minister of Finance.

The Bill proposes in particular to amend the Civil Codeof Québec (the “CCQ”) with respect to hypothecs, mainly (i) by amending the legal regime applicable to hypothecs granted in favour of a security agent (called a fondé de pouvoir ), and (ii) by introducing the concept of movable hypothecs with delivery on bank deposits and certain other pecuniary claims.

These proposed amendments, if adopted, will have an impact on the Québec security regime and will change certain bank financing practices.

1. Proposed amendments affecting hypothecs established in favour of holders of powers of attorney

The existing provisions of the CCQ do not permit a hypothec to be granted in favour of the agent of a banking syndicate on behalf of the lenders belonging to the syndicate. Practitioners have therefore developed a structure by which they base themselves on Article 2692 CCQ, a provision that permits a hypothec to be granted in favour of a person holding a power of attorney from bondholders or holders of other titles of indebtedness.

Under the current practice, a title of indebtedness, called a debenture, is issued by the borrower in favour of the agent of the banking syndicate and a fondéde pouvoir is appointed to be holder of the hypothec securing the payment of the debenture. The debenture is then pledged in favour of the lenders, represented by the agent of the banking syndicate, in order to secure the obligations of the borrower towards the lenders belonging to that banking syndicate.

The proposed amendment of Article 2692 CCQ would simplify this structure, by permitting that henceforth a hypothec may be granted directly in favour of the holder of the fondé de pouvoir, acting on behalf of the lenders, without necessitating the use of any debenture and a pledge of the debenture.

It is important to note that under the new Article 2692 CCQ, the hypothec in favour of a fondé de pouvoir will have to be granted by notarial deed, as is the case under the present system, except in the case of a movable hypothec with delivery.

2. New concept of movable hypothecs with delivery on pecuniary claims

The new rules proposed by the Bill would also permit the creation of movable hypothecs with delivery on bank deposits and certain other claims for amounts of money, called “pecuniary claims”. If the Bill is adopted, Québec would become the first province in Canada to provide a specific security regime to facilitate taking security on bank deposits.

Under these new rules, a movable hypothec with delivery on bank deposits could be granted by conferring control over such deposits by a creditor. Such control could be obtained in two ways:

  1. If the bank deposits are maintained by the creditor who is seeking to obtain a hypothec over such deposits, control will be conferred automatically on the creditor where the debtor has consented in writing to the bank deposits securing the performance of an obligation towards the creditor. Such an obligation may be either that of the debtor itself or that of a third party.
  2. If the bank deposits are maintained by a  financial institution other than the creditor who is seeking to obtain a hypothec over such deposits, the depositary financial institution, the creditor and the debtor will be required to enter into a “control agreement”, under which the depositary financial institution agrees in writing to comply with the creditor’s instructions without the consent of the debtor. It is important to note that the financial institution shall not be required to conclude any such control agreement in favour of a creditor.

One of the most important features of this reform is that the movable hypothec with delivery created by the control of bank deposits will constitute security having a super priority, ranking ahead of any other movable hypothec affecting such deposits, from the time when such control is obtained, whether or not such other hypothec is published. Furthermore, such a hypothec with delivery will not need to be registered in the Register of Personal and Movable Real Rights (the “RPMRR”), in order to be set up against third parties. That means that the creditor who obtains such control will not be required to conduct any search of the RPMRR when taking the security, in order to confirm the rank of its security, or to obtain any subordination agreement or discharge from any creditors who may have previously published a hypothec against such bank deposits.

The new system proposed by this Bill is largely inspired by the legal regime applying to bank deposits under Article 9 of the US Uniform Commercial Code and the regime governing securities accounts under An Act respecting the transfer of securities and the establishment of security entitlements (Québec).

The Bill provides that it will come into force when assented to, possibly as early as next spring. It should be noted, however, that the provisions concerning hypothecs constituted by control will come into force at a date to be determined by the government, which could be after the coming into force of the Bill itself. We will follow with great interest the progress of this Bill until its adoption in the Province of Québec.