Q: What relevant changes will Bill 28 bring to syndicated loan transactions in Québec?

A: On April 21, 2015, the Government of Québec adopted An act mainly to implement certain provisions of the budget speech of June 4, 2014 and return to a balanced budget in 2015-2016, also known as Bill 28. Among its many amendments, the provisions that will have a major impact on professionals practicing in the fields of banking and financial services concern (i) the legal regime applicable to hypothecs granted in favour of a “fondé de pouvoir” (security agent), and (ii) movable hypothecs with delivery on bank deposits. We will discuss the amendments relating to the movable hypothecs with delivery on bank deposits and the question of security over bank deposits in a further installment of this newsletter.

Who is a fondé de pouvoir under Québec law? A fondé de pouvoir is an agent representing the lenders in a syndicated loan transaction. Why did the system need to be changed?  Because the structure to grant a hypothec in favour of a fondé de pouvoir was quite cumbersome.  Prior to the adoption of Bill 28, a hypothec could not be granted directly in favour of a collateral agent under a syndicated loan, since it was not the direct creditor of all of the obligations of the debtor vis à vis the lenders belonging to the banking syndicate.

The only way of granting a hypothec to the fondé de pouvoir under the previous system was to base the security on article 2692 of the Civil Code of Québec (the “CCQ”), which allowed the granting of a hypothec in favour of the fondé de pouvoir  only if the obligation that was to be secured was a bond, a debenture, or similar form of indebtedness. Therefore, in order for the security to be effective, the previous version of article 2692 CCQ required, as security for the actual obligation, the issuance of a collateral demand bond or other similar form of indebtedness by the borrower and a pledge of the bond in favor of the fondé de pouvoir. Article 2692 CCQ also required that the hypothec be granted in favour of the fondé de pouvoir concurrently with the issuance and pledge of the bond, and that it be in notarial form.

Bill 28 simplifies the structure that is presently in place by allowing a hypothec to be granted directly in favour of the fondé de pouvoir, acting on behalf of the lenders, without the need of any further documentation. Moreover, a formal procedure of nomination and replacement of thefondé de pouvoir is also provided for in the revised version of article 2692 CCQ. Although the process is greatly simplified by Bill 28, it is important to note that the requirement that the hypothec be in a notarial form still stands.

What does this amendment mean for syndicated loans secured by assets situated in Québec? From now on, the granting of security for a syndicated loan will be similar to the system used in other provinces of Canada and in the United States, causing less confusion for any non-Québec party in the transaction. Moreover, the simplification of the process will also increase efficiency and rapidity. It will be interesting to see what other practical advantages this very useful amendment will provide for secured lenders and their legal practitioners.