Q: When a grantor of a movable hypothec alienates certain of its assets, is there a formality that must be completed by the secured party in order to preserve its rights?
A: In Québec, a hypothec is a real right over the hypothecated property. The hypothec grants to the secured party the right to follow the hypothecated property even if, following the execution of the hypothec, such property falls in the possession or ownership of a third party. Therefore, when a secured party is informed that the grantor of a movable hypothec is selling or assigning to a third party certain assets subject to the movable hypothec granted in its favour, the secured party must complete certain verifications and formalities in order to preserve its rights and rank under the movable hypothec. First, the secured party must determine the type of hypothec it holds (i.e. universal or specific hypothec) and second, it must determine if the hypothecated property is or has been alienated in the grantor’s ordinary course of business.
A hypothec that charges a universality of movable property alienated in the ordinary course of business subsists but attaches to property of the same nature which replaces the alienated property, without any additional formality on behalf of the secured party.
A hypothec that charges an individual property alienated in the ordinary course of business subsists but attaches to the property that replaces it by the registration of a notice identifying the new property. If no property replaces the alienated property, the hypothec subsists but attaches only to the proceeds of the alienation, provided they can be identified (for instance, if the money is held in a separate bank account).
Subject to the exception explained in the next paragraph, if the hypothecated property is not alienated in the ordinary course of business, the secured party preserves its rights pursuant to the movable hypothec by filing, under the name of the acquirer, a notice of preservation of hypothec in the Register of Personal and Movable Real Rights (“RPMRR”), regardless if the hypothec charges a universality of property or certain and determinate property. Such notice must be registered within 15 days after the secured party is informed in writing of the transfer of the hypothecated property and the name of the acquirer, or after the secured party consents in writing to the transfer. There are no specific formalities required with regards to the notice that must be sent to the secured party. The question of when the secured party has been informed in writing of the transfer of hypothecated property is a question of fact. The secured party must transmit a copy of the notice to the acquirer within the same 15 day timeframe. The notice must indicate the name of the grantor of the hypothec, the name of the acquirer of the hypothecated property and the description of the hypothecated property. Registering a notice pursuant to Section 2700 of the Civil Code of Québec under the acquirer’s name allows a third-party to take note of the existence of the secured party’s hypothec, and therefore renders it enforceable against any third party.
If the hypothecated property falls under specific categories of property at the time of the registration of the hypothec, such as road vehicles to which a Vehicle Identification Number (VIN) has been assigned, a specific file is created at the RPMRR under the VIN number in addition to the registration under the grantor’s name. If such file is created, a notice of preservation is not required regardless if the property is alienated in the ordinary course of business or not.
It is important to mention that the general intention of the legislation is to limit a secured party’s right to follow hypothecated property. Such intention is motivated by concerns for the stability of third party rights. Therefore, in some cases, some formalities, including those mentioned above, are necessary in order for the secured party to preserve its rights to the hypothecated property against third parties.
Consequently, under Québec law, the formalities to be completed regarding the preservation of the secured party’s rights under a movable hypothec depend of the nature of the hypothec (i.e. universal or specific hypothec) and on whether the hypothecated property is alienated in the ordinary course of the grantor’s business. However, the secured party should be aware that certain formalities must be completed in Québec as soon as it is informed in writing of the alienation of certain hypothecated property in order to preserve its rights.