When the grantor of a hypothec amalgamates with another entity, a secured creditor is not always informed prior to the fact. If the creditor is informed of the amalgamation in advance, there are certain verifications to be made and steps to be taken. If the creditor learns after the fact, there are still certain steps it may take to protect its rights.
Rights Conferred by a Movable Hypothec
In Québec, a hypothec on movable (personal) property is a real right which confers on a secured creditor the right to follow the charged property even when it changes hands, including when such property becomes the property of an entity resulting from the amalgamation of the initial grantor with a third party (“AmalCo”). Therefore, once executed and registered at the Register of Personal and Movable Real Rights (“RPMRR”), a movable hypothec is valid and may be set up or enforceable against third parties from the time of the registration.
If an amalgamation is contemplated and a secured creditor is informed in advance, it should verify whether there are any encumbrances charging the property of the amalgamating entities other than the initial grantor. Once the amalgamation is effected, the patrimony or assets of each amalgamating entity will become a single patrimony owned by AmalCo. Therefore, the encumbrances will rank based on their respective registration dates regardless of which of the amalgamating entities was the hypothec’s initial grantor. However, the Court of Appeal of Québec has rendered different decisions regarding this matter, and the ranking of the hypothecs granted by the entities prior to the amalgamation will depend on whether the charged property at stake was acquired before or following the amalgamation. In light of this, each situation should be analyzed on a case by case basis, and secured creditors may need to enter into an assignment of rank agreement to confirm their respective priorities to the assets of AmalCo.
It is important to keep in mind that it is common practice to stipulate in the loan documentation that the debtor/grantor may not amalgamate with another entity without the secured creditor’s prior consent. However, such obligation is only valid as between the secured creditor and the debtor/grantor of the hypothec. Although proceeding without the secured creditor’s consent would put the grantor in default, once the amalgamation is consummated, it may be set up or enforceable against the secured creditor and third parties. It is therefore important for a secured creditor to complete the necessary searches prior to any amalgamation, if possible.
Additional Registrations and Documentation
Following the amalgamation, if AmalCo’s name is different from the name of the initial grantor of the hypothec, the secured creditor must amend the registration of the hypothec at the RPMRR in order to reflect the change of name. As mentioned above, the purpose of any registration with the RPMRR is to perfect the hypothec such that it may be set up or enforceable against third parties. By amending the initial registration in order to include the new name of AmalCo, the secured creditor ensures that the hypothec remains perfected and may be set up or enforceable against all third parties following the amalgamation.
Finally, although it is not strictly required by law, it is good practice and common in Québec for the secured creditor to require that AmalCo and any guarantor or other credit party enter into an Acknowledgement and Confirmation Agreement in order to confirm the existing or pre-amalgamating obligations and security granted in favour of the secured creditor and to have the parties acknowledge and accept to be bound by such obligations and security going forward.