A Welcomed Wind of Change: Quebec Introduces Changes to the Regime for Taking Security in the Context of Syndicated Lending

July 24, 2015 | Marco P. Rodrigues

With the passing of An act mainly to implement certain provisions of the budget speech of June 4, 2011 and return to a balanced budget in 2015-2016 (the “Act”) in the spring of 2015, the Government of Quebec introduced, among other things, much awaited provisions that will have a positive impact on how secured syndicated financing transactions are structured in the Province of Quebec. In particular, the Act modified the existing provisions of Article 2692 of the Civil Code of Québec (the “CCQ”).

The Province of Quebec is a civil law jurisdiction. The widespread common law concept of holding security in trust for the benefit of others is not recognized under Quebec law. Prior to the changes introduced by the Act, it was challenging in Quebec in the context of a secured syndicated financing transaction for an entity to grant security in favour of a security agent (or the like), acting for the benefit of all the creditors from time to time party to the underlying credit documentation. Instead of the very straightforward structure commonly used elsewhere in North America and indeed elsewhere in the world[1], a more complex and costly structure was required in Quebec in order to broadly achieve the same commercial result.

Under revised Article 2692 of the CCQ, a legal person, partnership or trustee may now grant a hypothec[2] in favour of a hypothecary representative[3] for all present and future creditors of the obligations secured under that hypothec. The hypothecary representative may be appointed by the debtor, the grantor of the hypothec, or by one of the creditors. The hypothecary representative may be one of the actual creditors of the obligations secured under the hypothec, the only creditor of those obligations, or an unrelated third person to whom no such obligations whatsoever are owing. If the hypothecary representative is a third person, the secured obligations need not be limited to the payment of titles of indebtedness. Any nature of obligations may be secured under this structure.

While these changes have done away with the requirement of a more extensive suite of documentation (in addition to the deed of hypothec itself), it is worth noting that a hypothec granted in favour of the hypothecary representative must still be in notarial form, except in the case of a movable hypothec with delivery[4]. Accordingly, the signature of all the parties to the hypothec will need to be taken before a Quebec notary[5]. Signatories will therefore need to be physically available to sign in person before a notary in Quebec. Signatories will also be required to remit the relevant corporate authorities to the notary. However, there are ways to circumvent this potential geographical inconvenience. When the parties do not have signing representatives in the Province of Quebec, local counsel may be authorized, by way of a power of attorney, to sign the hypothec on their behalf.

The harmonization of the new Quebec rules with that of the rest of Canada and the United States is a welcomed change to the cumbersome formalities of the past. The new rules will greatly simplify the method for taking security in the circumstances described above, reduce costs and indeed provide much needed comfort to foreign investors and practitioners alike.

[1] In certain jurisdictions in continental Europe (mostly civil law jurisdictions where the concept of trust is not recognized), parallel debt provisions are used whereby an independent and separate parallel debt (equal to the actual aggregate debt then owing to the lenders under the underlying credit documentation) is acknowledged by the borrower as being owed directly to the security agent. The security agent then holds the benefit of its claim to the parallel debt for the benefit, and as property, of those lenders. This allows the security agent to foreclose over the assets for the benefit of those lenders.

[2] A hypothec is the Quebec equivalent of a security agreement.

[3] A hypothecary representative is the Quebec equivalent of a security agent.

[4] A movable hypothec with delivery is the Quebec equivalent of a pledge.

[5] This was equally the case prior to the changes in the Act.

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