The Fond6 de pouvoir for Holders of
Secured Indebtedness: Article 2692
Revisited, A Critical Examination
John B. Claxton, Q.C.”
In the general reform of Quebee’s civil law in 1994,
the special and exceptional legislation that authorized se-
cured financings through the issue of bonds or debentures
(Special Corporate Powers Act) was replaced by a single
provision: article 2692 of the Civil Code of Quebec. Al-
though its basic intent is to sanction the normal require-
ment that the security for the payment of the debt be held
by a person (a trustee) other than the holder of the title of
indebtedness (the bondholder), the author observes that it
does so in language that, given its plain meaning, would
embrace a significant number of modem commercial
banking or financing practices where such separation may
not reflect the desire of the parties or where the desired
separation does not fit within the structures dictated by arti-
cle 2692. Moreover, the imperative and punitive form of
the provision can be construed to prohibit or render null a
significant number of such transactions.
The author identifies a number of types of such trans-
actions. He then analyses the intended thrust and the basic
characteristics of article 2692 as well as related character-
istics of other aspects of the civil law which, through the re-
form process, would bear upon the structure of such trans-
actions. He finds that, as an article of exception, the provi-
sion must receive a restrictive interpretation. Moreover, the
author concludes, a literal application of the provision to
many of the transactions would place the Quebec commer-
cial borrower in an inferior position in contrast to the leg-
islative regime found in other jurisdictions. The author in-
fers that this was not the intention of the legislature.
At the same time, he suggests that an article ad-
dressing the same subject matter, but in enabling rather
than in imperative and punitive language, is highly desir-
able and he therefore proposes an appropriate text.
Lots de ]a r6forme gdn&rale du droit civil du Qu6bec
en 1994, la 16gislation sp&ciale et exceptionnelle autorisant
le financement garanti par l’mission des bons ou des obli-
gations (la Loi sur les pouvoirs spiciaux des corporations)
a 6td remplac6e par le seul article 2692 du Code civil du
Quebec. Malgr6 son intention de sanctionner l’exigence
que la caution pour le paiement de la dette soit d6tenue par
une personne (fiduciaire) diff~rente de celle qui d6ient le
titre de dette (d6tenteur de l’obligation), l’article 2692
achve ceci par un langage qui, dans son sens ordinaire, in-
clurait un nombre important de pratiques modemes en
commerce bancaire ou en financement oii une telle sfpara-
tion ne refl6terait pas le ddsir des parties. De plus, ]a s6pa-
ration d6sir~e ne serait pas nfcessairement compatible avec
les structures imposes par l’article 2692, et sa forme imp6-
rative et punitive pourrait 8tre interprdt6e comme prohibant
ou annulant un nombre important de transactions.
L’auteur 6num~re plusieurs types de ces transactions.
11 analyse ensuite Ia portde cherche par le l6gislateur ainsi
que les caractdristiques de base de l’article 2692. I1 exa-
mine aussi des caract6ristiques se trouvant parmi d’autres
aspects du droit civil qui, A travers le processus de r6forme,
auraient un impact sur ]a structure de ces transactions.
L’auteur
trouve que l’article 2692, dtant un article
d’exception, doit Etre interprdt6 de fagon restrictive. De
plus, il conclut que l’application a la lettre de I’article 2692
A plusieurs des transactions pourrait placer l’emprunteur
commercial qu~b6cois dans une position infrieure par rap-
port a sa situation dans un r~gime lgislatif d’une autre ju-
ridiction. L’auteur sous-entend que ceci n’6tait pas
l’intention du lgislateur.
En meme temps, I’auteur sugg6re qu’un article abor-
dant le meme sujet, mais qui soit permissif et non pas im-
p~ratif ni punitif, serait desirable ; il propose done un texte
appropri6.
” Of Lafleur Brown, Montreal. Professor Roderick A. Macdonald of McGill University has pro-
vided a number of most constructive and helpful comments, for which I am most grateful. E.B.
Claxton’s help in editing the text is greatly appreciated. The opinions expressed are my own.
McGill Law Journal 1999
Revue de droit de McGill 1999
To be cited as: (1999) 44 McGill L.J. 665
Mode de rf&ence: (1999) 44 R.D. McGill 665
666
MCGLL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 44
Introduction
I. Types of Transactions Affected
A. The Problem
B The Transactions
1. The Corporate Trust Deed
2. Secured Credit Agreements
3. The Stand-Alone Secured Debenture
4. Syndications
a. Syndication of Lenders-“Direct Loan” Syndications
b. Participations-“Farm-Out” Syndications
5. Securitizations
C, The Basis of the Transactions
II. The Thrust of Article 2692
A. The Origin of Article 2692
B Possible Approaches to Construction
C. Basic Characteristics of Article 2692
D. The Elements that Invoke Article 2692
E. Broad Import of Article 2692
F The Traditional View Examined
II. Enforcement of the Hypothec-Article 59 of the Code of Civil
Procedure
IV. Section 32 of the Special Corporate Powers Act
V. Hypothec Held by a Trust
A. Basic Elements of the Trust
B. Problems in Using a Trust
VI. Hypothec Held by a Mandatary
A. The Role and Powers of a Mandatary
1. Mandatary as a Hypothecary Creditor
2. Loan and Security Held by a Pr6te-Nom
3. Only Security Held by a Pr6te-Nom
B. Effects of Mandate on Certain Transactions
1. Secured-Credit Agreements
2. Direct-Loan Syndications
3. Farm-Outs
4. Farm-Outs at Common Law Compared
5. Securitizations
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
667
VII. Specific Questions Arising From Article 2692
A. Who May Grant the Hypothec Securing the Titles of Indebtedness?
B. What Does “Securing Payment Of” Mean?
C. What is a “Bond or Title of Indebtedness”?
D. Who May Issue Titles of Indebtedness Secured by Hypothec?
E What Does it Mean to Grant to a Fond6 de pouvoir?
F Why Should the Hypothec be in Notarial Form?
G. What is a ‘Fond6 de pouvoir”?
H. Who Maybe a Fond6 de pouvoir?
VIII. Suggested Modified Text for Article 2692
Conclusion
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MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 44
Introduction
One would think that enough has been written about article 2692 of the Civil
Code of Quebec (“C.C.Q’) to address the basic problems of its interpretation and ap-
plication. The provision speaks of afondi de pouvoir for creditors; one who is to hold
the hypothec securing bonds or other titles of indebtedness held by others. In 1994,
Louis Payette explained in a compelling way that afond de pouvoir was in fact not a
mandatary,’ and that in essence article 2692 continued the regime contemplated by the
operative provisions of the Special Corporate Powers Act,’ which, with reform, were
repealed by the Act Respecting the Implementation and Reform of the Civil Code.’
Similar conclusions were drawn in the author’s book of the same year.’ A number of
other papers have also visited the subject In 1997 in a study tracing the origins of ar-
ticle 2692 through the history of the corporate trust deed, the author also concluded
that afond de pouvoir could be a trustee and that the constituting corporate trust deed
could be a Quebec-constituted trust.’ This study is essentially a sequel to the latter
study.
Five years of experience with the C.C.Q. has revealed to the lawyer practising in
the commercial and banking fields that, unfortunately, although article 2692 may rea-
sonably be construed to permit transactions of the nature of the corporate trust deed,
its structure is such as to restrict or even prohibit several types of parallel transactions
which have become commonplace in the financial markets of North America, in-
cluding Quebec. It is not only the term “fond de pouvoir” that gives rise to the diffi-
culty, but the entire framing and phraseology of article 2692.
The problem is not just how the provision should be applied to certain esoteric
transactions. It is the opinion of many practising counsel that unless the concems
raised by the provision are addressed, Quebec business and industry will be unable to
put in place with reasonable certainty the security structures required to attract many
types of investment capital.
‘ L. Payette, Les Stiretds dans le Code Civil du Quebec (Cowansville, Qc.: Yvon Blais, 1994) at
164ff.
2 R.S.Q. c. P-16 [hereinafter SCPA]. The repealed provisions may be found in R.S.Q. 1977, c. P-16,
ss. 27ff.
“S.Q. 1992, c. 57, ss. 642-48 [hereinafter Implementation Act].
J.B. Claxton, Security on Property and the Rights of Secured Creditors under the Civil Code of
Qudbec (Cowansville, Qc.: Yvon Blais, 1994) at 226ff. [hereinafter Security on Property].
‘ See X.C. Martis, “Loan Syndication in Secured Transactions” in Meredith Memorial Lectures
1997. Contemporary Utilisation of Non-Corporate Vehicles of Commerce (Montreal: Faculty of Law,
McGill University, 1997) [hereinafter Non-Corporate Vehicles] 489.
6 J.B. Claxton, “The Corporate Trust Deed under Quebec Law: Article 2692 of the Civil Code of
Quebec” (1997) 42 McGill L.J. 797 [hereinafter “Corporate Trust Deed”].
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
669
At the same time, the inclusion of one or more articles embracing the same sub-
ject matter as article 2692 is highly desirable. With the repeal of the operative provi-
sions of the SCPA,7 the express sanction for the issue of secured titles of indebted-
ness-where for practical purposes the security is vested in a person other than the
creditor-holder of the title of indebtedness-was replaced by a provision that often
seems to compel such vesting where none is desired. It is the drafting of article 2692
that is at fault, not the separate underlying legal concepts that it reflects.
However, although article 2692 is the pivotal article in this study, it cannot be ex-
amined in isolation. One must have a basic understanding of the structure of the trans-
actions to which it may apply. Other and perhaps more fundamental principles of the
civil law also inform all of these transactions. In some cases some transactions may be
concluded without invoking the application of article 2692. Some assessment of the
likely impact of these fundamental principles on the transactions and on article 2692
itself is also required. The main principles of the law that come into play, apart from
the law of hypothecs generally, are the new law of trusts,’ the law of mandate,” and ar-
ticle 59 of the Code of Civil Procedure (“C.C.P”) concerning suits by one represent-
ing others. Section 32 of the SCPA, although of lesser importance, will also apply to
many of them.
The purpose of this study is to examine these underlying concepts. Thereafter,
comments on the phrasing employed in article 2692 will be made in response to a
number of stated questions. A possible solution to the uncertainties stemming from
the provision will be examined. The author proposes, where possible, answers to
questions on the interpretation of particular texts of the law that should prove both
reasonable in legal theory and acceptable to the business community.
I. Types of Transaction Affected
A number of types of transaction are affected by article 2692. They are not mutu-
ally exclusive, and are often combined. They are generally identified and described by
commercial jargon, although individually their structure may vary a good deal. Each
may be decorated by many “bells and whistles”, but the descriptions which follow are
thought to be sufficient for them to be understood in the terms required for this study.
First, however, it is useful to state briefly the problem that arises from article 2692 in
addressing all such transactions.
7 Supra note 2.
8 Arts. 1260ff. C.C.Q.
9 Arts. 213 1ff. C.C.Q.
“All of the transactions described, and the manner of their implementation, are affected in large
measure by tax law. The use of some forms of transaction is even driven by tax law. Many such trans-
actions have cross-border and conflict of law considerations. The statutes regulating banks, trust com-
panies, and other financial institutions all impose restrictions on their respective capacities to do cer-
tain types of transactions. The application of corporate law and of securities law is often an important
factor. These considerations are all beyond the scope of this study.
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[Vol. 44
A. The Problem
The problem flows from the notion that the security granted for an obligation may
be held by a person other than the holder of the obligation. In transactions which do
not employ a corporate trust deed, the parties often desire that the security be held by
a third party in circumstances not contemplated by article 2692. On the other hand,
the provision seems to compel the security to be held by a third party where this is not
the desire of the parties. It is now appropriate to turn to a description of the principal
transactions which give rise to the application of the provision.
B. The Transactions
1. The Corporate Trust Deed
The corporate trust deed is a contract between a corporation and a trustee provid-
ing for the issue by the corporation of bonds or other titles of indebtedness secured by
hypothec in favour of the trustee or afondi de pouvoir. In addition to the sale of such
securities, they may also be pledged by the issuer to secure any type of obligation, in-
cluding one for borrowed money. The history, uses, legal effects, and most restraints
respecting the use of the corporate trust deed were examined in “Corporate Trust
Deed”.” The conclusion reached there is that the corporate trust deed can still be em-
ployed in Quebec with very little change (if any) in its content and form; and that the
term “fondg de pouvoir” of article 2692 is broad enough to encompass the transaction,
to permit the use of the term “trustee”, and also to qualify the deed as creating a trust
under article 1260 C.C.Q., or not, as the draftsman desires.
2. Secured Credit Agreements
Generally, secured credit agreements are bilateral agreements between an enter-
prise borrower and one or more than one financial institutions providing for loans or
advances secured by hypothecs or other charges on property. They may be for a fixed
loan, or for a revolving credit, or both. They may be with a single borrower or with a
borrower group, such as a parent and its subsidiary corporations in several jurisdic-
tions. The credit is usually secured by one or more hypothecs, or charges on, or other
interests in, property of all members of the borrower group; sometimes on all prop-
erty, movable and immovable, corporeal and incorporeal, present and future. The
credit, as it is advanced from time to time, may or may not be evidenced by one or
more promissory notes or other acknowledgements of indebtedness. The basic credit
agreement is supported by various sub-agreements and guarantees from the related
corporations in the group, often in the different jurisdictions.
“Supra note 6.
1999]
J.B. CLAXTON, Q.c. – ARTICLE 2692 REVISITED
3. The Stand-Alone Secured Debenture
Frequently, the borrower delivers to the creditor a unilaterally-executed document
called a “debenture”. It evidences a stated amount of debt, states the terms of repay-
ment, often contains a list of covenants and events of default and may be negotiated
by endorsement and delivery. The debenture itself may contain a grant of security if
the security is on movable property only. If immovable property is charged as secu-
rity, a deed collateral to the debenture effects such charge. The debenture (in unilateral
form) is itself the credit agreement. This practice would seem to have been generally
discontinued in Quebec at about the time the SCPA came into force in 1914, but the
practice is still employed in other jurisdictions. Quebec borrowers sometimes issue
such debentures in Ontario.
4. Syndications
a. Syndication of Lenders-“Direct-Loan” Syndications
Agreements involving a syndication of lenders reflect a variation of the secured
credit agreement. Today, where large credits are involved, the financial institution
lender wishes to spread its credit risk among a number of other financial institutions,
or to provide that it may at its option do so in the future. Each lender will agree to
provide a stated portion of the total credit. This is called “syndication” (and in this
study, the term will be used to identify “direct loan syndications”-where the bor-
rower and the lead lender contract with each member of the syndicate). The agree-
ment may expressly provide for substitution and replacement of members of the syn-
dicate.’2 Normally, they are not solidarily bound to make the advances. Syndication in
most cases will involve, not novation, but the purchase by each new lender of a por-
tion of the interest in the credit agreement, including the claim for the outstanding ad-
vances and of an undivided interest in the underlying security. Normally, the security
is held by the lead lender alone as “security agent” for the benefit of all the lenders in
proportion to their interests.
b. Participations-“Farm-Out”Syndications
With a direct loan syndication of lenders, the borrower contracts with each mem-
ber of the syndicate, although de facto all his communications may be entirely with
the lead lender, who also acts as mandatary for the other members of the syndicate.
With participations, the borrower contracts only with the lead lender, but the contract
provides that the latter may grant, or “farn-out” sub-participations in the loan to other
2 Replacement could involve novation of the debtor of the obligation to make the advances (i.e., the
lead lender for a portion of his obligation) and his release when replaced. Generally speaking, the
problems of novation and release are no different under Quebec law than those found in other juris-
dictions. They and their known solutions are beyond the scope of this study.
MCGILL LAW JOURNAL /REVUE DE DROITDE MCGILL
[Vol. 44
financial institutions on agreed terms. Participations are most often effected by a sale
of a portion of the loan to maturity,” either by a flow-through arrangement-where
the lead lender transfers a portion of the principal and interest (and an undivided in-
terest in the related security held by the lead lender) to the participant–or on a differ-
ent basis-where the lead lender retains a portion of the interest earned on the loan as
servicing agent.
5. Securitizations
The term “securitization” is employed in the financial markets to describe a trans-
action where a financial institution assembles a large portfolio of similar assets that
provide a periodic cash flow-e.g. hypothecary loans or other claims-for sale (to the
public, pension funds, etc.) en bloc to a special purpose vehicle (“SPV”), which is
usually a trust or a corporation designated for the purpose, which then sells undivided
units of participation to the investors. The proceeds of sale are used to pay the pur-
chase price. In the model that is of interest in this study, the assets sold, and their un-
derlying hypothecs, are transferred with a sufficiently detailed list to permit the SPV
to register its title if later required, or on default; but at the time of the initial transfer
no notice is given to the original claim debtor. The notice of registration describes a
class or universality of claims, but the list and description of the claims and support-
ing hypothecs is not initially registered, and normally is only registered if the origi-
nating institution defaults. The originating institution is usually named servicing rep-
resentative or manager. It retains any registered title and looks after all aspects of col-
lection, administration, and enforcement. It gives no guaranty, but may make repre-
sentations as to collectability or may undertake to make substitutions for defaults in
collection or to otherwise make good the collection. On occasion, the securities sold
to the investor are further secured by a hypothec on all the assets of the SPV.” They
are referred to in this study as “mortgage-backed securities” (“MBS”).
C. The Basis of the Transactions
Multi-lender financings have become an established part of North American fi-
nancial practice. The credit needs of doing multi-jurisdictional business, the large size
” Direct loan syndications and farm-out syndications are described in Canadian Deposit Insurance
Corporation v. Canadian Commercial Bank (1986), 43 Alta. L.R. (2d) 24, 59 C.B.R. (N.S.) 1 (Q.B.)
[hereinafter Deposit hIsurance]; and Re Canadian Commercial Bank (1986), 46 Alta. L.R. (2d) 111,
62 C.B.R. (N.S.) 205 (Q.B.) [hereinafter Commercial Bank]. See also D.B. Simpson, “Loan Partici-
pations: Pitfalls for Participants” (1976) 31 Bus. Law. 1977 at 1977; W.N. Stahl, “Loan Participations:
Lead Insolvency and Participants’ Rights (Part 1)” (1977) 94 Banking L.J. 882; and W.N. Stahl & L.
Pike, “Loan Participation: Lead Insolvency and Participants’ Rights (Part II)” (1978) 95 Banking L.
38.
” The legal and certain tax issues of securitizations are further examined by E.B. Claxton, “Securi-
tizations, Monetizations, Royalty Trusts and the Quebec Trust” in Non-Corporate Vehicles, supra
note 5, 357.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
673
of loans, the competition among lenders, and their need to spread the risks are all
factors that have given rise to these practices. They are often compelled by both do-
mestic and international regulation of the lending policies of the individual financial
institutions. These may impose standards of capital adequacy, institutional liquidity,
risk assessment and limits, as well as loan limits to the individual borrower. In Can-
ada, as regards banking, they are imposed by the Bank Act 5 and the regulations and
guidelines thereunder. The latter reflect the standards last referred to and found in the
Accord of 1988 of the Bank for International Settlements’ Committee on Banking
Regulations and Supervisory Practices, known as the “BIS Accord”.’6
Through securitization transactions, a secondary market and an enormous source
of loan and investment capital have been developed. In a timely securitization, every-
one is a winner. The original borrowers who granted hypothecs have stable loans at an
acceptable interest cost and they remain customers of their lender. The latter, by the
sale of the portfolio, renews his fund of loan capital. (It is axiomatic that the loan
funds of financial institutions is limited.) The institution often sells the portfolio at a
profit as the present value-the discounted average cash flow-of the portfolio can be
greater than the face value. Through the management agreement, the institutional
originator often makes a further return by way of management fees. The investor in
the MBS makes a return on his investment that is usually better than comparable mar-
ket rates. It is backed by first mortgages on real property, with the risk spread among
many borrowers. Administration and collection is professionally managed. Finally,
the amount of loan capital in the community is renewed and increased and this should
lead to greater competition among lenders and a reduction of loan rates.
MBS originated in the United States in the 1960s. They were further advanced by
the programs of secondary investment in pooled mortgages developed by the National
Mortgage Association in the early 1970s. In 1986, Canada Mortgage and Housing
Corporation (“CMHC”) introduced a similar MBS program (“CMHC-MBS”) for the
pooling of insured mortgages to permit a CMHC-guaranteed “pass through” to in-
vestors of the qualified principal and interest less the approved administrative fees.”
CMHC has advised that under this program between January 1, 1987 and March 31,
1998, pools aggregating $38.6 billion were issued, of which $4.6 billion or 12.12%
reflected Quebec hypothecary loans. The CMHC annual report for 1997 discloses that
” S.C. 1991, c. 46.
16 Committee on Bank Regulations and Supervisory Practices, “International Convergence of Capi-
tal Measurement and Capital Standards (1988)” (1988) 51 Banking Rep. (B.N.A.) 143.
‘ Canada Mortgage and Housing Corporation, NHA Mortgage-Backed Securities Program Guide,
looseleaf NHA 6404 (Ottawa, C.M.H.C., 6 September 1996), online: CMHC-SCHL: NHA Mort-
(date accessed:
gage-Backed Securities Program
20 August 1999), adopted pursuant to the National Housing Act, R.S.C. 1985, c. N-11.
674
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[Vol. 44
in 1997, there were outstanding guarantees of CMHC-MBS in the amount of $15 bil-
lion of which not quite one-half were issued in that year.’8
Apart from CMHC securitizations, it is estimated by the Dominion Bond Rating
Service that there were approximately $27.3 billion of asset-backed securities out-
standing at the end of 1997. This figure includes short-term commercial paper (usu-
ally discount notes) of $22.8 billion. A good deal of this securitization is of accounts
receivable that are not backed by security interests in corporeal assets. However,
where the latter are available, they are normally included. The same service notes that
the growth of securitizations is enormous. It grew by 114% in 1997 over 1996. The
growth figures through February 1998 are equivalent or greater. In the normal course,
the Quebec loan market could absorb about 15% of the capital made available by this
means.’
9
II. The Thrust of Article 2692
A. The Origin of Article 2692
Article 2692 is the only article in the C.C.Q. that speaks of the holding of a hy-
pothec by a person other than the creditor of the secured obligation. It does so implic-
itly but not directly. It is derived from the provisions of the SCPA. The Commentaires
du ministre de la Justice contain a single statement on article 2692:
Cet article est conforme au droit ant6rieur. En effet, la Loi sur les pouvoirs spd-
ciaux des corporations pr6voit que l’hypoth~ue qui garantit le paiement
d’obligations ou d’autres titres d’emprunt doit 8tre constitu6e par acte de fid6i-
commis en forme notari6e et en minute.2
Under the SCPA, and indeed under much earlier special legislation, a number of
major problems of reconciliation of the security regime (sanctioned by that legisla-
tion) with the principles of Quebec civil law arose and occupied the courts. The leg-
” Canada Mortgage and Housing Corporation response to a direct enquiry: C.M.H.C., 1997 Annual
Report, online: Annual Reports (CMHC)
1997),
online:
DBRS
” Dominion Bond Rating Service, 1997 Year-end Review of Canadian Asset Backed Securities (31
of new extensive development of securitizations in the United States, see J.A. Rosenthal & J.M.
Ocampo (J.P. Morgan Securities), Credit Research Report (New York, 8 January 1998); and J.A.
Rosenthal & J.M. Ocampo, Securitization of Credit (New York: Wiley & Sons, 1988) at 199ff., esti-
mating that $US 44 billion of commercial MBS were issued in 1997.
Industry
Studies
” Commentaires du ministre de la Justice (Quebec City: Publications du Qu6bec, 1993) [hereinafter
Comninentaires], t. 2 at 1686. In Dord v. Verdun (City of), [1997] 2 S.C.R. 862 at 873, 150 D.L.R. (4th)
308 [hereinafter Dorel, the Supreme Court affirmed the decision of the Court of Appeal in Verdun
(MunicipalitJ de) v. Dord, [1995] R.J.Q. 1321, online: QL (AQ), to the effect that the Commentaires
were admissible, not as absolute authority, but to aid the evaluation of legislative intention.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
islature had sanctioned the form of deed, the charges by way of security in favour of a
“trustee”, on any kind of property, present and future, and the position of the trustee as
holder of the security and representative of the creditors. The legislature did so often
with terminology borrowed from the common law (“mortgage”, “convey”, “cede”,
“transfer”, sometimes combined with “hypothec”, “pledge”, “privilege”, “take pos-
session”, and “as security”), but failed to identify, define, or characterize such terms
with concepts known to the civil law.
In the seventy-five years following the adoption of the SCPA, the courts did a re-
markable job of reconciliation.’ By exception, the courts failed with the characteriza-
tion of the trustee for the bondholders. One line of cases involving close-held security
issues (a single or very few bondholders) describe the trustee as a form of mandatary.’
The other line of cases involving widely held issues of bonds (many holders, possibly
some with bearer bonds and unknown) prefer to characterize the trustee as the “virtual
creditor”.e Yet the forms and essential terms of corporate trust deed employed in both
types of issue were (and still are) the same. Does a close-held issue become widely
held when there are five bondholders, ten, or more than that? Moreover, through the
sale and transfer of the bonds, a widely held issue can become a close-held issue, and
vice versa. The two characterizations (mandatary and virtual-creditor) are mutually
exclusive. The language of article 2692 does not deal with this problem, but in the
opinion of some, it would seem to perpetuate it.
It also seems clear today that, had the legislature intended to force such form of
secured financing exclusively under the rules of mandate,”‘ the term “mandatary”
would have been used in article 2692.’ Equally, had it intended that the representative
of the creditors be a trustee in the sense of Quebec’s new law of trusts 6 to the exclu-
sion of other types of representation, it would have used the term “trustee”. One may
reasonably conclude that the term “fondd de pouvoir” is to have a broad meaning; one
that may include the trustee, or the mandatary, or another form of sui generis repre-
sentative of the creditors who is neither.
21 See “Corporate Trust Deed”, supra note 6.
“2See Trust gingral du Canada v. Marois, [1986] R.J.Q. 1029,4 Q.A.C. 161 [hereinafter Trust g&-
niral]; SocigtJ nationale defiducie v. Qugbec (Sous-ministre du Revenu), [1990] R.J.Q. 92, [1990]
R.D.F.Q. 134 (C.A.) [hereinafter SocigtJ nationale]; Atillasoy v. Crown Trust Co., [1974] C.A. 442,
online: QL (AQ); Banque canadienne nationale v. Normandeau, [1976] C.S. 285, online: QL (AQ);
Commission des normes du travail v. Cie de gestion Thomcor (26 February 1986), Montreal
500-05-005867-831, J.E. 86-400 (Sup. Ct.); and Vermatex Inc. (Syndic de) v. Meubles Bermex Inc.,
[1988] R.J.Q. 2136,20 Q.A.C. 189.
In contrast, see Trois-Rivires (CitJ des) v. Sun Trust Company (1922), 34 C.B.R. 351 (K.B.);
Zoltom Investments Inc. v. Rodgers, [1979] C.A. 534, online QL (AQ) [hereinafter Zoltom]; Lalibertj
v. Larue (1930), [1931] S.C.R. 7, (sub nom. Lafontaine Apts. v. Larue) [1931] 2 D.L.R. 12 [hereinaf-
ter Lalibertd cited to S.C.R.]; and Mercure, B6liveau et Associds v. Gaz mtropolitain, [1980] C.S.
471, 35 C.B.R. (N.S.) 174.
24Arts. 2130ff. C.C.Q.
Payette, supra note 1 at 164.
26Arts. 1260ff. C.C.Q.
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B. Possible Approaches to Construction
Two possible constructions of article 2692 present themselves. The first is the
conservative or traditional view. According to this view, since a hypothec is an acces-
sory to an obligation,2 it can only be held by the creditor of the secured obligation,
except (and it would be a restrictive exception) where the law expressly allows it to be
held by another. The SCPA provided such an exception. Only article 2692 expressly
sanctions such an exception today.
The second construction is the view of the reformist; one who would argue that,
as long as the principle that a hypothec is an accessory to the secured obligation is ob-
served, the holding of the hypothec may be separated from the holding of the obliga-
tion. The reformist would argue that, since all the essential, although originally ex-
ceptional, features of the SCPA were adopted in the reform process as general princi-
ples of the civil law, the separation of the holding of the hypothec from the holding of
the secured obligation is now an acceptable principle of the civil law as long as the
hypothec continues to be an accessory of such obligation. The reformist view posits
that through other measures of the reform process, this principle is now a part of the
civil law notwithstanding the existence of article 2692.
The language of article 2692 itself is not very helpful in determining which of
these two approaches was intended by the legislator. Nonetheless, the C.C.Q. reveals a
number of arguments to support the reformist’s position. In this study, an effort will
be made to canvass this approach. The author admits to being a reformist. One of the
thrusts of this study is also to show, not only that the reformist’s approach would pro-
vide a more consistent legal theory, but would also harmonize Quebec civil law with
the essential features of the modem financial markets and the needs of a modem legal
system.
Article 2692 provides:
2692. L’hypothque qui garantit le
paiement des obligations ou autres
titres d’emprunt, dmis par le fidu-
ciaire, la socirt6 en commandite ou
la personne morale autorisre A le
faire en vertu de la loi, doit, A peine
de nullit6 absolue, 8tre constiture
par acte notari6 en minute, en faveur
du fond6 de pouvoir des crranciers.
2692. A hypothec securing payment
of bonds or other titles of indebted-
ness issued by a trustee, a limited
partnership or a legal person author-
ized to do so by law shall, on pain of
absolute nullity, be granted by notar-
ial act en minute in favour of the per-
son holding the power of attorney of
the creditors.
Parenthetically, one must note that article 2692 now replaces the term “trustee” of
the SCPA with the term ‘fondi de pouvoir”. Although the Supreme Court of Canada
recently affirmed that the two linguistic texts of the Code are equally authoritative,’ in
27Art. 2661 C.C.Q.
28 In Dor, supra note 20, the Supreme Court provided a broad interpretation of the C.C.Q. as the
jus commune in relation to other public statutes, and further held that in the event of a difference be-
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
the case of article 2692, the term of the English version, “person holding the power of
attorney of the creditors” is an abomination. It is thought to be merely a bad transla-
tion. It evokes the idea of an express documented mandate from the holders of the se-
curities to the holder of the hypothecs, a bilateral contract.’ However, in practice, in
all cases of a public issue of securities there is no mandate, express or implied. When
the bonds or titles of indebtedness are first issued, the creditors who would grant such
mandate are unknown. They are often unknown when the titles are sold. The French
language term—“fondj de pouvoir”-is much broader and does not -necessarily in-
voke the concept of an express mandate? In this study, the term “fondj de pouvoir”
or, more simply, the term “representative” of the creditors will generally be used.
C. Basic Characteristics of Article 2692
Article 2692 is one of only three provisions of the C.C.Q. that address the ques-
tion of form for the creation of a valid conventional hypothec. Article 2693 C.C.Q.
states that an immovable hypothec is, on pain of absolute nullity, granted by notarial
act en minute. Article 2696 C.C.Q. states that a movable hypothec without delivery
shall, on pain of absolute nullity, be granted in writing.” As all property is either mov-
able or immovable, 3 articles 2693 and 2696 together cover all types of property that
can be the object of a hypothec. They reflect article 2665 C.C.Q., which characterizes
all hypothecs and states a hypothec is movable or immovable depending on whether
the object is movable or immovable property. Together and alone, articles 2693 and
2696 would exhaust the necessary subject of the form required to create a valid
hypothec.
Article 2692, on the other hand, is not concerned with the type of hypothec or the
type of property that is the object of the hypothec. Exceptionally, it addresses both the
type of obligation secured and the type of grantor of that obligation.” In such circum-
stances, the normal rule of construction is that article 2692 constitutes a special ex-
ception to the general rules for the form of document for the creation of hypothecs. As
a rule of exception, it ought to be restrictively construed?’ This principle of construc-
tween the two linguistic texts, one should not accept the narrower version, but search for the true in-
tent of the enactment.
Art. 2130 C.C.Q.
3 Payette, supra note I at 166.
3, By an express limited exception to this rule, arts. 2702ff. C.C.Q. permit a movable hypothec with
delivery, a pledge, to be granted by delivery.
32Art. 899 C.C.Q.
,” Another exception is found in art. 2699 C.C.Q. which provides that where certain types of collat-
eral are charged (bills of lading, negotiable instruments, and claims), value must be given before the
hypothec is valid. This exception does not address the form of execution. A writing is still required.
PA. C6t, Interpretation des lois, 2d ed. (Cowansville, Qc.: Yvon Blais, 1990) at 457; S.G.G. Ed-
gar, ed., Craies on Statute Law, 7th ed. (London: Sweet & Maxwell, 1971) at 121; and Sir P.B. Max-
well, On the Interpretation of Statutes, 11th ed. by R. Wilson & B. Galpin (London: Sweet & Max-
well, 1962) at 275, 278, 285.
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tion would reflect the established view of the legislation that article 2692 purports to
replace, the SCPA. Authority is consistent to the effect that this statute effected an ex-
ception to the ordinary law and ought to be restrictively construed.”
Article 2692 as drafted should be interpreted restrictively for another reason: it is
in neither declarative nor enabling form. It contains no express declaration of any
principle of substantive law, nor does it enable any principle to be applied in a par-
ticular way. On the contrary, it commands that certain transactions must be completed
in a defined way and a defined form. It is in imperative form, with a penalty. The
SCPA, in contrast, although also a law of exception, was declarative and enabling. As
an exception, it had to be strictly construed, but once complied with, a valid hypothec
was created. (Article 2692, by inference, does have some declaratory effect as it rec-
ognizes certain judicial facts or underlying concepts-this will be examined below.)
Being in imperative form, the penalty should result only when the precise transactions
described by article 2692 exist and the imperative dictates of the provision are not
complied with. This, one must conclude, can be the only consequence of an expressly
imperative and exceptional provision that provides a penalty. Thus, the penalty of ab-
solute nullity should result only if the precisely defined circumstances described in
article 2692 are present and the requirements of form which it dictates are not
followed.
D. The Elements that Invoke Article 2692
One approach to the interpretation of article 2692 is to apply the principles of the
interpretation of statutes in three steps as follows. The first step is to identify the “ju-
dicial facts” (herein sometimes called “elements”) that invoke the application of the
provision. 6 The transactions addressed by article 2692 (the grammatical subject of the
provision) must have three elements to qualify: (i) there must be a hypothec; (ii) it
must secure bonds or other titles of indebtedness; and (iii) the titles of indebtedness
must be issued by a trustee, a limited partnership, or a legal person authorized to do so
by law. If all three elements are not present in the transaction, article 2692 will not ap-
ply and the penalty cannot be invoked. If, however, they are present, the penalty ap-
plies only if the remaining prescriptions of the provision are not complied with. In this
sense article 2692 implies a prohibition.
The prohibition is not, however, absolute. Where the three elements forming the
subject of article 2692 are present, one may still escape the application of the penalty
if two other elements (the grammatical predicate of the provision) are present. Both
must be present. They are: (iv) the hypothec must be granted by notarial act en min-
ie; and (v) the grant must be in favour of afondi de pouvoir.
” Y. Renaud & J. Smith, Droit qudbicois des corporations commerciales, vol. 2 (Montreal: Judico,
law: see Ct6, supra note 34 at 130.
1974) at 942, and the jurisprudence cited therein.
Identification of ‘judicial facts” is an important first element in the assessment of the effect of a
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
679
The second step in the interpretation of a statutory enactment, one the courts have
consistently applied, is to apply what has become known as the “golden rule” of in-
terpretation. The rule was amply expressed by Pigeon J. in Wellesly Hospital v. Law-
son: “En premier lieu, c’est mrconnaltre la plus fondamentale des r~gles, savoir qu’on
ne doit s’6carter du sens litt&al qu’en cas d’ambigu’td ou d’absurdit”
The “golden rule” for the interpretation of statutes would be applied, and the
grammatical and ordinary sense of the words of article 2692 would be adhered to,
when the provision is interpreted as set forth above. Article 2692 will apply to a trans-
action when the transaction involves each of the first three elements. Thereafter, the
transaction is absolutely null unless by express exception it is written in compliance
with each of the final two elements. This is the grammatical and ordinary sense of the
words employed in article 2692. This is also the full extent of the application of the
provision.
This having been said, it is useful at this point to introduce a possible alternative
construction. One may argue that, despite the plain grammatical construction of arti-
cle 2692, the reference to the fondi de pouvoir is a fourth element that truly should
form a part of the subject matter of the provision. Thus, article 2692 would be invoked
only if there is a hypothec, securing titles of indebtedness, issued by a trustee, etc.,
and the hypothec is in favour of a fondi de pouvoir. Only in such event must the
transaction be by notarial act en minute. This construction will be examined more
closely in response to a specific question below.”
The third step in the interpretation of article 2692 is to determine the meaning of
the words identifying each element. They will be examined more closely in response
to the specific questions which are listed later in this study. It is submitted that the ap-
plication of the “golden rule” to article 2692 can only result in a number of “ambigui-
ties or absurdities”, to use the words of Pigeon J.
E. Broad Import of Article 2692
Notwithstanding that article 2692 should be restrictively interpreted, one cannot
simply conclude that it has no effect on our law other than to impose its imperative
and penal provisions for a failure to comply with its prescriptions. Article 2692 con-
tributes more than this to Quebec civil law. As with much of the drafting of the
C.C.Q., one must infer an action or a juridical concept from the context of its use or
” (1977), [1978] 1 S.C.R. 893 at 902, 76 D.L.R. (3d) 688. Pigeon J. cited case law that traced the
origin of the rule to the House of Lords decision in Grey v. Pearson (1857), 6 H.L.C. 61, [1843-60]
All E.R. Rep. 21. His Lordship cited Grand Trunk Pacific Railway Co. v. Dearborn (1919), 58 S.C.R.
315, 47 D.L.R. 27 (among others) as the case that adopted the rule in Canada. See also Crt, ibid at
429ff.
3″‘ See Part VLT.., below. This is the right construction if one accepts the comment to art. 2692
C.C.Q. found in the Commentaires, supra note 20, t. 2 at 1686, or the observation of Payette, supra
note I at 169.
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description in a provision, even though it is neither the direct object of the provision
nor defined elsewhere in the C.C.Q. Only in this indirect sense is the provision de-
clarative of what the law addresses. One must infer from the phrases employed in ar-
ticle 2692 a number of principles that affect the law of hypothecs more generally. All
these are necessary or inescapable inferences. They constitute underlying judicial
facts. They are:
(1) Quebec’s law contemplates the hypothecation of property to secure bonds or
titles of indebtedness.
(2) Quebec’s law expressly acknowledges that at least a trustee, a limited part-
nership, or a legal person authorized by the law may issue secured bonds or
titles of indebtedness.
(3) It is not repugnant to Quebec law that afondd de pouvoir acting for creditors
should hold a hypothec securing the obligation to the creditors.
(4) Such a fondd de pouvoir need not necessarily be a trustee or a mandatary.
This principle results only from a construction placed on the term by all
authority to date.”
The reformist concludes that today these principles are a part of Quebec law and,
apart from the last principle, would exist even if article 2692 did not. Note that none
of these principles constitute the direct object of article 2692. Although it would be
preferable if these principles were confirmed through a provision expressed in posi-
tive and enabling form, the fact remains that Quebec law reflects these principles and
confirms them through their expression in article 2692.
F The Traditional View Examined
The traditionalist would not read article 2692 in the same sense. He would begin
with the premise (which the reformist fully accepts) that every grant of security giving
the creditor the right to be paid by preference is exceptional and exists only where
permitted by law.’ He would note that hypothecation can take place only on the con-
ditions and according to the formalities authorized by law.”‘ He might maintain that
the holding of a hypothec separately from the debt it secures is a further restriction of
the general exception, that article 2692 is the only provision in the C.C.Q. that deals
with this idea, and that such a transaction can only be effected on complete compli-
ance with the provision.
The traditionalist seems to overlook the fact that, although any grant of hypothe-
cary security is exceptional and may be effected only as permitted by law, the rules on
” Payette, ibid. at 167; Security on Property, supra note 4 at 232; and “Corporate Trust Deed”, su-
pra note 6 at 854.
40 Arts. 2644,2647 C.C.Q.
‘ Art. 2664 C.C.Q.
1999]
J.B. CLAXTON, Q.c. – ARTICLE 2692 REVISITED
hypothecs are optional and enabling. Once the essential rules are complied with, the
draftsman is free to structure the uses and holding of a hypothec as he may elect to do
so. If there is no rule opposed to such a structure, the courts must give effect to the
hypothec.
The traditionalist’s argument, it would seem, confuses the act of hypothecation
with the manner in which the hypothecs are held. Apart from article 2692, the provi-
sions of the C.C.Q. on hypothecs are silent as to who must be the holder of a hy-
pothec. The only other article of any relevance is article 2661 C.C.Q., which states
that a hypothec is merely an accessory right, and subsists only as long as the obliga-
tion whose performance it secures continues to exist. This is one of the most impor-
tant of the principles that define when a hypothec may exist, 2 but it does not follow
that the holder of the hypothec and the holder of the obligation it secures must be the
same person. The accessory principle can be fully complied with through the terms of
the contract between the holder of the hypothec and the holder of the obligation
secured.
The language of article 2692 does not support the conservative view. Such view
does not reflect the plain meaning of the words employed by article 2692. The word
“issued” is not preceded by the words “shall only be”. Neither words in the provision
nor anything else in the C.C.Q. convey the idea that article 2692 affords the only
means of creating secured titles of indebtedness where the holder of the title is not the
holder of the hypothec.
The traditional view also leads to an unlikely construction when one considers ar-
ticle 2688 C.C.Q. This provision states that a hypothec granted to secure a sum of
money is valid even if, when it is granted, the debtor has not received the prestation
(the loan) in consideration of which he has consented to the obligation. Article 2688
states the rule is applicable in particular to lines of credit and the issue of bonds and
other titles of indebtedness. Article 2797 C.C.Q. reaffirms the principle. For more
than one hundred years, practice has accepted that an issue of secured bonds or titles
of indebtedness which rank pari passu may be held by many persons (some future
and unknown), that it is inappropriate that the holders should be undivided holders in
the security, and that in consequence the law should permit security to be vested in a
third person acting on behalf of the holders.’3 Article 2688 affirms that the hypothec
may exist apart from the obligation it secures. The separation of other elements-of
the holder of the obligation from the holder of the hypothec-involves a much sim-
pler modification, indeed no modification, of principle.
Reform was intended, among other things, to extend the regime encompassed ex-
ceptionally by the SCPA (and other special laws) to the general law providing for se-
curity on property, and make the special devices available to all, at least in the devel-
42 Payette, supra note 1 at 87ff.; and D. Pratte, Prioritis et hypothkques (Sherbrooke, Qc.: Revue de
droit, Universit6 de Sherbrooke, 1995) at 35ff.
41 “Corporate Trust Deed”, supra note 6.
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opment and the prosecution of an enterprise.’ Thus, one can now hypothecate mov-
ables, corporeal and incorporeal, present and future, including claims, and a class or
universality of properties. The expanded remedies were also borrowed from the spe-
cial legislation; namely, the rights to enter, to take possession, and to sell privately. It
seems inconsistent with the reform process to limit unduly the circumstances where
one can entrust the security for an obligation to a holder other than the creditor.
III. Enforcement of the Hypothec-Article 59 of the Code of Civil
Procedure
The holding of a hypothec by a person, afondi de pouvoir, other than the holder
of the obligation secured would be sterile unless suchfond de pouvoir could exercise
the rights attaching to such hypothec. The reform process was not silent in this area,
but brought about a complementary change in the C.C.P. Article 55 C.C.P. states that
whoever brings an action must have a sufficient interest therein. Article 59 C.C.P.
adds a corollary in enshrining the principle “personne ne plaide par procureur.” It
then lists an extensive number of exceptions in its second and third paragraphs. After
listing those who represent incompetents in the third paragraph, reform added a new
exception:
II en est de m8me de radministrateur
du bien d’autrui pour tout ce qui tou-
che A son administration, ainsi que
du mandataire dans 1’ex6cution du
mandat donn6 par une personne ma-
jeure en pr6vision de son inaptitude A
prendre soin d’elle-m~me ou A admi-
nistrer ses biens.
This also applies to an administrator
of the property of others in respect of
anything connected with his admini-
stration and to a mandatary in the
performance of a mandate given by a
person of full age in anticipation of
his incapacity to take care of himself
or administer his property.”
The amendment to article 59 C.C.P. reflects the general principle of article 1299
C.C.Q., which states that a person charged with the administration of property or a
patrimony that is not his own assumes the office of administration of the property of
others. It states that the provisions of that Title of the C.C.Q. apply unless another
form of administration applies under the law or under the constituting act, or due to
circumstances. Article 1316 C.C.Q. (in the same Title) states that an administrator
may sue and be sued in respect of anything connected with his administration. It is
important to note that the new exceptions added to article 59 C.C.P., when read with
the rules for the administration of the property of others, are “stand alone” provisions.
They are not tied in directly with article 2692 or, by their terms, with any other article.’
” See Commentaires, supra note 20, t. I at 748, 751; and t. 2 at 1666, 1669, 1682, 1686, 1687,
1695, 1698, 1700, 1701, 1720, 1736.
, hnplententation Act, supra note 3, s.190; and art. 59 C.C.P
46 The C.C.Q. does adopt them by reference when it declares expressly that such rules apply through
the following articles: 233 (tutorship), 274 (protective supervision), 644, 753 (successions), 794, 802
(liquidator of successions), 1029 (manager-undivided co-ownership), 1085 (syndicate in divided co-
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
However, for these rules to apply, the administrator must hold “property or a pat-
rimony” of another. 7 A hypothec is a real right in property. It is an accessory to any
obligation, including an account receivable or a claim. Part of its very essence is that it
gives rise to a right of action, the old hypothecary action, which is now called an ap-
plication for the exercise of hypothecary rights.’ A claim and rights to enforce that
claim and the security therefor are patrimonial assets.’9 Generally, all patrimonial as-
sets are property?” The holder of a hypothec securing a claim or any other enforceable
patrimonial obligation is a holder of property.
Article 59 C.C.P. endorses the conclusion that afondi de pouvoir, or other man-
datary who holds a hypothec through a different provision, can represent joint holders
of a hypothec. After asserting that a person cannot use the name of another to plead,
article 59(ii) C.C.P. states that “[n]evertheless, when several persons have a common
interest in a dispute, any one of them may appear in judicial proceedings on behalf of
them all if he holds their mandate:’ (It then adds some procedural rules on the use and
extent of the mandate.) It is clear that joint holders of a hypothec who desire to en-
force their secured claims and their hypothec have such a common interest. Those
whose security is held by one of them as the others’ mandatary also have a common
interest.” One should also observe that the express mandate to exercise hypothecary
rights required by article 59(ii) C.C.R could be set out in the basic secured credit
agreement in anticipation of the subsequent syndication of the credit and the related
security by the lead lender.
It must also be noted that the C.C.Q. makes no express statement concerning en-
forcement by the fondi de pouvoir under article 2692. It speaks only of exercise of
hypothecary rights by the “creditor” 2 Indeed, Chapter 5 (“Exercise of Hypothecary
Rights”) of Title 3 (“Hypothecs”) of Book 6 (“Prior Claims and Hypothecs”) uses the
term “creditor” throughout when speaking of the exercise of hypothecary rights.
However, if the intended purpose of article 2692 is to permit continuance of the re-
gime of the SCPA, one must conclude that thefondi de pouvoir, as the sole registered
ownership), 1142, 1145 (usufructuary), 1224 (institute in substitutions), 1278 (trustee), 1484 (man-
agement of the business of another), 1709 (person charged with the sale of the property of another),
1778 (exempts rules of sale of an enterprise from hypothecary sales), 2135 (general mandatary), 2168
(mandate in anticipation of incapacity), 2238 (general partners), 2266 (liquidator of partnership),
2768 (temporary possession by hypothecary creditor), and 2773 (possession by hypothecary creditor
for administration). If the mandatary with a general mandate has these powers, there would seem to
be no inherent principle of civil law that prohibits the granting of such powers expressly to a manda-
tary who holds a hypothec.
QArt. 1299 C.C.Q.
4’Art.
2748 C.C.Q.; and art. 795 C.C.P.
9 Arts. 2,3148 C.C.Q.
50 “Corporate Trust Deed”, supra note 6 at 842.
” Quaere: Is the exception provided by article 59(ii) C.C.P. available to the holder of the security
who is not also a holder of one of the obligations secured or of an aliquot part of the obligation se-
cured?
52 Arts. 2748, 2751, 2757, etc. C.C.Q.
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[Vol. 44
holder of the hypothec, may alone take suit in the exercise of hypothecary rights. One
must conclude that the term “creditor”, as used in Chapter 5 on the exercise of hy-
pothecary rights, must be interpreted broadly to mean “holder”. Note also that the
SCPA before reform contained no provision expressly authorizing the “trustee” to take
proceedings in enforcement of the security held on behalf of the bondholders, but a
constant jurisprudence allowed him to do so.”
In addition, the general rules governing the exercise of hypothecary rights do
make a specific reference to the rules on administration of the property of others. Ar-
ticle 2768 C.C.Q. states that after an ordinary surrender of the property, the person to
whom the property is surrendered has “simple administration”. Article 2773 C.C.Q.
provides that when surrender is for purposes of administration, it entrusts “full ad-
ministration” to the holder. Both “simple administration” and “full administration” are
defined in the rules for the administration of property of others The right to sue in
connection with such administration is found in article 1316 C.C.Q. Thus, the reme-
dies for the exercise of hypothecary rights, including those held by thefondi de pou-
voir, are expressly tied into the rules for the administration of the property of others as
well as the amendment to article 59 C.C.P.
From this analysis one must conclude that a person who holds a hypothec granted
for the benefit of a creditor of the secured obligation can, if authorized by such credi-
tor, exercise such hypothecary rights whether or not he is qualified as afondi de pou-
voir under article 2692. The position of the trustee and the mandatary holding hy-
pothecs will be examined in greater detail later in this study.
IV. Section 32 of the Special Corporate Powers Act
A study of the import of article 2692 on various types of secured-loan transac-
tions should also touch on section 32 of the SCPA. This section antidates reform, but
the reform process modified its language to reflect the wording now used in article
2692. Section 32 now provides as follows:
32. Le fond6 de pouvoir des cr6an-
ciers en faveur duquel est consentie
une hypoth~ue pour garantir le
paiement d’obligations ou autres
titres d’emprunt ne peut acheter de
la compagnie la premire 6mission,
par souscription 6ventuelle A forfait,
achat, souscription ou autrement
titres
des obligations ou autres
d’emprunt garantis par hypothque.
32. The person holding the power of
attorney of the creditors in whose fa-
vour a hypothec is granted to secure
payment of bonds or other titles of
indebtedness cannot purchase from
the company
issue, by
underwriting, purchase, subscription
or otherwise, of the bonds or other
titles of indebtedness secured by hy-
pothec 5′
the first
“Corporate Trust Deed”, supra note 6 at 827ff.; Laliberti, supra note 23 at 14.
Arts. 1301, 1306 C.C.Q.
s SCPA, supra note 2, as am. by the Implementation Act, supra note 3, s. 645. It is curious that the
word “company” was not replaced by the phrase “a trustee, a limited partnership or a legal person
authorized to do so by law.” In all probability, this was merely an oversight by the drafter.
1999]
SJ.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
685
This section of the SCPA was originally adopted in 1933.56 Its obvious and only
purpose was to assure the avoidance of a conflict of interest between the fond de
pouvoir and the holders of the titles of indebtedness in public or widely held issues of
securities. 7 Thus, in Madill v. Lirette,5″ the Court of Appeal, noting that there is no
legislated sanction for a breach of section 32, held that it provided a relative nullity
only, one that could be raised only by one of the holders of the titles of indebtedness.
Article 1420 C.C.Q. reflects this principle in stating that a relative nullity may be in-
voked only by the person in whose interest it is established, and that such a person
must act in good faith and sustain serious injury therefrom. Moreover, such person
may waive or renounce the invocation of such nullity.9
Section 32 of the SCPA expresses a blunt and rather clumsy prohibition that has
been superseded today by the new, much more subtle and far reaching provisions of
articles 1309 to 1318 C.C.Q. These provisions provide in themselves an extensive re-
gime on conflicts of interest. They will have application to anyfond6 de pouvoir who
holds hypothecs or other security. In addition, they by inference empower the court to
examine each case on its merits and order (or refuse to order) redress according to the
circumstances.
However, taken at face value, the blunt prohibition of section 32 of the SCPA may
conflict with the new and more elastic provisions of the C.C.Q. on conflicts of inter-
est. Unless the prohibition of section 32 has been waived, its blunt prohibition could
be invoked in regard to transactions today where there is in fact no such conflict, or
where it has been fully disclosed, accepted, agreed to by the parties, and regulated by
the credit agreement. It should be repealed and until it is, to the extent possible, its ap-
plication should be waived by the secured creditors in the documents constituting the
rights of the fondi de pouvoir.
V. Hypothec Held by a Trust
A. Basic Elements of the Trust
The expression ‘fondj de pouvoir” is broad enough to include the trustee under a
Quebec trust and the deed granting the hypothecs can create a Quebec trust under ar-
5
6 Loi modifiant la Loi des pouvoirs spifciaux de certaines corporations, S.Q. 1933, c. 84. The sec-
” S. Le Bel, “Les 6missions d’obligations dans le droit de la province de Quebec de 1890 h nos
” [1987] R.J.Q. 993, 8 Q.A.C. 81. At the time of the decision, s. 32 was s. 27 of the SCPA, R.S.Q.
tion was originally s. 136.
jours” (1980) 21 C. de D. 43.
1964, c. 275.
59Art. 1423 C.C.Q.
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ticles 1260 and following. ‘ Moreover the use of the trust to permit a trustee to hold
hypothecs securing titles of indebtedness held by another would apply whether article
2692 existed or not. Article 1263 C.C.Q. (as amended recently) expressly declares
that a trust may be created for such purpose.”‘ The SCPA sanctioned such an arrange-
ment expressly. If article 2692 did not exist, the civil law would now recognize a trust
created for such a purpose.”2
The difficulty with this construction is that article 2692 does exist. If the several
elements which invoke it are present, it could be found to apply to such a trust and
thereby render it null unless the prescriptions of article 2692 are complied with.’
In many situations, the use of a trust to hold the security could be desirable.’ It
will be particularly desirable where the issue of bonds or other titles of indebtedness
is to be widely held. It may be the preferred method of shielding a large group of dis-
tant investors from the consequences of a finding that thefondi de pouvoir is a man-
datary and that they have assumed the full responsibilities of a mandator.’ This may
be achieved through the use of a corporate trust deed securing titles of indebtedness
that are widely held.
B. Problems in Using a Trust
The use of a trust may, however, present a number of problems. Firstly, the
C.C.Q. imposes restrictions on the persons who may qualify as the trustee. If the
trustee is a legal person it must be a Quebec licensed and qualified trust company. ‘ If
the trustee is also a beneficiary, that is to say, a creditor of the obligation secured, the
C.C.Q. imposes the need for a second independent trustee.67
In many cases, the requirement that there be a third party corporate trustee would
be both an expensive and an inflexible means of securing what have become fairly
routine banking transactions. The initial and annual fees of the trustee are a factor. In
most circumstances, the Quebec borrower ultimately bears the cost and inconvenience
imposed by these restrictions.
The required elements of such a trust are examined more fully in “Corporate Trust Deed”, supra
note 6 at 839ff.
6 For an imaginative and wide ranging examination of the uses of the Quebec law of trust as a secu-
rity device, see R.A. Macdonald, “The Security Trust: Origins, Principles and Perspectives” in Non-
Corporate Vehicles, supra note 5, 155.
62 See Parts II.E. and M, above.
63 The limits of its application are more fully examined in Parts VI.B. and VII.C., below.
“Corporate Trust Deed”, supra note 6 at 804.
6′ Ibid. at 836.
6Art. 1274 C.C.Q.
67 Art. 1275 C.C.Q.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
VI. Hypothec Held by a Mandatary
One cannot examine the effect of article 2692 without some review of the princi-
ples of mandate.’
A. The Role and Powers of a Mandatary
1. Mandatary as a Hypothecary Creditor
Quite outside article 2692, the creditor of a Quebec secured loan may choose to
act through his own representative or mandatary, who would be entrusted with the
administration (even the making) of the loan, and with the holding and administration
of the security.’ Here, one might normally assume also that the relationship between
the creditor and his mandatary is disclosed both to the debtor and to the public. The
relationship would be disclosed by appropriate declarations in the deed of hypothec.
If immovables are hypothecated, the deed is registered at length or by a summary, and
disclosure is made by this process. If movables are hypothecated, the notice of regis-
tration in the Register of Personal and Movable Real Rights would disclose the name
of the mandatary as the grantee of the hypothec and the name of the creditor as the
holder.’ The regulations under article 2981 C.C.Q. speak of “holder” in the sense of
the creditor and not in the sense of the mandatary.7′ In addition, the Ministry of Justice
manual of instructions concerning such registrations contains the following passage:
“[S]i une des partie a agi comme mandataire, c’est le mandant, c’est-A-dire le repr6-
sent6, le vrritable titulaire ou le constituant du droit, qui doit 8tre d~sign6 dans la r6-
quisition d’inscription du droit “’72
2. Loan and Security Held by a Pr~te-Nom
The lender may also act through the intervention of a prate-nom or representative
who appears opposite the borrower and the public as the lender and the holder of the
hypothec, but who in fact acts as the mandatary of the true lender who wishes to re-
main silent and unknown. Articles 2157(ii) and 2159 C.C.Q. acknowledge this con-
cept. It is also to be inferred from the rules of administration of the property of others.
Article 1319(ii) C.C.Q. states that an administrator is liable to third persons if he acts
in his own name. The Supreme Court of Canada expressly affirmed that a mandate
may be given to a silent prite-nom in the following passage: “En droit qurbrcois,
Arts. 2130ff. C.C.Q.
0 Art. 2130 C.C.Q.
70 Art. 2981 C.C.Q.
” Regulation respecting the register of personal and movable real rights, O.C. 1594-93, 17 Novem-
ber 1993, G.O.Q. 1993.11.6215.
72 The instructions also provide that the name of the mandatary may be disclosed in a supplemen-
tary form designated “Annex A.P.”.
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comme en droit frangais, le contrat de pr&e-nom est une forme licite du contrat du
mandat” 3
In the case of a pr~te-nom for an undisclosed mandator, the instrument of regis-
tration would not disclose the latter’s interest as the “holder” of the hypothec notwith-
standing the regulations respecting registration and the instructions for registration.
Neither the regulations nor the instructions can operate to modify the substantive
law.’
3. Only Security Held by a Pr6te-Nom
The use of a prate-horn assumes that the name of the true creditor and beneficiary
of the hypothec is unknown to both the debtor and to the public. In financial practice,
if one excludes the public issue of bonds, this is almost never the case. Where an ad-
vance of credit is to be made, the name of the true creditor is generally fully known to
the borrower and the grantor of the hypothec. But in a given case, the creditor may
elect, with the knowledge and consent of the borrower, to have the hypothecs securing
the credit (distinct from the debt owing) held by another as representative of the
creditor. The representative holds them for the exclusive benefit of the creditor. His
holding of the hypothec is published by registration, but his mandator’s interest is not.
The hypothecs are held by a pr~te-nom. The VictuniP case provides a direct parallel
for this arrangement. Where no bonds or other titles of indebtedness secured by hy-
pothec are issued, there is nothing in Quebec civil law that prohibits a transaction that
is structured in this manner.
B. Effects of Mandate on Certain Transactions
1. Secured-Credit Agreements
Quebec law continues to permit the security arrangements for credit agreements
employed in modem banking practice. The initial credit agreement would state the
full amount of the credit and create the security. The borrower and all lenders would
” cuni Aktiengesellschaft v. Minister of Revenue of the Province of Quebec, [1980] 1 S.C.R. 580
at 584, 112 D.L.R. (3d) 83, Pigeon J. [hereinafter Victunfl. Here the mandatary held immovable prop-
erty charged with a hypothec securing debentures issued to the public, all on behalf of a mandator.
The Minister of Finance was unable to collect the tax on capital (essentially a tax on paid-up capital,
long term debt, reserves, and surpluses) as the mandate, although withheld from the public, was fully
disclosed to him. The court held that a third party (the Minister) who knows of the existence of the
mandate is not in a position to ignore it.
” One must also note that generally the mandator whose existence is disclosed is alone responsible
for the acts of his mandatary (arts. 1319, 1322, 2157, 2160 C.C.Q.), while theprtte-nom for an undis-
closed or hidden mandator is personally responsible for his acts (arts. 1319, 2157 C.C.Q.). So is the
mandator when he later becomes known (arts. 2159, 2160 C.C.Q.).
” Supra note 73.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
689
be parties to it. The hypothecs could be registered in the name of the lead lender
alone. The borrower understands this and would consent to it. As regards the public,
though, the lead lender would be the registered holder of the hypothecs for the full
amount of the authorized credit.’6 To the extent that the lead lender acts as the holder
of the security for the other lenders that are members of the lending group, he would
act as a prete-nom, a mandatary for his co-lenders as undisclosed mandators.”
It should also be noted that the structure avoids the creation of a trust- Assuming
the lead lender is a bank, being a bank, it cannot act (at least in Canada) as a trustee of
an express trust. Its statutory powers preclude acting as a trustee. It may act, however,
as a fiduciary (as may anyone else).”
If no bonds or titles of indebtedness are to be issued, article 2692 would not be
relevant. Unless land is to be hypothecated, notarial form is not required. However, if
bonds or other titles of indebtedness are to be issued, article 2692 may apply.’
2. Direct-Loan Syndications
Direct-loan syndications are viewed under Quebec law as secured credit agree-
ments with several lenders, except that the parties to the original credit agreement are
only the borrower and the lead lender, while the agreement itself makes provision for
additional lenders to be added (or replaced or deleted) in the future. New lenders are
brought in by the lead lender through the sale of a participation in the loan. As the
lead lender sells interests to members of the syndicate, he would transfer an undivided
interest in the borrower’s debt and the underlying security.’ The borrower would ac-
quiesce.’ The lead lender remains the only registered holder of the hypothecs and as
such is a prete-nom for the interests of the other members of the syndicate.
76 Some have suggested that s. 427 of the Bank Act, supra note 15, obliges each bank to hold its own
security directly. It is the author’s opinion that the bank may hold through a mandatary; that which is
held by a mandatary is held by the bank.
” Counsel will be obliged to assure, of course, that adequate disclosure of the interests of the true
creditors is made to the insurers of the underlying security, as the courts have consistently held that a
mere pr~te-nom who fails to disclose that he acts for others has no insurable interest: see R.P. Godin,
“The Development of Major Real Estate Projects under the Laws of Qudbec” in Meredith Memorial
Lectures 1989: Current Problems in Real Estate (Cowansville, Qc.: Yvon Blais, 1990) 259 at 294.
7 In Quebec, the rules for the administration of property of others have codified a standard of be-
haviour for all those acting in a fiduciary capacity. They bring him to much the same position as the
constructive or resulting trustee in the common law jurisdictions. In Quebec, they include the right to
sue to enforce his administration. For a definition of “constructive trust” and “resulting trust”, see
D.W.M. Waters, Law of Trusts in Canada (Toronto: Carswell, 1974) at 277ff.
“The limits of its application are more fully examined in Parts VII.B. and VII.C, below.
“”Art. 1637 C.C.Q.: a sale or transfer of a claim is quite distinct from novation of the creditor (art.
1660 C.C.Q.) under Quebec law. The latter creates a new obligation, the former does not. See J.-L.
Beaudoin, Les Obligations, 4th ed. (Cowansville, Qc.: Yvon Blais, 1993) at 510.
81 Art. 1641 C.C.Q. If he does not acquiesce, the comments on farm-outs in Part VI.B.3, below,
might apply.
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Some counsel have suggested that the Quebec law of mandate is insufficiently
flexible to support such arrangement. They argue that, since mandate is a bilateral
contract,” the parties to it must exist at the time of its creation.’ In the opinion of the
author, in the example just given, they do exist. The transaction starts with a credit and
security agreement between the borrower and the lead lender. There is no mandate at
this time as there is no syndication and no co-creditor/mandator. But the contract can
anticipate and provide for this event. When the lead lender sells an interest to the first
and to each subsequent syndicate member, the lead lender becomes a security agent
and a mandatary for the interest of the new syndicate members. The mandate is then
created and the relationships between the mandators and the mandatary then exist.’
The borrower acquiesces in the sale’ through his consent. As additional members of
the credit facility syndicate arrive and depart, the mandators of the security agent and
the ultimate beneficiaries of the security change, always with the consent of the bor-
rower and of the security agent. Each time a mandate exists, so do the parties who
grant it and so does the bilateral characteristic of the contract.’
Thus, for direct-loan syndications, counsel need not require any change or re-
newal of the security. The parties are generally reluctant, in any case, to change or
even renew the security because of expense. Also, since no change of security is
needed, the parties can continue to benefit from the fact that the original security
would be “seasoned” against the deemed preference rules under bankruptcy law from
the date on which it is first granted. It would rank from its original date. The burden
and expenses of researching the names of third party secured creditors at the time of
the syndication and obtaining their consent can be avoided.
3. Farm-Outs
For farm-out secured loan syndications, where the borrower does not expressly
consent to the sale of a participation, the response of Quebec law is a little more un-
certain. The uncertainty arises by reason of the absence of a lien de droit between the
sub-lender and the borrower. This problem is not unique to Quebec law. Moreover, it
“Art. 2130 C.C.Q.
BS See Payette, supra note I at 163; and Martis, supra note 5.
Although mandate involves a bilateral contract and comes into being upon its acceptance by the
mandatary (art. 2130 C.C.Q.), the mandate is often unilateral in form, and acceptance is often evi-
denced merely by the actions of the parties. The express power of attorney, the corporate resolution,
and the written instruction to a stock broker or bank are all evidenced by a unilateral writing issued by
the mandator. Certain deposit receipts, consignment receipts, and the commodity broker’s confirma-
tion are all examples that originate with the mandatary: see C. Fabien, Les r~gles du mandat (Mont-
real: Chambre des notaires du Qudbec, 1989) at 110ff.
” Art. 1641 C.C.Q.
6A mandate can also be ratified. Moreover, when there is ratification the effect is retroactive to the
moment of the performance of the act. It is also binding on third parties unless they can show they
suffered a prejudice: see A. Popovici, La couleurdu inandat (Montreal: Thrmis, 1995) at 52. See also
Fabien, supra note 84 at 272.
1999]
J.B. CLAXTON,
.c. – ARTICLE 2692 REVISITED
does not arise solely in consequence of the Quebec law of hypothecs. There is no re-
lease of the lead lender for the portion of the future loans to be made by the sub-
lender. Nor does the borrower acquire the right to call upon the sub-lender to make a
portion of the future loans. Generally, the borrower would preserve his rights to oblige
the lead lender to make all advances. Under Quebec law, one cannot normally transfer
the performance of an obligation to another without the consent of the person to
whom it is owed.”
One can, however, transfer a claim such as the borrower’s debt owing, or a por-
tion of it, including an undivided portion of it. If the borrower is notified of the sale,
the hypothec securing it, or rather the same undivided portion of the hypothec secur-
ing it, is also transferred. 9 If the loan is fully disbursed, the legal requirements for a
perfected transfer of a claim and its security have been complied with and the result is
one that should be acceptable to the parties. If, however the loan is not fully disbursed,
or is for a revolving credit, it is doubtful if the sub-lender has any obligation to make
further advances (there being no lien de droit between the sub-lender and the bor-
rower) and it is doubtful if he acquires an interest in the underlying hypothecs. The
sub-lender’s interest, or at least a portion of it, would be no more than a personal
claim against the lead lender. The debt secured by the hypothecs might be restricted to
the aggregate debt owing to the lead lender alone.
Caution suggests that the sub-lender obtain the concurrence of the borrower to
any such sale. It also suggests that if the lead lender desires a release of a portion of
his obligation to make advances after the farm-out, he have the borrower consent to
the farm-out and the release.
4. Farm-Outs at Common Law Compared
In the Alberta cases concerning the insolvency and winding-up of the Canadian
Commercial Bank, the court found that the participation farm-out agreements created
an express trust, with the bank as the trustee.’ There was a bonafide sale of an undi-
vided participation in the loans combined with the creation of a trust. The court found
that the terms of the farm-out agreements led to this conclusion. They provided that
all repayments of the debt be held for the benefit of the participants, and be promptly
remitted to the participants according to their interests and without any commingling
of the proceeds of repayments with the funds of the bank.
In Quebec, a court could not find the existence of such a trust unless the original
holder and transferor of the claim and any related security was an individual or a
qualified trust company.’ However, the Quebec court should find, at least for direct-
See L. Faribault, Traitj de droit civil du Quibec, t. 11 (Montreal: Wilson & Lafleur, 1961) at 460.
Art. 1637 C.C.Q.
Art 1638 C.C.Q.
See Deposit Insurance, supra note 13; and Commercial Bank, supra note 13.
9’Art. 1274 C.C.Q.
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loan syndications and for farm-outs where the borrower consents (provided the credit
agreement admitted of it), that the lead lender becomes a mandatary for the sub-
lender’s interest in the claim and in the underlying security. Perhaps, even more sim-
ply, the court should find the lead lender becomes an administrator of the property of
others for the interests sold to the sub-lender, and that in consequence the lead lender
is obliged to account as a fiduciary. In either case, as long as there is a segregation of
the funds repaid by the borrower to the lead lender from the other funds of the lead
lender, the sub-lender should obtain an enforceable right respecting his undivided in-
terest in such funds. He should obtain an enforceable right against the lead lender re-
specting his undivided interest in the security.
5. Securitizations
As regards securitizations, the originator of the portfolio of secured receivables
remains, opposite the claim debtor, his creditor and holder of the hypothecs. The
claim debtor gets no notice of the sale to the SPV. The originator of the portfolio is a
prete-non for the purchaser of the MBS. One should also note that if an original bor-
rower defaults, the SPV re-transfers the hypothec to the originator before the latter
takes proceedings to enforce the borrower’s hypothec. This is the manner in which
CMHS-MBS were written before reform and remains the manner in which they are
written today. Article 2692 is not invoked by these transactions. If, however, the SPV
grants a further hypothec on its assets to secure the holders of the MBS it intends to
issue, article 2692 must be complied with.
VII. Specific Questions Arising from Article 2692
Having now examined the basic concepts of law that inform the transactions de-
scribed in this study, it is now appropriate to return to the precise phrasing of article
2692, and to examine the substantial number of questions that it invokes. Generally,
the separate phrases of the provision will be examined in the order of their occur-
rence.
A. Who May Grant the Hypothec Securing the Titles of Indebtedness?
Article 2692 starts with the words “A hypothec securing”. The words are unquali-
fied as to the type of hypothec or the grantor of the hypothec. They must therefore in-
clude any type of hypothec and anyone’s hypothec. It could be the hypothec of the is-
suer of the bonds or titles of indebtedness. It could be that of another; that of a parent,
subsidiary, or other affiliate of the issuer (if the relevant corporation’s law permits it);
or it could be that of another guarantor. It could be that of an individual.
1999]
J.B. CLAXToN, Q.C. – ARTICLE 2692 REVISITED
One of the deficiencies of the SCPA was that it could not be employed by a guar-
antor to secure his obligation toward the creditor of a third party issuer of the bonds. 2
The grantor of the hypothec could invoke the statute only to secure payment of “its”
bonds, debentures, or debenture-stock. Reform has removed this restriction. There is
now no reason why, under the prescriptions of article 2692, one cannot hypothecate
one’s property to secure the bonds or other titles of indebtedness issued by another.
One must also note that the first words, “A hypothec”, are in the singular. Here
the singular must include the plural. The Interpretation Act provides that the singular
number shall extend to the plural whenever the context admits of it.” It does so here.
To suggest that one would escape the strictures of article 2692 if the transaction in-
cludes several hypothecs would be to give it an unreasonable and too narrow a con-
struction. Moreover, whether the grant is of a hypothec upon a list of properties or a
hypothec upon each property in the list is strictly a matter of the draftsman’s style.
B. What Does “Securing Payment Of”Mean?
The second element of the subject matter of article 2692 is found in the phrase
“securing payment of bonds or other titles of indebtedness.” This phrase modifies and
defines the word “hypothec”. It restricts the application of the provision to hypothecs
securing payment of certain types of obligation. Two aspects of the phrase deserve
some attention.
The first arises where the principal transaction for which the hypothec is given is
reflected by an agreement, and incidentally, the amount of the debt is also evidenced
by a bond or other title of indebtedness. Does article 2692 apply if the credit agree-
ment provides that the advances outstanding from time to time are to be evidenced by
a promissory note or a unilateral acknowledgement of indebtedness delivered to the
bank? At first sight, both are “obligations ou autres titres d’emprunt” or in English,
“titles of indebtedness” secured by a hypothec, and article 2692 would apply. Would it
apply if the credit agreement alone contains the obligation for the indebtedness, and
the bank then in addition obtains from the borrower a note for each advance? The
bank could merely advise its borrower that this is its customary practice and that it
provides certainty as to the amount of the loan from time to time outstanding. Is the
application of article 2692 and the validity of the hypothec to depend on the subtlety
of the draftsman? Should counsel warn the bank that if it obtains notes its hypothec
may be in jeopardy?
As regards the stand-alone secured debenture, if one ignores article 2692, the de-
benture itself could contain a hypothec of movable property. If immovable property
were to be charged, the hypothec could be granted by a collateral or supplementary
92 J. Ttrault, “Pitfalls under Trust Deeds” in Meredith Memorial Lectures 1976-77: Corporate Debt
Financing (Toronto: Richard De Boo, 1978) 17.
93R.S.Q. c. 1-16, s. 54.
694
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notarial deed running in favour of the registered debenture holder. At first sight, a de-
benture is a title of indebtedness.
The legislature could not have intended that the creditor be obliged to employ a
fondi de pouvoir to hold the security in all circumstances where a promissory note,
debenture, or other title of indebtedness is to be used to affirm the amount of the debt.
To dictate that every agreement for a secured loan that is to be evidenced or further
evidenced by a note or other title of indebtedness must be in notarial form with a
fond6 de pouvoir (who, by inference, must be a third party as the C.C.Q. speaks of his
acting on behalf “of the creditors”/”des cr~anciers”) makes no sense. To dictate that in
all cases where there is a secured title of indebtedness, the security must be held by a
person other than the creditor would be a radical departure from the traditional law of
hypothecs. It would result in an absurdity. No legal utility is to be served by such a
rigid and formalistic structure. Yet article 2692, being in imperative and penal form,
and read literally can be construed in this sense. One must endorse the statement of
Louis Payette noted earlier to the effect that he favours an interpretation of article
2692 in a spirit of continuity, to reflect the continuance of the regime of the prior law.’
Continuity dictates that this phrase of article 2692 cannot be read literally.
One can reasonably conclude that, notwithstanding the literal text of article 2692,
where there is an agreement between the debtor and the creditor-whether in bilateral
or in unilateral form-stating the amount or the maximum amount of the obligation
secured, article 2692 is not invoked merely because the debt is evidenced by, or fur-
ther evidenced by, the delivery of a promissory note, debenture, or other acknow-
ledgement of indebtedness. This conclusion is also reinforced by the conclusion on
the meaning of the phrases “bonds or other titles of indebtedness” and “granted to”.9″
The second aspect of the phrase “securing payment of bonds or other titles of in-
debtedness” involves consideration of the object of the words “payment of’. Securing
payment of bonds or other titles of indebtedness does not include securing payment of
a balance of price, a loan, break payment clauses, penalties, obligations for specific
performance, or other non-monetary obligations. It would, however, do so where such
obligations are incidental to the securing of payment of the bonds or other titles of in-
debtedness. Most loan agreements contain several such obligations. Nor do the words
“securing payment of’ have such an object where the bonds or titles of indebtedness
are issued under a pledge agreement in order to guarantee the performance of an obli-
gation.’ The importance of this aspect will become more apparent in the following
section.
94 Payette, supra note I at 169.
‘5 See Parts VIT.C. and VU.., respectively, below.
his behalf.
The bonds so pledged could be held by the creditor of the principal obligation, or by another on
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
695
C. What is a “Bond or Title of Indebtedness”?
What is to be included in the term “obligations ou autres titres d’emprunt”/”bonds
or other titles of indebtedness” and the additional words “6mis par”I”issued by”? If
the phrase were given a large meaning, it could include any contract involving a debt
for borrowed money, a credit agreement, a bill of sale with a balance of price, an in-
voice for goods sold and delivered on terms, a banker’s acceptance or other bill of ex-
change, a guaranty, etc. Suretyship’ is often evidenced by a unilateral contract, which
is in insurance practice usually called a “bond”. It is sometimes secured by a hy-
pothec. It could include almost any obligation that can be secured by a hypothec.
Such a large meaning would place article 2692 in direct conflict with article 2696
concerning movable hypothecs without delivery. It is unreasonable to suggest that se-
curity for such obligations must be in notarial form and in favour of afondd de pouvoir.
The phrase in question should be given a meaning that is more consistent with the
historical antecedents of this provision in Quebec. Under the SCPA, the phrase em-
ployed was: “bonds, debentures or debenture-stock “‘” This phrase would not appear
to have been judicially construed in Quebec, but is thought not to provide a precise,
limitative list of words of art. It includes “notes” and similar titles of indebtedness.”
All authority seems to hold that the phrase refers, not to the indebtedness itself, but to
a document evidencing it.”‘ It is a “title” evidencing a claim.”‘ Consistency suggests
that generally the new words should have the same meaning as the old.
Because the relevant law, now reflected in article 2692, is in imperative form, it is
important to define the limits of the phrase. A grammatical analysis of each of the
phrases “obligations ou autres titres d’emprunt” and “bonds or other titles of indebt-
edness” involves a different emphasis, but each brings one to the same conclusion. In
the French version, “obligations” means “bonds”; it is also the broad generic term for
all contractual obligations. It is restrictively modified by the term “ou autres titres”. If
“autres” were absent, “titres d’emprunt” would merely be an alternative to “obliga-
tions” and the latter could have a very large meaning. The use of the word “autres”
Art. 2333 C.C.Q.
9′ Supra note 2, s. 27. The term “debenture-stock” is a disused term to signify a stock in or share of
a consolidated mass of debt or debenture financing, often where the security was held by a trustee, in
a period when “debentures” were often individually issued and secured (pro rata with others): see
F.E. Wegenast, The Law of Canadian Companies (Toronto: Carswell, 1979) at 631; and C.M.
Schmitthoff, ed., Palmer’s Company Law, 23d ed. (London: Stevens & Son, 1982) at 532.
99 W.K. Fraser, Company Law of Canada, 5th ed. by J.L. Stewart & M.L. Palmer (Toronto: Car-
swell, 1962) at 382.
,’ Ibid.; see also L.C.B. Gower, The Principles of Modern Company Law, 3d ed. (London: Stevens
& Sons, 1969) at 347.
,o, Renaud & Smith, supra note 35 at 347; and “Corporate Trust Deed”, supra note 6 at 809-10.
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however restricts it to “obligations” of the same kind as “titres” under the ejusdem
generis principle.’ 2
In the English version, on the other hand, the term “bonds” is the specific term,
while “other titles of indebtedness” is the generic term. The application of the same
ejusdemn generis principle would suggest that the term “titles of indebtedness” should
include only things of the same kind or class as “bonds”.
The term is also qualified by the word “issued”. As used in article 2692, “issued”
merely means validly authorized and legally “delivered”. “Issued” is not thought to be
a technical term, but a mercantile term. It would exclude documents that are stolen or
deposited merely for safekeeping. ” This also suggests that a document or paper evi-
dencing a unilateral acknowledgement of a debt for a specified sum is involved. Both
the French and the English phrases would thus include bonds, debentures, notes, units
of indebtedness, and other titles where the evidence of the debt is reflected by a
documentary title: by the issue of a paper, a security, a valeur mobilikre.
Another use of the term supports this interpretation. The French term “obligations
ou autres titres d’emprunt” may now be words of art in the C.C.Q. In its English ver-
sion, the C.C.Q. sometimes uses the term “bonds or other evidences of indebtedness”
instead of “titles of indebtedness”. One finds the latter phrase used in the second
paragraph of article 2688 C.C.Q., concerning hypothecs to secure lines of credit. The
former phrase is used extensively in the sub-paragraphs of article 1339 C.C.Q. con-
cerning presumed sound investments by those having the administration of the prop-
erty of others. This list of qualified investments (with modifications) is modelled on
the list of the Civil Code of Lower Canada,” which in turn reflects the similar lists
found in dozens of statutes of Quebec, of the other provinces, and of Canada.”5 If one
reads these in their proper context, one must conclude the term “obligations ou autres
titres d’emprunt” is restricted to what are generally known as “valeurs mobili~res” or
“securities” (debt securities) contemplated by the Quebec Securities Act.”
All of this leads one to conclude that “bonds or other titles of indebtedness” in-
volve documentary titles that are issued or delivered and are of the nature of “securi-
ties” as known to securities law. They are usually sold for cash, but this is not an es-
sential feature of their nature. They are often, but not always, sold to the public. Nor-
mally, but not essentially, such titles also constitute contracts of adhesion.” Normally,
but also not essentially, such titles form part of a series of titles, where each consti-
’02 A. Mayrand, Dictionnaire de inaximes et locutions latines utilisies en droit, 3d ed. (Cowansville,
Qc.: Yvon Blais, 1994) at 123.
“5′ Wegenast, supra note 98 at 638; and Fraser, supra note 99 at 385.
Comentaires, supra note 20, t. I at 806.
o
n
05 These statutory lists of defined investments are known in legal jargon as the “legal for life stat-
utes”; see e.g. Pension Benefits Standards Act, R.S.C. 1985 (2nd Supp.), c. 32, and Regulations,
S.O.R./93-299; and Trustee Act, R.S.O. 1990, c. T-23, s. 26.
06 R.S.Q. c. V-1.1.
“0′ Art. 1379 C.C.Q.
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J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
697
tutes a part of the whole series and benefits and ranks pari passu with the other titles
comprising the series. Frequently, but again not essentially, they may be transferred by
delivery or by endorsement and delivery. The debt that they evidence is rarely also de-
finitively quantified in a bilateral contract between the debtor and the creditor. All of
these criteria will be pertinent in assessing whether article 2692 is to apply to a trans-
action. It will still be up to counsel (and the courts) in each case to determine when
the delivery of an evidence of indebtedness (a paper) secured by a hypothec consti-
tutes one contemplated by the provisions of article 2692.'”
Unfortunately, until this aspect of article 2692 is clarified through amendment,
and in the absence of a more definitive construction by the courts, the imperative and
penal form of the provision will cause many counsel to hesitate before approving a
number of transactions that would otherwise reflect normal business practices.
D. Who May Issue Titles of Indebtedness Secured by Hypothec?
The third element of the subject matter of article 2692 speaks of titles of indebt-
edness issued by “a trustee, a limited partnership or a legal person authorized to do so
by law.” This listing, in the context of article 2692, is curious. One should conclude
that if another, not embraced by the list, issues secured titles of indebtedness, the pen-
alty of article 2692 will not apply. The list does not refer to the individual, not even
the entrepreneur. Nor, one can argue, does it refer to the ordinary corporation or legal
person.
An individual may also issue such titles of indebtedness. The issue may be se-
cured by his hypothec or by that of a guarantor, including a corporate guarantor (a
“legal person”).'” Such a practice might be unusual, but nothing in our law, especially
not article 2692, prohibits it. And nor should it, at least for the entrepreneur. The ordi-
nary individual, it is true, can only grant certain types of hypothec, but one who car-
ries on an enterprise is not so restricted.’0 If his enterprise is substantial, he may be
able to raise debt capital by an issue of debentures or notes. The notes could be se-
cured pari passu by a hypothec. The hypothec could be held by a trustee or possibly
another who either is, or is not, qualified as afondi de pouvoir. The individual issuer
could do so free of the strictures of article 2692.
The position of the individual may be examined from another point of view. The
Bills of Exchange Act, in speaking of bills, notes, and consumer notes, constantly
speaks of “persons”. “‘ The term “person” includes an individual. A “person” may is-
sue a note. A note is not invalid by reason only that it contains also a pledge of collat-
‘0 Quaere: As art. 2692 is imperative and penal, would it apply if only a single bond is issued? This
interpretation would be inconsistent with that of the SCPA, but that was not an imperative and punitive
enactment: see Trust giniral, supra note 22; and Socit6 nationale, supra note 22.
” Fraser, supra note 99 at 386.
“o Arts. 2684-89 C.C.Q.
. R.S.C. 1985, c. B-4, ss. 4, 16,25, 59, 176, 189, etc.
698
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eral security.”2 Such security would now be a hypothec in Quebec, and if it is a mov-
able hypothec, it could be granted in the note itself. Thus, the Bills of Exchange Act
clearly implies that an individual may issue a title of indebtedness secured by hy-
pothec. The list of those who may do so that is found in article 2692 should not be
limitative.
Accordingly, although an individual who is an entrepreneur may issue a series of
secured notes as securities without regard to form, if the issuer is not an individual but
an entity named by article 2692, it can only do so by notarial act in favour of a third
party fondj de pouvoir who would hold the security. Article 2692 would impose the
penalty of nullity on some issuers, but not on others. No legal purpose seems to be
served by this consequence.
A closer examination of each of the terms “a trustee”, “a limited partnership”, “or
a legal person authorized to do so by law” is warranted. It is convenient to examine
the last of these terms first. The list ends with the words “authorized to do so by law.”
Does this phrase modify all items in the list, or only the last, “legal persons”? The
French version, which uses the phrase “autorisre A le faire en vertu de la loi” suggests
that the phrase modifies “legal persons” only. This phrase grammatically agrees with
“personne morale”, but not with “fiduciaire”.
The term “authorized to do so by law” raises other questions. Does it mean
authorized “by a statutory text of law” or merely “according to the formalities pre-
scribed by law” (statutory borrowing power, authorizing by-law, resolution of the
board, etc.)? If it means the latter, it is redundant. Such qualification, although inher-
ent in all acts of alienation, is never found in the articulation of the civil law by the
C.C.Q. It is not found in relation to “trustee” or “limited partnership”, the preceding
items of the list.
It is most likely that the phrase “authorized to do so by law” is intended to refer
simply to certain amendements to the SCPA brought in by reform. Although the op-
erative provisions of the SCPA permitting corporate trust deed financing were re-
pealed, two other provisions were recast. Section 34 of the SCPA now empowers a le-
gal person constituted in Quebec or elsewhere without capital stock and which does
not carry on an enterprise, “if empowered by its charter or by the law governing it,” to
grant a hypothec, even a floating hypothec, on a universality of its property, movable
and immovable, present and future, and notwithstanding the restrictions of the C.C.Q.
Section 27 of the SCPA contains similar provisions respecting similar legal persons
with share capital.”‘ There are thousands of corporations (school boards, hospitals,
fabriques, municipal corporations, etc.) in Quebec and elsewhere that are creatures of
special legislation that do not have power to borrow or to grant security.”‘ The phrase
“authorized to do so by law” would seem to be intended to refer merely to these pro-
I Ibid., s. 176(3).
“3 Supra note 2, ss. 27, 34, as am. by Implementation Act, supra note 3, ss. 643, 648.
” See Conimentaires, supra note 20, t. 1 at 200-01.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
699
visions; that “authorized” really means “having the capacity to do so conferred upon
them by the law.” However, if this is the case, the phrase is redundant as the amend-
ments to the SCPA referred to above are complete and stand alone.
The result is even more anomalous. If the phrase “authorized to do so by law” is
intended to refer to the new provisions of the SCPA, although redundant, a strict and
restrictive reading of article 2692 means that it does not embrace the ordinary legal
person, the commercial corporation. This means that such a corporation can either is-
sue secured bonds or other titles of indebtedness without complying with article 2692,
or if one accepts the conservative view that the provision is restrictively enabling, that
such a corporation cannot issue such securities at all. Neither of these conclusions
concerning the meaning of these words is acceptable. Article 2692, whatever its
meaning, cannot have these results. This analysis does serve, however, to illustrate the
difficulty the practitioner faces in attempting to apply the provision in a rational way.
The inclusion of the “trustee” in the list must also be examined. One must turn to
the instrument creating the trust to determine the powers of the trustee to borrow, to
hypothecate trust property, as well as any formalities he must follow to do so. If the
instrument is silent and contains no restrictions, the trustee acts as the administrator of
the property of others charged with full administration.”‘ One with full administration
may “alienate the property by onerous title, charge it with a real right or change its
destination [etc.]'”‘ To hypothecate is to “charge'”” with a “real right”.’ ‘8 The inclu-
sion of the “trustee” in the list of who may issue secured titles of indebtedness under
article 2692 is unnecessary and also redundant.
The reference in the list to “limited partnership” would appear to be equally un-
necessary. The C.C.Q. expressly states that a limited partnership-presumably, as
with the trustee, one authorized by the constituting instrument-may make a distribu-
tion of securities to the public and issue negotiable instruments.”‘ One should not con-
strue the use of the term “negotiable instruments” in a narrow or restrictive way. The
provision is clearly enabling and would have to include “other titles of indebtedness”
which may or may not be negotiable instruments. There is nothing in the civil law that
makes it inherently wrong that the limited partnership should borrow and issue titles
of indebtedness. This is also established by the further principle that, again subject to
the agreement, the general partners have the powers with respect to partnership prop-
erty of a general partnership, and opposite the special partners are bound as adminis-
trators of the property of others charged with full administration.'” Article 2211
C.C.Q. also expressly admits the hypothecation of partnership assets where the con-
Art. 1278 C.C.Q.
,16 Art. 1307 C.C.Q.
“, Arts. 2644,2645,2647 C.C.Q.
, 8 Art. 2660 C.C.Q.
“‘ Art. 2237 C.C.Q.
Arts. 2238, 1278 C.C.Q.
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tract so provides. The position of the limited partnership is the same as that of the
trustee. The listing of “limited partnerships” in article 2692 is also redundant.
It is most probable that in formulating the phrase “a trustee, a limited partnership
or a legal person authorized to do so by law” (the third element of the subject matter
of article 2692) the draftsman merely intended, firstly, to replace the term “company”
with the term “legal person” and secondly, to extend the scope of article 2692 to the
trustee and the limited partnership. However, as noted, he failed to include the indi-
vidual, particularly the entrepreneur. The reference to “legal persons” is in a form that
is most ambiguous. These oversights, when found in an imperative and penal expres-
sion of the law, produce a result that is most unsatisfactory.
E. What Does it Mean to Grant to a Fond6 de pouvoir?
The meaning of the phrase “granted … in favour of the person holding the power
of attorney of the creditors”/”&tre constitu6e … en faveur du fond6 de pouvoir” has
two aspects that require examination. First, did the draftsman truly intend that if at
any time the several elements that are the subject of article 2692 exist in a transaction,
the hypothec must, on pain of nullity, run in favour of afondi de pouvoir? Are not the
principles of the civil law protected equally well if the hypothec runs to the creditors
directly? Under credit agreements, there are often two or three banks acting together.
Although the lead bank often holds all the security on behalf of the other banks, in
many cases the banks hold the security jointly. They then enter into an administrative
agreement in favour of one of them. If they have to exercise their hypothecary rights,
they act in concert. They often evidence their claims by having the borrower issue ti-
tles of indebtedness. Must they be represented by afondi de pouvoir?
A literal construction would give article 2692 an application that does not reflect
the former law. It would do so without any apparent utility. Either the statement of the
Minister”‘ that article 2692 is in conformity with the prior law is false, or the con-
struction of the phrase “bonds or other titles of indebtedness” according to its plain
meaning is false. One is obliged to conclude that the “golden rule” of statutory inter-
pretation cannot be followed; that if one applies the literal sense of the words of the
provision to all transactions embraced by the provision, an absurdity will result.'” If,
once again, continuity is to be reasonably observed, article 2692 should be read as if
the draftsman had made an error in syntax; as if the phrase “granted … to afond de
pouvoir” came after and were to modify the word “hypothec”. Article 2692 would
then read “A hypothec granted to afondi de pouvoir to secure bonds ..”
Article 2692 would then have four elements identifying the circumstances when
its imperative requirements would apply. As the provision must be strictly construed,
all four elements would have to be present before it applied. This construction would
at least restrict the imperative and punitive effects of article 2692 substantially. Con-
1 Coininentaires, supra note 20, t. 2 at 1686.
I2See the “golden rule”, supra note 37 and accompanying text.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
sistency and a rational construction of the law compels such a construction of article
2692 even though this construction goes far beyond a literal reading of its words. ‘
Unfortunately, however, one may expect counsel in a given transaction to hesitate be-
fore giving an opinion that assumes the courts will eventually arrive at a finding of
this construction.
The use of the words “granted … to a fondi de pouvoir” gives rise to a second
question. Does “granted” mean originally written by the grantor directly in favour of
thefondi de pouvoir, or does it merely mean “held” by thefondi de pouvoir? A strict
construction suggests that it means only the former. Article 2692 will not apply if the
hypothecs are granted to one, and subsequently acquired by another. Many securitiza-
tions will therefore not be affected by article 2692. In such securitizations, the out-
standing claims and related hypothecations are acquired by the SPV, which issues ti-
tles of indebtedness or participations “backed” by the hypothecs.
F Why Should the Hypothec be in Notarial Form?
The clarity of the phrase of article 2692 “on pain of absolute nullity, be granted
by notarial act en minute” is not in question. One ought to question, however, the util-
ity of this obligatory requirement of form. The SCPA had a similar requirement, al-
though this statute had an infinitely narrower scope of application. No doubt it was
thought in the early part of this century that such a requirement would give the assur-
ance of certainty, stability, and proof of a then exceptional and complex contract (the
corporate trust deed securing bonds or debentures). Moreover, it extended the law of
hypothecs to enable the creation of charges of the nature of hypothecs on all types of
property, movable and immovable, corporeal and incorporeal, present and future. Per-
haps most important of all, at that time, the normal form of deed for the creation of an
ordinary hypothec (confined to a charge on immovable property) was by notarial act.
Today, circumstances are very different. In the modem economy the importance
of land has diminished. A hypothec may be granted on any type of property whatso-
ever. It has replaced a variety of charges or grants of security interests that never re-
quired notarial form. With the enormous expansion of the field of hypothecs, most
hypothecations today will not involve immovables. The level of activity on the finan-
cial markets for secured financings has also increased exponentially. The widely held
issue of secured debt securities of the time of the SCPA represents only a fraction of
such financings. In response, developments in the preparation of documents, their re-
production, their communication and their proof have revolutionized both legal and
commercial practice. All this has been recognized in reform, which permits the hy-
pothecation of movable property by any written instrument.’24 Apart from article 2692,
notarial form is reserved only for the traditional field of hypothecs on immovable
property. Moreover, article 2692, as noted earlier, addresses the characteristics of the
‘” It would reflect the observations made in Part VII.B., above.
124 Art. 2696 C.C.Q.
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issuer and the obligation secured. The SCPA, on the other hand, addressed essentially
the nature of the property charged and the manner in which the charge is held. In arti-
cle 2692, the exceptional domain of the notary has been preserved, but by reason of
the quality of certain grantors and of the form of the obligation secured. No social,
economic, or juridical utility is served by this rule.
To prepare a document in notarial form is now considered to be burdensome, time
consuming, and expensive. It is the Quebec borrower who pays for this. Extending
this requirement to the vastly enlarged field of the hypothecs contemplated by article
2692 places the Quebec enterprise at a disadvantage when compared to the require-
ments of other jurisdictions. It is submitted that the requirement that transactions em-
braced by article 2692 be in notarial form en minute ought to be removed.
In the alternative, the requirement should at least be restricted to the securing of
issues of marketable securities to be offered to the public. This was the essential prac-
tical feature of the SCPA at the time of its adoption.
G. What is a “Fond6 de pouvoir”?
The term ‘fondi de pouvoir” employed in article 2692 has not been a word of art
under Quebec law. Perhaps, with reform, it is now a new term of art in the civil law
legal lexicon. If, as the Commentaires state, “[c]et article est conforme au droit ant6-
rieur,”” the use of the term is merely to replace the term “fidricommissaire”, and in
English, the term “trustee” of the SCPA. The term is now also used in article 3060
C.C.Q., which restricts the right of the registrar to discharge from registration hy-
pothecs granted to secure bonds or titles of indebtedness. As noted earlier, it is also
used in section 32 of the SCPA that prohibits afond6 de pouvoir from subscribing to
an issue of the bonds or titles of indebtedness where he holds the hypothecs. To the
knowledge of the author, it has not been used elsewhere. It would seem the draftsman
of article 2692 sought a new term that was expressly generic in order to embrace any-
one who acts as the representative of the creditors; a term which did not essentially
embrace nor exclude the concept of mandate, or that of trust. An English-language
equivalent term would simply be “representative”. One might say this generic term
was adopted to permit the law to adapt to the “innominate” relationships required for
creative commercial practice.
The term “fond6 de pouvoir’ may identify a new form of representative who
holds rights in or to property as a fiduciary. The C.C.Q. names a good number of
other types of representative: the tutor,” the curator,'” the trustee,'” and the mandatary
holding a general mandate'” are some of the examples.'” All must, subject to the
‘”Supra note 20.
126 Art. 177 C.C.Q.
,’Art. 258 C.C.Q.
2 Art. 1260 C.C.Q.
z’ Art. 2130 C.C.Q.
1999]
J.B. CLAXTON, Q.c. – ARTICLE 2692 REVISITED
terms of their appointment, follow the rules for the administration of property of oth-
ers.’3 ‘ These rules are suppletive in nature and apply save to the extent that “another
form of administration applies under the law or the constituting act, or due to circum-
stances,”‘3 2 exception being made for the principles of public order. Thus, thefondg de
pouvoir can be a representative of the creditors whose powers and duties are strictly
determined by the contract of his appointment. It would be a contract sui generis
similar, or at least parallel, to the corporate trust deed drafted under the SCPA. As Rin-
fret J. (as he then was) stated when characterizing the rights of the trustee under a
corporate trust deed qualified under the SCPA: “[C]’est le contrat, et non le statut, qui
doit determiner la nature des relations de la faillie, du fiduciaire et des porteurs
d’obligations” ’33
Where thefondd de pouvoir is neither a mandatary nor a trustee, what basic char-
acteristics should he have? His rights (powers) and obligations will be strictly defined
by the contract, as was the case under the SCPA. He will be the holder of the hy-
pothecs, of course, and will have all powers necessary to exercise the rights that attach
to hypothecs.
With respect to other characteristics, it is appropriate to examine his position in
contrast to that of the trustee and the mandatary. Thus, as regards the trustee, thefondd
de pouvoir who is not also a trustee would be a fiduciary subject to the rules for the
administration of property of others, but free of the qualifications for Quebec trus-
tees.’3 If a legal person, it need not be a Quebec licenced and qualified trust com-
pany.3 ‘ If the fondd de pouvoir is also a creditor (the provisions of section 32 of the
SCPA having been waived), the need for an independent trustee will not apply. 6 The
fond6 de pouvoir will have the administrative duties and powers that are settled upon
it by the contract.
The hypothecs the fondd de pouvoir holds will probably remain a part of the pat-
rimony of the collective holders of the titles of indebtedness, the creditors he repre-
sents. They would run with their claims, their titles of indebtedness. The question of
which patrimony held the hypothecs did not seem to present a practical problem un-
der the SCPA, as it was never the subject of any of the more than one hundred re-
ported judgements. However, the creditor’s rights and the fond6 de pouvoir’s powers
and his obligation to take proceedings in the exercise of the hypothecs he holds would
be regulated by the act of his appointment. The traditional act of this kind-the corpo-
Those found in the C.C.Q. were listed at supra note 46.
‘ Arts. 1299ff. C.C.Q.
132 Art. 1299 C.C.Q.
3 Lalibertd, supra note 23 at 15. See also Perron v. L’Eclaireur (Lteg) (1933), 57 B.R. 445 (K.B.);
and Quebec Productions Corporation v. Lavigne, [1972] C.A. 172, online: QL (AQ).
” This construction of our law would bring it into line with the common law and its doctrine of
constructive trust or resulting trust, which may apply in other jurisdictions in parallel circumstances:
see Waters, supra note 78 at 277.
‘
3 Art. 1274 C.C.Q.
‘3 Art. 1275 C.C.Q.
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rate trust deed-normally reserves to the creditors some deferred right to take suit.
Under the SCPA, the trustee’s right to take proceedings was always upheld where the
other requirements of the Act were complied with.” This suggests that any property
right in the hypothecs remains in the patrimony of the creditors.
How would the rules governing a mandatary under a mandate compare with those
governing a fondg de pouvoir who is not a mandatary? Generally, he would be a
pr~te-nomn, whose principals are not known to the public.’ 8 They may or may not be
known to the borrower-issuer. His obligations to supervise the security, to monitor the
performance of the borrower-issuer, to report and to act and take suit in the event of
default, can all be regulated by the contract. This was the case with the corporate trust
deed governed by the SCPA. It continues to be the case for the thousands of corporate
trust deeds still outstanding. The process of reform has not changed this relationship.
The contract governing thefondd de pouvoir could also regulate and substantially
restrict the extent of the responsibility of the creditors for the actions of their repre-
sentative to a degree that may not be possible if thefond6 de pouvoir were an ordinary
mandatary. Such regulation was the normal practice in corporate trust deeds written
under the SCPA. In public issues of titles of indebtedness, the title holder would not
accept that thefondi de pouvoir is his mandatary. He would not accept that he is re-
sponsible for the acts of thefondi de pouvoir,'” must indemnify him,'” cover his ex-
penses,” pay interest on his advances,”‘ or be liable to third parties for damages
caused by him.”‘ The issuer and thefondg de pouvoir would also not accept that the
death or bankruptcy of the title holder ends the relationship.'”
H. Who Maybe a Fond6 de pouvoir?
Who should be empowered to hold hypothecs on behalf of the creditors of the
obligation secured? Article 2692 does not address the question. Neither the C.C.Q.
nor the pre-reform SCPA places any restriction or requirements on the person who is
to act as the fondd de pouvoir. Under the SCPA, an individual occasionally acted as
the trustee.’ Thus, any person may act as afond6 de pouvoir. The individual may so
act. So may the duly authorized legal person unless the rights granted in favour of the
fondi de pouvoir create an express trust. If a trust is created, the trustee must be an in-
‘”See Lalibertg, supra note 23 at 14; and “Corporate Trust Deed”, supra note 6 at 808.
” Art. 2157 C.C.Q.
Art. 2152 C.C.Q.
“‘Art. 2154 C.C.Q.
Art. 2150 C.C.Q.
14 Art. 2151 C.C.Q.
4 Art. 2160 C.C.Q.
” Art. 2175 C.C.Q.
“4′ Zoltom, supra note 23. The fact that the defendant, Rodgers, who acted as trustee was a Quebec
resident was considered, but the fact that Rodgers was also an individual was not raised in the Court
of Appeal decision.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
705
dividual or a trust company licensed to do business in Quebec.”* Moreover, as noted
above, if the fondi de pouvoir is also one of the creditors and a trust is created, there
must be an independent trustee.’ 7
Apart from section 32 of the SCPA, which was examined earlier, there is nothing
in article 2692, nor in Quebec law generally, that prohibits one of the creditors of the
obligation secured from acting as the fondi de pouvoir, holder of the hypothecs, for
the benefit of all the creditors.
VIII.
Suggested Modified Text for Article 2692
The questions reviewed in this study are of great concern to the lawyer practising
financial law in Quebec. The interpretation and possible construction of the part of the
law reflected in this study is an attempt to examine how the practicing lawyer would
expect article 2692 to be applied, given the drafting of the provision and a basic un-
derstanding of the objectives or at least the thrust of the reforms as expressed in the
Title of the C.C.Q. on hypothecs and the Commentaires of the Minister of Justice.
Perhaps, over time, the courts could arrive at similar conclusions and answer the
questions posed in this study in the same way. Unfortunately, the modem practice of
law is likely to preclude reconstruction of article 2692 by the courts in this manner
within any reasonable period of time. Today, in every major secured financing in-
volving one of the transactions described earlier, instructed counsel for both the bor-
rower and the lead-lender are expected to give a categorical, non-interpretative, writ-
ten opinion that the transaction itself and the security for it are valid and enforceable
in accordance with their terms. Lenders will generally not accept “reasoned” opin-
ions. If counsel cannot give the required opinion and cannot find a reasonable alterna-
tive form of structure at reasonable cost, the transaction will not be concluded. If the
financing contemplated is important to the borrower, and if the North American fi-
nancial markets are prepared to provide it, the borrower will be obliged to complete it
in another jurisdiction. He may charge his Quebec property (often channelled into a
subsidiary) merely to secure a guaranty supporting the foreign transaction. This is in
fact happening repeatedly today because of the uncertainty created by this area of the
law in Quebec.
One solution would be to have the Quebec National Assembly simply repeal arti-
cle 2692. It adds nothing of a positive nature to the protection of the rights of credi-
tors, both secured and unsecured, nor more generally to the law of hypothecs. The ar-
gument that one can still separate the holder of the hypothec from the holder of the
obligation secured by invoking the law of trusts or the law of mandate is almost unas-
sailable. Even with the repeal of the relevant enabling provisions of the SCPA, all
authorities agree it was not the intention of the reform process to throw out practices
that Quebec borrowers and secured lenders have enjoyed for more than the last cen-
‘
4 6 Art. 1274 C.C.Q.
Art. 1275 C.C.Q.
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[Vol. 44
tury. Moreover, where such practices, and the related secured banking practices, have
become commonplace throughout the North American financial markets and are es-
sential to permit borrowers to participate in such markets, it cannot be the intention of
the reform process to deny Quebec borrowers access to such markets.
Mere repeal of article 2692, however, would leave a climate of uncertainty as to
the status of the corporate trust deed. It would create further uncertainty as to the
rights of the Quebec secured creditor in many of the transactions. This uncertainty
would leave the Quebec borrower in an inferior position. This has been noted repeat-
edly in this study in relation to almost all of the questions that have been examined.
The most appropriate solution is to have the Quebec National Assembly recast the
basic provisions of article 2692 in positive and declaratory form,'” and to do so with
words that are reasonably open in their meaning, while preserving the principles of
Quebec civil law as now expanded and reflected by reform. The following text en-
deavours to do this:
2692. L’hypothlque peut 6tre date-
nue par un fiduciaire, un mandataire
ou autre fond6 de pouvoir des
crdanciers de
‘obligation garantie.
Les r~gles d’administration du bien
d’autrui s’appliquent au drtenteur
de titre d’hypoth~que.
2692. A hypothec may be held by a
trustee, a mandatary or other repre-
sentative of the creditors of the obli-
gation secured. The rules for the ad-
ministration of the property of others
shall apply to the holder of such
hypothec.
L’hypoth~que peut 8tre consentie
pour garantir le paiement des obli-
gations ou autres titres d’emprunt
6mis par la personne qui exploite
une entreprise, une personne mo-
rale, le fiduciaire ou la socirt6 en
commandite, sous rdserve des res-
trictions imposres par Ia loi ou de
‘acte constitutif.
A hypothec may also be granted to
secure bonds or other titles of indebt-
edness issued by a person who car-
ries on an enterprise, a legal person, a
trustee or a limited partnership, sub-
ject to such restrictions as may be
imposed by law or by the constitut-
ing act.
It is the author’s opinion that such a provision, combined with the repeal of sec-
tion 32 of the SCPA, would solve the vast majority of the problems and questions of
uncertainty raised in this study. The first paragraph of the proposed article 2692 is in
positive and permissive form. It declares that the law will recognise that a hypothec
may be held by the representative of the creditor secured. Replacing the verb
“granted” with “held” would expand the scope of the declaration. Reference to the
rules for the administration of the property of others is made to affirm how Quebec
law will treat such a holding of a hypothec, and also assure greater clarity. It reflects a
practice found repeatedly in the C.C.Q.'” It retains the expressionfondi de pouvoir (in
” Cot6, supra note 34 at 491,498.
“9Supra note 46.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
707
English, “representative”) but adds the terms “trustee” and “mandatary”. The provi-
sion then admits of the interpretation that each of the three may have separate attrib-
utes. The mention of all three would be entirely consistent with the principles of re-
form, and indeed, with the text of the existing article 2692.
The second paragraph is in the same form. It declares expressly that bonds or
other titles of indebtedness may be secured by hypothec and also affirms who may is-
sue them. Because of its subject matter, it would probably be more appropriate to
combine it with article 2687 C.C.Q. or possibly with the second paragraph of article
2688 C.C.Q., rather than include it as part of a revised article 2692. The suggested
paragraph could be readily recast to encompass this idea.
The list of those who might reasonably issue bonds or titles of indebtedness is
useful as it clarifies the scope of the law. The term “legal person” is unqualified. It is
unnecessary to qualify the term “legal person” by reference to the need for “authori-
zation” or “capacity”. As noted, the reform amendments brought to sections 27 and
34 of the SCPA, which enable non-commercial and non-share capital corporations to
obtain such capacity in certain circumstances, stand alone. As specific statutory en-
actments, they would override any general enactment.'” Thus, the reference without
qualification to “legal persons” in the proposed article 2692 will not eliminate the
need for such qualification in cases where none exists.
However, if the legislature were to conclude that the need for some qualification
should still be expressed, one could add after the words “legal person” the phrase
“having the capacity to do so by law,” and in French “ayant la capacit6 t le faire en
vertu de la loi.” Note the word to be employed should be “capacity” rather than
“authorized”. This term would mesh better with the intent of the amendments to the
SCPA.
In the second paragraph, the phrase “bonds or other titles of indebtedness” has
been retained. If the provision is drafted in permissive and enabling form, the phrase
seems adequate without further definition. Note also that it defines those who are em-
braced by the provision and who might issue such titles. This would not prohibit the
individual who is not an entrepreneur from granting a hypothec to secure his surety
“bond”, etc.
Today, hypothecs which invoke the application of article 2692 should not be re-
quired to be in notarial form en minute. Such a requirement is a departure from the
requirements of form for the modem hypothec on movables and seems to serve no le-
gitimate legislative objective. It is truly an impediment to the ability of the Quebec
entrepreneur to compete for secured financing on reasonable terms. It greatly impedes
his flexibility. If, however, some concession to the traditional prerogative of the notary
as reflected in the SCPA is still required, the provision could contain a further para-
graph that would read as follows:
,o Dori, supra note 20. See also the discussion at supra note 28.
MCGILL LAW JOURNAL / REVUE DE DROITDE MCGILL
[Vol. 44
L’hypothque consentie pour ga-
rantir le paiement des obligations ou
autres titres d’emprunt A 8tre 6mis
au public, doit, sous peine de nullit6
absolue, 8tre constitute par acte
notarid en minute.
A hypothec granted to secure bonds
or other titles of indebtedness pre-
pared to be sold to the public shall,
on pain of absolute nullity, be granted
by notarial act en minute.
Finally, as examined earlier, section 32 of the SCPA should now be repealed. To
expressly prohibit the fondi de pouvoir from acquiring the bonds or titles of indebt-
edness at the time of their first issue is no longer necessary. This blunt and clumsy
prohibition has now been superseded by the adoption into Quebec law of more com-
prehensive provisions respecting conflicts of interest. Such repeal is not merely to tidy
up a redundant provision of law. Such general prohibition interferes seriously with the
normal practices employed in North American syndicated credit transactions; prac-
tices that are disclosed to all the parties to such agreements, are regulated by the
agreement to their satisfaction, and are acceptable to them.
Conclusion
It took almost seventy-five years after the adoption of the SCPA'”‘ to arrive at a
reasonable understanding of its terms and its operation within the civil law. Moreover,
and most important, the SCPA was an exceptional statute designed to enable and
sanction certain transactions where the hypothecs securing an obligation were held by
one, while the secured obligation was held by another. If it was complied with, the
courts were obliged to uphold the contract. Any disputes were confined to the char-
acterization, meaning, and effects of the special regime created by the SCPA. With re-
form, the enabling statute, the sanction, is gone. Reform did, however, incorporate all
the exceptional principles found in the SCPA as general principles of the civil law. The
special devices permitting a charge on any type of property, both present and future,
permitting a floating charge, and authorizing the special remedies of entry, possession,
and private sale are now available to any secured creditor of an enterprise. It is sub-
mitted that under reform, the separation of the holding of a hypothec from the holder
of the secured obligation is permitted, even if article 2692 did not exist, as long as the
fundamental principle that the hypothec remains an accessory of the secured obliga-
tion is maintained.
Although analysis of the C.C.Q. fully supports this conclusion, the only provision
of the C.C.Q. that deals expressly with the separation of the holder of the hypothec
from the holder of the secured obligation is article 2692. It is not in declarative or
enabling form, but in imperative and penal form. Whatever it means, it is a rule of ex-
ception and must, on pain of nullity, be strictly complied with. For the courts to read it
as expressing the positive enabling principles of law that reform intended would re-
“‘ Originally enacted by S.Q. 1914, c. 51 as an addition to The Quebec Companies Act, R.S.Q.
1909, Title 11, c. 3, ss. 2ff.
1999]
J.B. CLAXTON, Q.C. – ARTICLE 2692 REVISITED
709
quire a radical reconstruction of its text. It seems likely that any legal tests and inter-
pretation of article 2692 in the courts will be directed to determining whether the im-
pugned contract grants a valid security interest or that the security interest is “abso-
lutely null” rather than interpreting the meaning of the legislation.
Moreover, the language employed in many of the separate judicial facts or ele-
ments identified by article 2692 is vague and ambiguous when employed in the con-
text of an imperative and penal provision. Cautious counsel will usually conclude that
when a transaction is likely to engage the application of the provision, its prescrip-
tions be rigidly complied with. In the alternative, the transaction will be structured, if
possible, so that there is no chance that article 2692 would be invoked by it. The pro-
vision itself could be interpreted to permit essentially only the form of corporate trust
financing that we have known for nearly one hundred and thirty years and that was
sanctioned by the SCPA. Unfortunately, however, the language employed in article
2692 could also be interpreted to embrace many other types of transactions involving
the financing of an enterprise. Because of its imperative and penal form, the existence
of article 2692 is likely to impede a good number of transactions that it was not in-
tended to embrace.
In the past thirty years, the world of corporate finance has evolved a great deal.
As the markets for world trade have opened, the markets and the availability of fi-
nancing have also opened. They are much more flexible than before. New financial
products are being developed every day. Credit is more available to the entrepreneur
than ever before. It has become an essential tool for his growth. Co-extensive with
these developments, and perhaps because of them, there are now new controls on fi-
nancial institutions which impose standards respecting capital adequacy, liquidity, and
risk assessment. To comply with these controls, major loans are syndicated among a
number of lenders, only one of which holds the security for the benefit of all. How-
ever, the bulk of the security that is expected to be given for such an extension of
credit is most frequently to be found in a particular jurisdiction. Much of it, and par-
ticularly accounts receivable, is often located in the jurisdiction of the principal office
of the borrower. Interests in the underlying security in any tangible property tend to be
dealt with in the same place. If the Quebec entrepreneur expects to participate fully in
the benefits made available by world markets, he must be able to get the financing re-
quired and be able to give the security required. Article 2692 presents a real impedi-
ment to these expectations of the Quebec entrepreneur.
A provision of the C.C.Q. that addresses the same subject matter, but in positive
and enabling form, is desirable. Such a provision would identify the basic elements of
the transactions it contemplates and declare how the law will respond when certain of
them come together. It should enable such transactions to take place. Article 2692
should be replaced with such a text.
