THE CREATION BY THE FEDERAL PARLIAMENT OF SECURITY MECHANISMS IN THE BANKRUPTCY AND INSOLVENCY ACT

Martin-François Parent, Legal Counsel
Civil Code Section,
Department of Justice Canada

Introduction

Private law generally provides rules for the creation of security mechanisms and the exercise of the remedies that allow the holders of such security mechanisms to enforce their rights. In the last few years, this area of law, which falls within the provinces' jurisdiction, has been considerably simplified. Thus, in Quebec, for example, the many and varied "privileges" under the Civil Code of Lower Canada [hereinafter C.C.L.C.] have been abandoned, and the hypothec is now the only genuine real security regime.

Parliament also creates new security mechanisms from time to time that are generally for the Crown's benefit. Apart from the constitutional aspect, which we shall not deal with, these mechanisms raise some issues that will be briefly outlined in this paper. The issues involve a number of legal considerations, including how the security is created, how it may be set up, how the remedies for each kind may be enforced and what right of preference they confer with respect to other security mechanisms. Moreover, the way a security on property is designated can pose some terminological problems.

These issues are of relevance to the program to harmonize federal legislation with Quebec civil law. The question arises to what extent do the rules set out in the Civil Code of Quebec [hereinafter the C.C.Q.] apply to these issues and to what extent should the legal expression of these concepts be harmonized with civil law in a federal context. These are issues that touch on harmonization and the legislative policy underlying the creation of these security mechanisms.

In the Bankruptcy and Insolvency Act [hereinafter the B.I.A.], Parliament has created certain kinds of security on property that raise precisely these kinds of issues. And because they are relatively recent and have been litigated to a limited extent, these issues are even more in need of analysis. The harmonizer, therefore, finds himself in the curious position of having to anticipate potential litigation and try to find solutions to the problems that might lead to litigation. The security mechanisms in question here include an immovable security for the costs of remedying environmental damage,[1] a "first charge" on the fees and disbursements of an interim receiver[2] and a security granted to farmers, fishermen and aquaculturalists for payment of their products.[3]

We will start with the problems that may be posed by the terminological designation accorded to these security mechanisms. We will then examine what problems the resolution of those problems raise with respect to substantive law, i.e., creation, right of preference and, finally, exercise of the remedies to which they give rise.

1. Terminological designation of securities

For the civilian lawyer at least, the reform of the Civil Code rendered obsolete the terms used to designate certain security mechanisms.[4] However, these terminological designations are still present in the federal legislative corpus, hence the need to harmonize them with the new civil law.[5]

Apart from obsolescence, the B.I.A. in general poses other terminological problems related to the fact that it is marked by common law.[6] In a civil law context, such problems are generally resolved by consensus within the legal community.[7] The courts have recognized that some of the terms in the Act are incorrectly employed as far as a civilian audience is concerned, which requires additional efforts of interpretation.[8] Should the B.I.A. require such interpretive feats and such effort to reach a consensus, admirable as that may be? At the very least, it must be admitted that the B.I.A. poses some conceptual problems to civilists.[9]

As an illustration, federal Parliament regularly uses the expression "charge" to designate security mechanisms.[10] In particular, it uses the expression "charge ranking ahead of any or all secured creditors/première charge" to designate the security mechanism it creates for the benefit of the interim receiver to guarantee payment of his claim for fees and expenses.[11] In order to benefit from this "first charge", the interim receiver must apply to the court for an order to that effect. If this "first charge" is ordered, it may encumber part or all of the debtor's assets.[12]

This use of the term "charge" may rightly cast confusion into the civilian lawyer's mind. Since the term "charge" has a number of meanings,[13] it may be asked whether, in civil law, a security mechanism can be designated by the term "charge". To explore this hypothesis, the forms of security recognized by the C.C.Q. will be examined in turn as well as the extent to which they may be designated by the term "charge" in the context of the B.I.A.

1.1. Hypothecs

The C.C.Q. defines hypothecs as real rights.[14] The literature also uses this classic definition of hypothecs.[15] More precisely, hypothecs are accessory real rights,[16] real securities.[17] Real rights are rights an individual exercises directly on tangible things.[18] For instance, hypothecs constitute real rights to guarantee the performance of an obligation.[19] What about the term "charge"? It is interesting, in this regard, to distinguish between hypothecs on immovables and hypothecs on movables.

Immovable hypothecs

Both the literature and the cases seem to agree that a hypothec is a "charge".[20] Moreover, it seems that the term "charge" can apply to conventional hypothecs as well as to legal hypothecs on immovables.[21] Pigeon J., in Town of Anjou v. C.A.C. Realty, even went so far as to state that he did not see how it could be said that a hypothec was not a "charge".[22] Not only is this right included in the ordinary meaning of the expression, but this is also clear from the sections of the Code of Civil Procedure [hereinafter C.C.P.] relating to a judicial sale of immovables.[23] On this point, Beetz J., who wrote the minority opinion, was in agreement with Pigeon J.[24] As a result, it may be concluded that the Supreme Court of Canada has made it clear that the term "charge" may designate an immovable hypothec. This meaning does not seem to pose any problem under the C.C.Q. that it did not already pose in the C.C.L.C.[25] The task now is to see whether this name is appropriate for the other security mechanisms in the Code.

Movable hypothecs

One of the great innovations in the new Civil Code in terms of security on property was the introduction of the movable hypothec.[26] It brings together former real security mechanisms that existed under the C.C.L.C.[27] Although movable hypothecs are also real rights, the term "charge" is generally defined so as to designate only immovable real rights.[28] In addition, the Quebec legislature does not provide for "opposition to sale of property subject to a charge" and "opposition to charges" except in immovable matters.[29] This terminology is also employed to indicate the real rights registered in connection with an immovable in the land register[30] but not those registered in connection with a movable in the register of personal and movable real rights.[31] As is apparent, the term "charge" is not of current use with respect to movable hypothecs. What is the case with prior claims? This is the topic that will be addressed next.

1.2. Prior claims

The C.C.Q. grants preferred creditor status on the basis of certain claims.[32] Theoratically, prior claims should not be considered as "charges" since they do not confer real rights.[33] However, it appears that things are not that easy. On the issue of whether the word "charge" in the definition of "secured creditor" in the B.I.A. could include the concept of prior claim, the Quebec Court of Appeal, in Château d'Amos, through Brossard J., dissenting on the merits, held in obiter that the concept of "charge", familiar to common lawyers, was poorly defined in Quebec civil law.[34] Although the Quebec legislature subsequently modified the concept of "prior claim" to make it "constitute a real right",[35] Brossard J.'s words indicate that the use of the term "charge" in the context of a provision dealing with security on property is probably borrowed from common law.

In common law, "charge" refers, among other things, to "an instrument creating security against property for payment of a debt or obligation"; the term charge can embrace other meanings, including a lien, a claim and an encumbrance.[36] As an illustration, the Special Corporate Powers Act[37] [hereinafter the S.C.P.A.], which allows a corporation to be financed through the issuance of bonds secured by a trust deed mechanism whereby the debtor issuer charges his property with a "floating charge" and a "specific charge", a terminology borrowed from common law.[38] The "floating charge" was on a universality of property, including the debtor's present and future inventory. The debtor issuer thus retained possession of his property. The "specific charge" affected property that the debtor-issuer had specifically pledged, hypothecated or pawned. The trust deed mechanism disappeared in 1994 with the reform of the civil law, taking with it the "charges" that the S.C.P.A. had allowed to be created.[39]

1.3. Other security mechanisms

The C.C.Q. provides for other mechanisms that can be used to secure the performance of an obligation.[40] They are the security trust,[41] the right of retention,[42] the right of revendication,[43] and suretyship.[44] Are these security mechanisms charges? Usually, the term "charge" designates a class of rights where one finds the dismemberments of the right of ownership: servitudes,[45] usufruct[46] and use[47] (or habitation).[48] Not all of the security mechanisms which we referred to precedently constitute such limits to the right of ownership. For instance, suretyship does not restrict immediately the right of ownership of a surety over his property.

Moreover, "charge" is a word that is not used by the C.C.Q. to identify a class of security on property. In fact, properly speaking, the correct use of the term "charge" is to designate an immovable hypothec as a restriction of the right of ownership of the debtor following the constitution on an immovable of a real right for the benefit of the creditor. In that sense, the real right confered to the hypothecary creditor allows him to follow the property, to sell it and to be preferred upon the proceeds of the sale whereas the "charge" is the consequence, that is to say the limit imposed to the right of ownership of the debtor. This is probably how the remarks of Pigeon J. in Town of Anjou v. C.A.C. Realty are to be interpreted.[49]

As a result, in civil law, the term "charge" may not be used to designate any security mechanism since not all of them restrict the right of ownership. In that respect, the use of the term "charge" to designate any security is improper and indeed ineffective in civil law.

From a civilist standpoint, the word "security" is certainly preferred to the word "charge". That, in fact, is what the federal Parliament does in subsection 14.06(7) of the B.I.A. to designate the security mechanism it provides to the Crown and in subsection 81.2(1) of the B.I.A. to designate the security mechanism it gives to farmers, fishermen and aquaculturists. Moreover, the use of the word "charge" tends to disappear from the terminology employed by the National Assembly as the program to harmonize public statutes with the C.C.Q shows.[50]