3. General issues

3.1. Creation of new security mechanisms

Provincial private law usually provides for rules governing the creation of security mechanisms and recourse by security holders in enforcing their rights. The federal Parliament occasionally creates new mechanisms, usually benefiting the Crown. This situation raises some issues about the creation of these mechanisms and the right of preference they confer over other security mechanisms found in provincial private law. The designation of various security mechanisms may also raise terminological issues of considerable importance.

Terminology used to designate security mechanisms

The C.C.L.C. used a variety of expressions to designate various security mechanisms. In reforming the civil law, the Quebec National Assembly jettisoned a number of these security mechanisms, making them outdated overnight.[196] The C.C.Q. now retains only prior claims, hypothecs and a few other mechanisms including right of retention, suretyship, and what are called "ownership security" mechanisms and "trust security" mechanisms. These changes do not yet appear in federal legislation.[197] In addition, the federal Parliament sometimes uses the English word "charge" to designate security mechanisms, but this word has different meanings in the common law and the civil law traditions: in common law the word "charge" is synonymous with "security", while in civil law its meaning is limited to real rights.[198]

Effecting security

The C.C.Q. usually provides that legal hypothecs take effect only once they are registered in the proper register.[199]In the B.I.A., the federal Parliament has created security mechanisms benefiting certain creditors without requiring that these mechanisms be registered. Examples include the charges granted to farmers, fishermen and aquaculturists[200] and the charges granted to interim receivers.[201] In the latter case, civil law practitioners find the procedure for effecting the security surprising since, in order to benefit from the security, interim receivers must submit an application to the court, which in its discretion decides whether it is appropriate to grant the security.[202]

Under very specific circumstances, the B.I.A. also provides the Crown with a new security mechanism.[203] The B.I.A. already provides for very specific rules governing the validity of security held by the Crown.[204] These rules would not apply to the new security mechanism because it is specifically an interest in land;[205] in common law, rights in land need not be registered.[206] In Quebec, where a dual system of land ownership is recognized, the situation is quite different.[207] The rule on registering security held by the Crown would appear to be applicable in Quebec; if this is the case, there would be genuine disparity between the situation in Quebec and that in the other provinces.[208]

The possibility of new security mechanisms not only raises issues about creating these mechanisms; it also adds, to the structure of preferences recognized in the jus commune, other rights that may jeopardize the balance among creditors.

Rights of preference

The C.C.Q. provides for only two causes of preference: prior claims and hypothecs.[209] When bankruptcy occurs, the B.I.A. supplants ordinary jus commune rules, and creditors are treated in accordance with a separate scheme of distribution—unless they are defined as "secured creditors",[210] in which case, under sections 69 to 69.3 of the B.I.A., they have recourse under the jus commune, and the two causes of preference set out in the C.C.Q. apply.

In the B.I.A., the federal Parliament has created security mechanisms that give security holders a right of preference and a rank them above all other creditors. For example, subsection 14.06(7) of the B.I.A. provides as follows: "[…] [the charge] ranks above any other claim, right or charge against the property, notwithstanding any other provision of this Act or anything in any other federal or provincial law."

The same is true for the claims of farmers, fishermen and aquaculturists regarding products they have delivered to bankrupts.[211] This upsetting of balance, among creditors with security, provided for in provincial jus commune may be a source of confusion. At the very least, where Quebec civil law is concerned, it would seem appropriate to harmonize these security mechanisms with those provided for under the C.C.Q.

3.2. The concept of "settlement/disposition"

"Settlement of property/disposition de biens" is a concept from the common law tradition that was imported into Canadian legislation, in the B.I.A. in particular.[212] This concept was imported from the British law in 1919.[213] According to the traditional case law, this concept refers to:

  • a gift to a beneficiary
  • on condition that the donated property be maintained in its original form or in a condition that allows it to be traced.[214]

The element of tracing, which characterizes "settlement/disposition", is unknown in civil law: the civil law concept of gift does not include this element of control since gifts are made by gratuitous title.[215] Any juridical acts that might be subject to a "paulian action" include an element of fraud;[216] and hypothecs that debtors may offer as security for the performance of obligations do not include the element of tracing, since the property charged remains in the debtor's patrimony.[217] Finally, even if the trust under the C.C.Q. constitutes a patrimony by appropriation, the idea of transferring property to a trust with the intent that it can be traced is foreign to civil law.[218]

In 1992, the federal Parliament introduced a definition of the word "settlement/disposition". Strictly speaking, this provision is more a list than a definition: it provides that a settlement "includes a contract, covenant, transfer, gift and designation of beneficiary in an insurance contract, to the extent that the contract, covenant, transfer, gift or designation is gratuitous or made for merely nominal consideration".[219]

As can be seen, the concept of tracing does not form part of the so-called statutory definition of "settlement/disposition". Nevertheless, in our opinion the case law should maintain its traditional interpretation in accordance with English law,[220] particularly since this definition uses the word "includes", which indicates that this list is neither exhaustive nor exclusive.

As well, the concept of "settlement/disposition" is still unknown in Quebec civil law, which applies the concept of "alienation without sufficient consideration" instead.[221] Clearly, some degree of harmonization of federal bankruptcy legislation and Quebec civil law is called for on this point.

In concluding this part, we point out that the British Parliament has amended its bankruptcy legislation, replacing the concept of settlement with the concept of "act for an undervalue", which does not require demonstration of intent to maintain the property in a condition that allows it to be traced.[222]

3.3. The concept of enterprise

Unlike common law, in the C.C.L.C. Quebec civil law established a dual system comprising, firstly, civil matters and, secondly, commercial matters. Thus, according to case law and authorities, certain persons were "commerçants", and certain acts "actes de commerce". The reform of the C.C.Q. ended this dual system by jettisoning these concepts; the C.C.Q. now refers only to the concept of entreprise,[223] which designates "all organized economic activity" carried on by natural or legal persons.[224] Judge Pierre J. Dalphond lists the following characteristics of an enterprise:


  • a plan setting out the enterprise's objectives, which determine how its activities are organized (the plan need not be complicated or even written);
  • assets related to the pursuit of the objectives (assets may vary from a vast corporation's employees, machinery, equipment and immovable to a tradesperson's simple tool kit);
  • a series of habitual, usual legal acts involving the businessperson in the pursuit of the objectives;
  • other economic agents, who are receptive to the goods and services offered by the enterprise and are usually defined as the enterprise's clients, goodwill, or market;
  • economic consideration or benefit directly attributable to the businessperson's efforts.[225]

Since being passed in 1919, federal bankruptcy legislation, faithful to its common law roots, has applied to everyone, businessperson or not. However, its use of the expressions "business", "carrying on business", "trade" and "commercial", and particularly the wording of these expressions in the French version, are variable. For example, the expression "to carry on business" is rendered sometimes by the French expression "exercer ses activités"[226] and sometimes by "continuer le commerce";[227] the expression "trade or business" is rendered sometimes by "métier ou commerce"[228] and sometimes by "commerce ou entreprise".[229] As well, the B.I.A. continues to use the French expressions "exercer le commerce", "faire commerce", and "continuer un commerce", which were accurate when the C.C.L.C. was in effect but have been outdated since the reform of the C.C.Q.

In our view, although the issue raised by the concept of enterprise is more terminological than substantive, it could lead indirectly to a substantive problem, and harmonization of the B.I.A. with the changes made to Quebec civil law would therefore be called for.

3.4. The concept of suretyship

When assets of bankrupt debtors are to be administered, under the B.I.A. trustees must provide security to the Superintendent, to ensure the due and faithful performance of their duties. This concept of security raises a harmonization issue with the Quebec civil law concept of suretyship.

Suretyship in civil law

Article 2333 of the C.C.Q. provides that: "[s]uretyship is a contract by which a person, the surety, binds himself towards the creditor, gratuitously or for remuneration, to perform the obligation of the debtor if he fails to fulfil it." Suretyship contracts, then, have three parts, are ancillary and subsidiary and, since they impose no obligations on creditors, are unilateral.[230] Suretyship contracts are therefore distinct from insurance contracts, hypothecs, and deposit contracts.

(i) Distinction between civil law suretyships and insurance contracts

Suretyship contracts and insurance contracts share certain characteristics. The idea of risk is present in both types of contracts: in one, it is risk of failure to perform obligations; in the other, it is risk of loss resulting from accidents.[231] As well, the reform of the C.C.Q. has permitted suretyship contracts for money, which are somewhat like purchased insurance policies. These two types of contracts are fundamentally different, however, since suretyship contracts are unilateral contracts; insurance contracts, on the other hand, are principal synallagmatic contracts.[232]

Still, these two types of contracts are sometimes confused. The Quebec Regulation respecting the application of the Act respecting insurance defines the securities provided by insurance companies in Quebec as follows:

Guarantee insurance means surety insurance and fidelity insurance. Surety insurance guarantees against failure to discharge or the unfaithful discharge of an obligation, or failure to pay a penalty or an indemnity upon such default, but does not include credit insurance of mortgage insurance. Fidelity insurance means insurance against loss to the insured caused by the dishonesty of his employees, in particular in the case of theft, breach of trust embezzlement.[233]

Nor does it seem that the confusion between the concepts of suretyship contracts and insurance contracts in Quebec civil law is limited to the application of this Regulation. In the decision in Entreprises Gamelec Inc., the Quebec Court of Appeal stated as follows: [translation] "[t]he Regulation is administrative in nature and cannot have the effect of changing the nature of insurance contracts or suretyship contracts, which are governed by different provisions of the C.C.Q."[234]

(ii) Distinction between suretyship and hypothecs

Similarly, suretyship and movable hypothecs share one characteristic: they both guarantee the performance of obligations. However, movable hypothecs are a form of real security, while suretyship is a form of personal security. If debtors default on their obligations to hypothecary creditors, these creditors may exercise their security claim against the property that is subject to the hypothec. On the contrary, for all practical purposes the security provided under suretyship contracts makes additional patrimony available to creditors, up to the value of the initial contracts entered into by debtors.[235]

(iii) Distinction between civil law suretyships and deposit contracts

It is easy to confuse suretyship contracts with deposit contracts, particularly since many statutes use the expression "cautionnement en espèces". As has been seen, one characteristic of suretyship contracts is that they have three parts. In comparison, deposit contracts are principal contracts under which depositors hand over movable property to depositaries, who undertake to keep the property for a certain time and to restore it to the depositors.[236]

Security required from trustees under the B.I.A.

At one time, federal bankruptcy legislation required that trustees applying for a licence provide general security. That requirement was eliminated in 1992.[237] Since that time, this legislation has required only specific security, in order to ensure the due and faithful performance of trustees' duties and the fair distribution of dividends to creditors.

Subsection 16(1) of the B.I.A. describes the specific security trustees must provide if they are to administer assets, as follows:

[e]very trustee duly appointed shall forthwith give security in cash or by bond of a guaranty company […] for the due accounting for […] of all property received by the trustee as trustee and for the due and faithful performance of the trustee's duties.

This section thus gives trustees an alternative: they can provide either a cash deposit or a bond issued by a guaranty company.

(i) Cash deposits

The major dictionaries recognize that the word "cautionnement" can mean a cash deposit.[238] The Quebec National Assembly itself has recognized cash deposits[239] and pledges[240] as forms of security. That said, it appears that the use of the word "cautionnement" to designate a cash deposit is improper in civil law.[241] According to article 2333 of the C.C.Q., the word "cautionnement" implies the intervention of a third party, the surety, whom the creditor may ask to perform the obligation in the debtor's place.[242] Since cash deposits do not imply intervention by a third party, correct expressions would be "gage", "hypothèque mobilière avec dépossession"[243] or "dépôt".

Elsewhere, the C.C.Q. provides for presentation of sufficient security, instead of surety that might take the form of a cash deposit; the very existence of this provision points to the distinction between these two concepts.[244] This situation could arise in the case of defendants residing abroad, for example; in such cases, the C.C.P. provides for security for costs.[245] Trial level judges may require plaintiffs not residing in Quebec to find a person who will act as surety;[246] the purpose of this procedure is to cover costs that may result if an application is dismissed. However, plaintiffs wishing to avoid the trouble of finding a surety can ask the court if they may make a cash deposit as sufficient security under article 2338 of the C.C.Q.[247] As well, although subsection 16(1) of the B.I.A. provides for a cash deposit as a guarantee, in practice trustees post bonds issued by guaranty companies.[248]

(ii) Security in the form of bonds issued by guaranty companies

Subsection 16(1) of the B.I.A. allows trustees to guarantee the performance of their duties by providing security in the form of bonds. Bonds are evidence of a contract between a financial institution and an individual, under which the financial institution makes a sum of money available to the individual on certain conditions and for a certain time. Although bonds as such do not correspond to the definition of "cautionnement" set out in the C.C.Q.,[249] they may be used as security specifically to guarantee the performance of debtors' obligations.[250] Subsection 16(1) of the B.I.A. probably refers to this possibility.

In any case, official receivers must appraise the security provided by trustees. The Office of the Superintendent has issued a Directive setting out the points official receivers are to consider in fixing the amount of bonds.[251]

General conclusions

As can be seen, the Justice Canada harmonization program gives us an opportunity to reflect on delightfully fine points of law. Together we have considered issues raised by new forms of security in the federal legislative corpus; the concept of settlement, so foreign to civil law and the concepts of enterprise and suretyship.

The B.I.A. raises the richest and most fascinating harmonization issues. Issues we have considered include: the definition of secured creditors, vesting in courts of jurisdiction in bankruptcy and equity, terminology and supplementary law required in certain procedures (particularly petitioning in bankruptcy). In addition, we have reviewed the application of Part XI of the B.I.A. to Quebec creditors, whether Quebec partnerships and trusts have juridical personality and can become bankrupt and finally the identification of the status of trustees regarding their various roles.

Our purpose in presenting these issues at this stage is to spark discussion among you and eventually to obtain your comments. Above all, our intention was to make you aware of issues involved in the harmonization of federal bankruptcy legislation with Quebec civil law.

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