Can a legal hypothec resulting from a judgment charge a universality of movable property?

Litige, main tenant une balance, Litigation, Hand holding balance

The Civil Code of Québec allows a creditor in favour of which a Québec court has ruled that a debtor must pay a specific amount to register a legal hypothec on the movable and immovable property of such debtor. The registration notice of such legal hypothec shall indicate, inter alia, the asset charged and the amount of the claim1. The legal hypothec will rank depending on the date, hour and minute of its registration.

Can such a legal hypothec charge all the movable property that a debtor owns? The Québec Superior Court had to settle the debate in its decision Plasticon Canada Inc. v. Corbec Inc.2, which decision has not been appealed and the appeal delays have expired.

In this decision, Plasticon Canada Inc. (“Plasticon”) executed an agreement with Corbec Inc. (“Corbec”) regarding the design, manufacture and delivery of steel tanks and structures. The performance of the agreement resulted in a dispute between the parties, and the condemnation of Plasticon for the payment of a sum of approximately $395,000.

A legal hypothec charging the universality of the movable property of Plasticon is then registered at the Register of Personal and Movable Real Rights.

The decision is appealed and, for that specific reason, Corbec’s attorney does not begin the necessary steps for the execution of the decision, including the determination of the movable property that Plasticon owns.

Plasticon challenges the validity of the legal hypothec because its scope is broader than what the Civil Code of Québec allows. Plasticon further argues that it is prevented from substituting the hypothec by a sufficient security, as permitted under Section 2731 of the Civil Code of Québec, because it is technically impossible to determine how one can substitute a legal hypothec charging a universality with specific movable property.

The Court proceeds to an analysis of the question. Legal authors do not agree between themselves regarding the right to register a legal hypothec on a universality of movable property of the debtor. Some legal authors mention that such right remains subject to the right for a debtor to substitute the hypothec (see foregoing paragraph), or the fact that the Civil Code of Québec does not expressly provide that such legal hypothec may charge a universality of movable property.

In addition, few decisions from the courts directly address the question.

The Court finds that many legal hypothecs provided under the Civil Code of Québec are permitted provided that they charge the asset directly related to the claim. For example, a legal hypothec resulting from the construction of an immovable may charge only the immovable on which such construction took place, and not any other asset of the debtor. Furthermore, the Court outlines that even if Section 2730 of the Civil Code of Québec provides that the legal hypothec may charge “the movable or immovable property” of the debtor, such wording should not be interpreted as limiting it to one asset only. The Court also agrees that the general principles of the Civil Code of Québec regarding hypothecs on the universality of movable property apply to the legal hypothec resulting from a judgment.

Finally, the Court indicates that Section 2731 of the Civil Code of Québec allows a court, on application of the owner of the property charged with a legal hypothec, to determine which property the hypothec may charge, to reduce the number of properties or to allow the applicant to substitute other securities, sufficient to secure payment, for the hypothec; the court may even order cancellation of the registration of such legal hypothec.

The Court therefore dismiss Plasticon’s request to obtain the discharge of the legal hypothec that charges its movable property.

Unfortunately, the debate remains unresolved by the Court of Appeal. The present decision not having been appealed, such debate will most likely take place again in a (maybe) near future!

By Émilie Therrien

1 Section 2730 Civil Code of Québec

2 2019 QCCS 2110