HARMONIZATION OF FEDERAL LEGISLATION WITH QUEBEC CIVIL LAW: SOME EXAMPLES FROM THE BANKRUPTCY AND INSOLVENCY ACT

2. Issues raised in the B.I.A. Continued

2.4. Application of Part XI

Regarding harmonization of the B.I.A. with Quebec civil law, Part XI of the B.I.A. raises issues concerning the identification of receivers, and concerning the advance notice secured creditors must send debtors before their rights and receivers' obligations can be exercised in administering bankrupts' property.

Identification of receivers

Since 1992, the B.I.A. has included provisions governing recourse by secured creditors. In these provisions, the federal Parliament requires receivers to act honestly in administering and liquidating debtors' property.[126] However, these rules apply only when receivers take possession of debtors' property to administer it. Subsection 243(2) of the B.I.A. defines receivers within the meaning of Part XI as follows:

Subject to subsection (3), in this Part, "receive" means a person who has been appointed to take, or has taken, possession or control, pursuant to (a) an agreement under which property becomes subject to a security (in this Part referred to as a "security agreement"), or (b) an order of a court made under any law that provides for or authorizes the appointment of a receiver or receiver‑manager, of all or substantially all of (c) the inventory, (d) the accounts receivable, or (e) the other property of an insolvent person or a bankrupt that was acquired for, or is used in relation to, a business carried on by the insolvent person or bankrupt.

This definition has two basic components. Firstly, receivers are the persons who take possession of insolvent debtors' property. Secondly, receivers must be authorized to do so by means of an order or a security agreement. The wording of this definition is nevertheless ambiguous and allows for two contradictory interpretations.

Broadly interpreted, the wording "a person who has been appointed to take, or has taken, possession [of property]" presents an alternative, between the traditional concept and what would be a new concept of receivers. According to this definition, receivers may be persons traditionally appointed under an order or a security agreement, but may also be creditors who have taken possession of property under a security contract in order to realize the security.

Strictly interpreted, on the other hand, subsection 243(2) of the B.I.A. refer only to the traditional concept of receivers, and therefore receivers it defines are persons who take possession of insolvent debtors' property under a court order or a security agreement.

These arguments were made before Baynton J. of the Saskatchewan Court of Queen's Bench. After recognizing the validity of each argument, Baynton J. ruled in favour of the strict interpretation. He added, however, that in light of the purposes of Part XI of the B.I.A., secured creditors could be receivers within the meaning of subsection 243(2) of the B.I.A. on condition that they be appointed under an order or a security agreement to take possession of their debtors' property.[127]

Applied in Quebec, this decision would mean that subsection 243(2) of the B.I.A. does not apply to hypothecs. As Me Alain Riendeau has argued, the legal basis for allowing hypothecary creditors to exercise their rights if debtors default is not found in court orders or security agreements, but in the C.C.Q.[128] Professor Jacques Deslauriers, however, is less categorical, stating as follows: [translation] "[i]n Quebec at least, there is no agreement on identifying guarantees that, if implemented, would trigger the receivership rules under Part XI."[129]

In fact, it seems that in Quebec, security agreements within the meaning of subsection 243(2) of the B.I.A. were implemented by means of trust deeds, under which debtors' businesses, inventory, accounts receivable and other property were taken possession of and liquidated. Quebec's former Special Corporate Powers Act provided for these trust deeds for the benefit of obligees, whose trustees ("fiduciaires") could take possession of, administer and liquidate the property of defaulting issuer debtors.[130] The disappearance of these trust deeds with the reform of the C.C.Q. may have given the impression that Part XI of the B.I.A. no longer applies in Quebec.[131]

This categorical statement, however, must be qualified: in Quebec there are creditors whose security is provided for in legislation other than the C.C.Q. and can be realized using receivers. Examples include security contracts between banks and their customers, which may provide for taking possession of customers' inventories. As Gonthier J. of the Supreme Court of Canada wrote in the decision in Atomic Slipper: "[…] there is nothing to prevent a bank taking possession of goods if it has acquired such a right by agreement and the debtor does not object. In that case, it does not have to seek leave of the court in order to realize on its security."[132]

In case of insolvent customers, Part XI of the B.I.A. would probably apply. Theoretically, banks' receivers are to carry out the obligations set out in sections 246 and 247 of the B.I.A. They are also to administer the property "honestly and in good faith" and "in a commercially reasonable manner". In addition, they are to prepare and provide reports describing how they have carried out their responsibilities concerning the property.

As Me Riendeau states, the C.C.Q. provisions governing administration of the property of others have similar purposes.[133] As well, as Professor Jacques Deslauriers notes: [translation] "[…] in 1992 and 1994, the legislatures had similar objectives and motivations. However, although some debtors once claimed that, where some of their creditors were concerned, the law of the jungle prevailed, we now swim in a veritable sea of notification and monitoring processes […]."[134]One may wonder whether the federal Parliament intends to rely on Quebec provincial law. If so, it might be helpful to subject receivers' taking possession of insolvent debtors' property on behalf of banks to the C.C.Q. rules governing the administration of the property of others.

Advance notice

Subsection 244(1) of the B.I.A. requires secured creditors to send an advance notice to insolvent debtors before realizing their security.[135] In particular, secured creditors may not realize their security until 10 days have expired. That said, the C.C.Q. provides for immediate surrender of debtors' property if the property may perish or if the claim may be endangered.[136] At first glance, this possibility of immediate surrender of debtors' property appears incompatible with the 10 days' advance notice required under subsection 244(1) of the B.I.A.; the latter should prevail. One can always consider the relevance of harmonizing these sections.

2.5. Bankruptcy of Quebec partnerships and trusts ("fiducies")

The recent changes to civil law trusts ("fiducies") and the introduction of autonomous patrimonies by appropriation raise the issue of what rules apply when these patrimonies become insolvent; this issue also applies to partnerships.

Partnerships' bankruptcy

The system applicable under the B.I.A. assumes the existence of an insolvent or bankrupt debtor that is at least a legal entity with juridical personality.[137] Interestingly enough, it considers partnerships to be persons.[138]Quebec law, partnerships may take one of four forms: general partnerships, limited partnerships, undeclared partnerships, and joint-stock companies,[139] the last of which are moral persons.[140] Moral persons are endowed with juridical personality.[141]

Although the C.C.Q. is less clear about other forms of partnership, some indications suggest that general partnerships may have certain characteristics of juridical personality.[142] For example, article 2198 of the C.C.Q. on general partnerships provides, "[a] partner is a debtor to the partnership for everything he promises to contribute to it." Article 2225 of the C.C.Q. provides, a partnership may sue and be sued in a civil action under the name it declares. Article 2199 of the C.C.Q. is somewhat more explicit:

A contribution of property is made by transferring rights of ownership or of enjoyment and by placing the property at the disposal of the partnership. […] A contribution consisting in the enjoyment of property that would normally be required to be renewed during the term of the partnership transfers ownership of the property to the partnership, which becomes liable to return property of the same quantity, quality and value [emphasis added].

Legal entities that may hold debts, sue, and receive transferred ownership of property bear a striking resemblance to entities with juridical personality. The same may be said about limited partnerships. Article 2241 of the C.C.Q. provides as follows:

While the partnership exists, no special partner may withdraw part of his contribution in property to the common stock, in any way, unless he obtains the consent of a majority of the other partners and the property remaining after the withdrawal is sufficient to discharge the debts of the partnership [emphasis added].

If general partnerships may have debts, could it be affirmed that they have a patrimony, and therefore may become insolvent, particularly since the rules governing general partnerships apply to limited partnerships?[143] The Quebec ministère de la Justice has nevertheless commented that, although authorities and case law:

[translation] […] have often recognized that partnerships, particularly general and limited business partnerships, have some degree of juridical personality, […] this juridical personality has never been considered as complete as that attributed to corporations, for example.[144]

Still according to the Quebec ministère de la Justice, attributing juridical personality to partnerships would not confer any particular real advantages, and might create a disparity of treatment between partnerships formed anywhere else in North America, which do not have juridical personality.[145] In particular, this attribution would set partnerships created in Quebec apart from those created in the rest of Canada.[146]

In a recent decision on partnership law, Brossard J. of the Quebec Court of Appeal stated as follows:

[translation] In Quebec, the majority trend in both authorities and case law has been to recognize that partnerships have separate patrimony and are moral persons, although this latter characteristic has sometimes been described as incomplete. […] Ownership rights are an attribute of persons and can therefore belong only to physical or moral persons. My argument is that partnerships do not have juridical personality separate from that of the partners and therefore may not have patrimony separate from that of the partners. […] in the case of partnerships, what must be borne in mind is that all administrative and legal actions by a partnership (signing contracts, managing assets, owning property), which often appear to be made in the partnership's own name, are so made only in the partnership's capacity as agent for the partners, in accordance with the specific agreements drawn up among them. […] I do not believe that the Quebec Code implicitly attributes juridical personality to partnerships. On the contrary, it seems to me that its provisions confirm that partnerships do not have juridical personality and cannot own property.[147]

According to Professor Charlaine Bouchard, this approach appears to be too restrictive in light of the attributes partnerships have enjoyed since 1994.[148] Professor Bouchard goes on to say that general partnerships and limited partnerships should constitute autonomous patrimonies, the way civil law trusts do.[149] Would that allow partnerships to fall into bankruptcy? Professor Bohémier notes the position expressed by authorities and case law on this point as follows:

[translation] For the purposes of the Bankruptcy Act, authorities and case law refuse to recognize that partnerships have juridical personality. Partnerships may be declared bankrupt only by means of bankruptcy of all the partners. Any bankruptcy proceedings must be initiated by or against the partners themselves, never by or against the actual partnership.[150]

However, it should be pointed out that unincorporated associations have been recognized as having juridical personality, and may therefore become bankrupt.[151] Thus, if unincorporated associations may become bankrupt, what is there to prevent partnerships from doing so as well? Considering B.I.A. provisions governing bankruptcy of partners in a partnership, does it necessarily follow that the purpose of these provisions is to take away the right to sue the partnership itself?[152] We could add that Rule 109 of the B.I.G.R. seems to make express provision for cases in which partnerships are the subject of receiving orders.[153] And that the C.C.Q. provides for this particular situation.[154] We could consider the following statement by Professor Bohémier:

[translation] Because the legislation provides for and recognizes the juridical personality of partnerships, we believe that partnerships can become bankrupt in the same way as estates, executors, or unincorporated associations can become bankrupt.[155]

As the issue regarding partnerships' juridical personality is still open, so is the issue regarding the bankruptcy of partnerships. However, the latter raises even greater concerns since it arises in the context of federal legislation, the B.I.A. which is closely tied to Quebec civil law as well as the private law of other canadian provinces and whose purpose is to treat creditors equally.

Bankruptcy of Quebec trusts ("fiducies")

Since the civil law reform of 1994, trusts ("fiducies") may constitute autonomous patrimonies by appropriation.[156] Because these trusts constitute patrimonies, they bring together one or more forms of property. Since they are appropriated autonomously, they are linked to no holders. Neither settlors, trustees ("fiduciaires") nor beneficiaries have any ownership rights in these trusts;[157] trustees themselves have only control over property transferred to these patrimonies.[158] As a result, bankruptcy of one of these persons cannot have the effect of transferring property from trusts' patrimonies to trustees ("syndics"). In this regard, paragraph 67(1)(a) of the B.I.A. is probably inapplicable.[159]

It should be noted that, when trustees ("fiduciaires") or beneficiaries become bankrupt, these trustees' duties as administrators of the property of others are terminated.[160] In addition, according to Professor Albert Bohémier, paragraph 67(1)(d) of the B.I.A. supports the argument that existing powers of these trustees over property constituting patrimonies by appropriation are vested in trustees ("syndics").[161]

The issue of bankruptcy of actual trusts ("fiducies") is worth raising. One may wonder whether introducing the concept of "autonomous patrimonies by appropriation" into Quebec civil law has not had the effect of creating a legal entity much like that of moral persons. From the concept of patrimonies by appropriation with no holders—which resemble headless horsemen—to the idea that they have juridical personality is only a short step, and one we still cannot take.

2.6. Roles of trustees ("syndics")

The B.I.A. deals with trustees in the Part entitled "Administrative Officials". As administrative officials, trustees are considered officers of the court.[162] However, the B.I.A. gives trustees a much more complex status: Professor Albert Bohémier writes that describing the roles of trustees is one of the most problematic subjects in bankruptcy law.[163] We shall therefore limit ourselves to addressing issues raised by the various roles trustees are called upon to play under the B.I.A.: trustees (here "fiduciaires"), grantees (here "cessionnaires"), administrators of the property of others, receivers, and owners.

Trustees ("fiduciaires")

The French version of section 15.1 of the B.I.A. specifically provides, "[l]e syndic est un fiduciaire au sens de l'article 2 du Code criminel." The purpose of this designation is to make it possible to apply against trustees certain Criminal Code provisions on fiduciary obligations. The Criminal Code defines the word "trustee" by reference to provincial private law. In Quebec, this reference would make it possible to claim that the C.C.Q. provisions on trusts—including the provisions on administrators of the property of others—apply to trustees. That said, in bankruptcies it would be doubtful that debtors' property would be transferred into autonomous patrimonies by appropriation with no owners: as Professor Madeleine Cantin Cumyn notes: [translation] "Although deprived of the exercise of ownership, bankrupts retain ownership until their property is sold by trustees."[164]

In fact, if the intent of Parliament is to be reflected as faithfully as possible, the French version of section 15.1 of the B.I.A. should specify that for the purposes of the application of the Criminal Code, a trustee is deemed to be a "trustee" within the meaning of section 2 of the Criminal Code. That said, it may be appropriate to take advantage of this point to review the reference to "trustee" contained in the B.I.A.

Grantees ("cessionnaires")

When debtors assign their property to trustees, the property which the assigning debtors actually owned, and which constituted the pledge shared among creditors, passes to and is vested in the trustees.[165] In an analysis of this specific point of describing the roles of trustees, Me J.‑Michel Deschamps concluded that trustees are considered more assignees than successors to debtors or representatives of creditors.[166] According to Professor Bohémier, however, the term "trustee" does not easily lend itself to a single description.[167] And Professor Madeleine Cantin Cumyn energetically states that, where the roles of trustees are concerned, [translation] "using "assignee" as a description is a fanciful and extreme solution."[168] She points out: [translation] "[w]hen bankruptcy legislation involves application of Quebec private law, trustees may be given a single description: that of administrators of the property of others."[169] To this concept we now turn.

Administrators of the property of others

A number of differences can be noted between the powers of trustees and the obligations of administrators of the property of others. Administrators of the property of others are responsible for the simple or the full administration of property or a patrimony not their own.[170] Simple administration is limited to performing all acts necessary for the preservation of the property,[171] collecting the fruits and revenues of the property,[172] exercising the voting rights pertaining to securities owned,[173] and continuing the operation of the property.[174] Full administration means preserving the property and making it productive, and increasing the patrimony or appropriating it to a purpose;[175] in this case administrators may alienate the property by onerous title or charge it with a real right.[176]

Before starting to administer debtors' property, trustees must obtain a licence from the Office of the Superintendent of Bankruptcy[177] and provide security covering the value of the property.[178] Once debtors' property has been transferred to trustees,[179] the B.I.A. authorizes the trustees to administer and to sell the property, subject to supervision by inspectors; it does not give them the power to make it productive.[180] The Superintendent may intervene at any time and issue directives to trustees concerning the exercise of their powers.[181] These elements, reflecting the quasi-criminal nature of bankruptcy proceedings distinguish trustees from administrators of the property of others.

Receivers

In acquiring and retaining possession of bankrupts' property, trustees are in the same position as court-appointed receivers.[182] The receivership system in the B.I.A. is derived directly from English law.[183] The actual usefulness of this concept, apparently completely foreign to Quebec civil law, is debatable.

The C.C.Q. recognizes the existence of two types of sequestration: conventional sequestration and judicial sequestration. Conventionally chosen sequestrators are persons with whom property in dispute is deposited.[184] All indications are that subsection 16(4) of the B.I.A., in referring to court-appointed receivers, does not mean these conventionally chosen sequestrators. According to the C.C.P., judicially chosen sequestrators are court appointed depositaries put in possession of property for the duration of a dispute between two parties.[185] Also, according to the Quebec Court of Appeal, it should not be assumed that judicially chosen sequestrators are the same as receivers of property or trustees in bankruptcy.[186]

In our view, it is likely pointless to retain the reference to the receivership mechanism since, under the B.I.A., debtors' property clearly passes to and is vested in trustees, who take possession of it and administer it.

Owners

When debtors own immovables at the time of the assignment, subsection 74(2) of the B.I.A. allows trustees to be registered as the owners of the property, free of all encumbrances; trustees must first register the assignment.[187] In case of default, debtors not only remain the owners of their property, but also any assignments, conveyances, mortgages, or real rights granted by trustees are null and void.[188]

In common law, this provision raises no conceptual issues: under trust law, trustees acquire the trust of debtors' property.[189] In civil law, however, it presents a conceptual ambiguity.

First of all, in a civil law system, ownership is the reunion of three elements: (1) fructus, the right to use; (2) usus, the right to enjoy; and (3) abusus, the right to dispose of.[190] This makes owners free to use, enjoy, and dispose of their property, within the limits imposed by law. As has been noted, the B.I.A. limits trustees' powers. Trustees must exercise ownership rights not for their own benefit but for the general benefit of the creditors. This situation is probably what led Bernier J. of the Quebec Court of Appeal to state: [translation] "[i]t is not as individuals but as trustees ("fiduciaires") that trustees ("syndics") become owners of assigned property; the purpose of the Bankruptcy Act (that is, liquidation for the creditors' benefit) governs trustees' ownership rights […]" [emphasis added].[191]

As Professor Albert Bohémier points out, in civil law it is difficult to conceive of persons owning property for the benefit of others and not for their own benefit.[192] However, this is the view described by Durocher J. of the Quebec Superior Court and reiterated by Nuss J. of the Quebec Court of Appeal: as soon as bankruptcy is declared, [translation] "[…] debtors' property becomes both trustees' property and creditors' patrimony" [emphasis added].[193]

This legal situation is the one envisaged in common law, in which trustees acquire legal title and beneficiaries acquire beneficial title.[194] It is not the situation of trusts envisaged in civil law, in which trust property forms an independently assigned patrimony, which neither the settlor, the trustee ("fiduciaire"), nor the beneficiary owns.[195]

As can be seen, describing the roles of trustees ("syndics") means juggling with the concepts of trustees ("fiduciaires"), administrators of the property of others, grantees, receivers, and owners. From a civilist point of view, this description is even more complex given the statutory context in which these roles are defined, a context marked by common law.

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