A movable hypothec with delivery, commonly referred to as a pledge, is a security frequently used in Quebec law. Its purpose is to guarantee the performance of an obligation.

More specifically, it is based on a fundamental principle: the physical delivery of the charged property to the creditor. Thus, the pledge grants the creditor special protection without, in principle, requiring registration in a public register.

The grantor of the pledge

First, a pledge may be granted only by a person capable of alienating the property given as security. This rule flows directly from section 2681 of the Civil Code of Quebec. Unlike other forms of movable hypothec, the restrictions set out in section 2683 C.C.Q. do not apply to a pledge.

By contrast, sections 2684 and 2684.1 C.C.Q., relating to universality of property, do apply. This is so whether the hypothec is constituted with or without delivery. In addition, section 2685 C.C.Q. also remains applicable.

From a formal standpoint, the law does not require that a pledge be evidenced in writing. However, in practice, it is strongly recommended to formalize the agreement in writing. This precaution facilitates proof of the hypothec, its conditions, and its scope, particularly in the event of a dispute.

Delivery of the property and dispossession

Next, the essential characteristic of a pledge lies in the dispossession of the grantor. Concretely, the charged property must be physically delivered to the creditor. Alternatively, in certain cases, the instrument representing the property may be delivered, such as a share certificate.

This delivery is determinative, because the hypothec then becomes enforceable against third parties. Thus, the creditor’s protection begins upon effective dispossession of the property.

Moreover, section 2705 C.C.Q. also allows the property to be delivered to a third party. However, this is subject to the condition that written evidence of the pledge be delivered to that third party. This requirement is intended, in particular, to ensure legal certainty and transparency vis-à-vis other creditors.

Property that may be the subject of a pledge

A pledge may relate to both corporeal and incorporeal property. Where corporeal property is concerned, it must be capable of being physically delivered to the creditor or the third-party holder.

For incorporeal property, dispossession generally occurs through the delivery of the representative instrument. Thus, this requirement ensures compliance with the conditions set out in section 2702 C.C.Q..

In addition, placing the property in the possession of the creditor or the third party plays a central role in matters of publication. Under section 2703 C.C.Q., publication of the pledge is ensured by possession of the property itself. It therefore subsists so long as the property remains in the creditor’s hands.

Continuity of dispossession

The validity of a pledge requires continuous and, in principle, uninterrupted dispossession. However, sections 2704 and 2706 C.C.Q. provide for certain important nuances.

Thus, the creditor may allow the temporary return of the property to the debtor or to a third party. This return may be for purposes such as inspection or maintenance. However, this situation does not compromise the validity of the pledge if the creditor retains possession and legal control of the property.

Where dispossession is involuntary, the pledgee creditor has remedies allowing them to revendicate the property. In particular, they may reclaim the property from the person who holds it without right. These remedies are provided for in sections 2704 and 2706 C.C.Q., as well as in section 517(1) of the Code of Civil Procedure.

Publication in the RDPRM and control agreements

Although publication of a pledge is primarily based on possession of the property, registration in the Register of Personal and Movable Real Rights (RDPRM) remains possible. Indeed, section 2707 C.C.Q. authorizes such registration to increase the visibility of the security.

This registration may also allow a pledge to be transformed into a hypothec without delivery, where the statutory conditions are met.

Moreover, for certain incorporeal property, specific rules apply with respect to dispossession. Dispossession may then be effected by control. The creditor thus obtains legal control of the property through a control agreement. This possibility is provided for in sections 2713.1 et seq., as well as 2714.1 et seq. C.C.Q.

Rights and obligations of the pledgee creditor

The creditor who holds the property in pledge benefits from specific rights governed by sections 2736 to 2742 C.C.Q.. However, the creditor remains subject to an obligation to preserve the property. This obligation must be exercised with prudence and diligence, in accordance with the reference made to section 2283 C.C.Q..

This rule is intended, in particular, to protect the value of the property given as security. It protects both the interests of the creditor and those of the debtor.

It is also important to highlight a significant limitation. The pledgee creditor may not assert their right against a seizing creditor. In such a situation, the pledgee must surrender the seized property and claim their collocation according to rank, in accordance with section 2706 C.C.Q., as well as the rules of collocation set out in the Code of Civil Procedure.

Conclusion

In conclusion, a pledge constitutes an effective and flexible security under Quebec law. Indeed, it relies primarily on dispossession of the property rather than mandatory registration in a public register. However, its validity and enforceability depend on strict compliance with the rules governing delivery, possession, and preservation of the property.

Thus, a legal analysis is often necessary to determine the most appropriate security. This analysis depends, in particular, on the nature of the property and the parties’ situation. Our firm can assist you in evaluating your options and securing your guarantees in real estate law.