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Types of guarantees (collateral)

The possible guarantees for a creditor are personal or real securities.

Personal security

Personal security, or suretyship

A personal security or suretyship enables the creditor to obtain payment of his claim from a third party if the debtor is unable to pay. We are referring to personal security because no specific movable or immovable property guarantees the repayment of the debt. There is therefore no connection between a specific asset of the debtor and his creditor. It is the debtor who makes a personal commitment and usually pledges his assets with a benefit, i.e. an additional person who becomes responsible for the same debt. This way, all the assets belonging to the debtor and the third party are used as collateral.

Definition and operation of suretyship

Section 2333 of the Civil Code of Québec defines suretyship as follows:

“Suretyship 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.”

This is therefore a three-way relationship. The debtor, creditor and the surety.

Example: Julien, a young graduate, has just landed his first marketing job and wants to buy a co-ownership property. He goes to his financial institution to get a $130,000 loan. The bank requires a surety from another person (formerly called “endorsement”). Julien’s father agrees to be his surety. The bank is the creditor, Julien is the debtor and Julien’s father is the surety. If Julien fails to pay the bank, the bank can ask the surety, i.e. Julien’s father, to pay.

Suretyship may not exceed what is owed by the debtor or be contracted with more onerous conditions. If the suretyship does not meet this requirement, it is not null for that reason. It may only be reduced to the extent of the principal obligation.1 In other words, the bank cannot require more than $130,000 from Julien’s father and must do so under the same conditions. If the bank ever demanded more, an action against it would not cancel Julien’s father’s obligation, but would only reduce it to the conditions originally imposed on Julien.

 

1 S. 2341 C.C.Q.
 

Effects of personal surety (guarantee)

A surety is therefore a security, a guarantee given to a creditor (the bank) to ensure repayment of its debt (the loan).

Clauses waiving the benefits of discussion and division are always included in surety contracts.

The benefit of discussion2

The benefit of discussion allows a surety who is sued by a creditor for payment of a debt to force creditors to discuss the debtor’s assets before taking action against him.

This means that the creditor (e.g. the bank) will first have to seize the debtor’s (e.g. the company’s) assets and have them sold under judicial authority. If the selling price is insufficient to cover the repayment of all the company’s debts, the creditor may then take legal action against the surety, i.e. the shareholders or directors personally.

 

2 S. 2348 C.C.Q.
 

The benefit of division3

The benefit of division allows the surety to require the creditor to divide his action between different sureties.

Example: Louis, Roland and Michel are shareholders in a company and each of the sureties is responsible for a share of the debt. Louis may require the creditor to sue him for a third of the debt. The creditor may sue Roland for another third and Michel for the last third.
 

3 S. 2349 C.C.Q.
 

Waiver of the benefits of discussion and division

By waiving the benefits of discussion and division, the creditor may, at his sole discretion, require repayment of the debt from a single surety (the most solvent), without first attempting to exercise his recourse against the debtor. Thus, the bank may require any of the company’s shareholders to pay the debt in full. Should Louis repay the company’s debt in full, he will have recourse against Roland and Michel for their respective shares.

Termination of suretyship

Neither the death of the debtor nor that of the creditor terminates the suretyship. Upon termination of the suretyship, the surety remains liable for debts existing at that time, even if those debts are subject to a condition or a term.4

The suretyship is terminated:

  1. Upon the death of the surety5

  2. Extinguishment of debt

  3. By a three-year notice for suretyship contracted with a view to covering future debts, or for an indeterminate period6

  4. If a creditor accepts property in payment7

Suretyship attached to the performance of special duties is terminated upon cessation of the duties.8
 

4 S. 2364 C.C.Q
5 S. 2361 C.C.Q.
6 S. 2362 C.C.Q.
7 S. 2366 C.C.Q.
8 S. 2363 C.C.Q.


Real security which includes the mortgage

Mortgages and prior claims are the two real securities which will, depending on the circumstances, have an impact on the broker’s work.

What are the prior claims?

These are claims determined by law and do not need to be published. A prior claim, as its name suggests, is a preferential right against movable or immovable property, as the case may be, belonging to the debtor. They are paid even before mortgage claims.9

Prior claims

Prior claims are characterized by two elements: the right of preference and publication.

Right of preference

Prior claims rank according to their order among themselves, and without regard to their date, before movable or immovable hypothecs.10

Creditors are paid in the following order:

  1. Prior claims
  2. Mortgage claims; and
  3. Ordinary or unsecured claims (i.e. based on a private writing that is not secured by any collateral).

Publication

Generally speaking, prior claims exist by the nature of the claim and it is not necessary to publish them in the Land Register or the Registre des droits personnels et réels mobiliers (RDPRM), as the case may be.

Save for a few exceptions, prior claims do not include a resale right; they therefore do not confer on the creditor the right to follow the property to which they relate into whatever hands it may come. These claims are therefore enforceable against the other creditors of the debtor, owner of the property, but not against any purchaser of this property.

Order of priority of a claim

Prior claims have an order among themselves and section 2651 of the Civil Code of Québec establishes their rank:

“The following are the prior claims and, notwithstanding any agreement to the contrary, they are in all cases collocated in the order here set out:

  1. legal costs and all expenses incurred in the common interest;
  2. the claim of a seller who has not been paid the price of a movable sold to a natural person who does not operate an enterprise;
  3. the claims of persons having the right to retain movable property, provided that the right subsists;
  4. claims of the State for amounts due under fiscal laws;
  5. claims of municipalities and school boards for property taxes on taxable immovables as well as claims of municipalities, specially provided for by laws applicable to them, for taxes other than property taxes on immovables and movables for which the taxes are due.”

Prior claims of the same rank concur in proportion to the amount of each claim.11
 

9 S. 2650(1) C.C.Q.
10 S. 2657(1) C.C.Q.
11 S. 2657(2) C.C.Q.

 

Last updated on: December 18, 2023
Reference number: 266035