Canada: COVID-19 Financial Services Update: Use Of Cash Deposits In Québec

The situation created by the spread of COVID-19 will have a significant impact on the cashflow of several businesses as a result of a reduction in sales and, consequently, of accounts receivable and cash balances. While government support measures certainly help, businesses may be seeking other sources of short-term funding.

In Québec, businesses that receive cash deposits from customers for goods and services to be delivered have access to such funding. This includes businesses which sell movable property, and whose customers have made prepayments on a specific item or on goods in inventory, such as materials. The same situation is common where the deposit is an advance payment for the performance of a service.

In the current circumstances, the possibility of using or accessing the amounts on deposit may be tempting for these businesses.  The question it raises is whether they have the right, pursuant to the applicable laws of the Province of Québec, to do so if the goods or services have not yet been delivered.

Under Québec law, the person in possession of movable property is presumed to be the holder of its ownership right¹. In other words, possession of movable property (such as money) is considered to be ownership thereof, unless ownership is contested by a third party. In addition, money is fungible property, meaning that it can be replaced by other property of the same nature. By law, money received as a deposit by a business is no longer identifiable and is considered part of its patrimony from the time it is deposited into an open bank account under the business's name where other sums have previously been deposited². The deposited funds become commingled with other funds, making it impossible to retrace and identify them.

A business becomes the owner of funds received as a deposit from a third party.  The business can use these funds at its discretion to pay its employees, creditors or to cover its fixed costs³, unless prohibited by legislation applicable to a business or industry which provides that the amount is to be held in trust. For example, the Travel Agents Act⁴ and the Act respecting prearranged funeral services and sepultures⁵ each provide that the amounts received are to be held in trust. In addition, the Consumer Protection Act⁶ also requires that if the money is received by the business from consumers prior to the conclusion of the contract or if the principal obligation under the contract is to be performed more than 2 months after the conclusion of the contract, such money must be transferred in trust, unless the merchant is exempt from this obligation. Unlike the common law provinces, there is no "implied trust" under the laws of Québec. However, a "true trust" can still be found to exist if the criteria of a true trust are met⁷.

The business remains a debtor of the third party and owes a debt or obligation to it in the amount of the deposit until the goods and services have been delivered. In most cases, the third party that provides the deposit is an unsecured creditor of the business, since it does not hold security on the business's property.

To conclude, in most instances Québec businesses can use deposit funds received but they will continue to have a debt towards the third party. 

The situation for financial institutions

If the funds were deposited in bank account(s) opened with the borrower's financial institution, would said deposits become accessible to said financial institution in case of realization? In other words, could a lender assert its right to the funds deposited by third parties and held by the borrower?

In the event of a realization of security and provided that the financial institution has valid security over the sums (by way of control or otherwise) or compensation rights, subject to the "true trusts" and statutory trusts discussed above, the financial institution will be able to seize the sums held by the borrower.  These sums can then be applied to the repayment of the borrower's obligations since they form part of the borrower's patrimony.

Footnotes

1. Civil Code of Québec, art. 928.

2. 9083-4185 Québec inc. (Syndic de), 2007 QCCA 1837. See also British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 SCR 24.

3. Groupe Dufour inc. c. Thibeault, 2006 QCCQ 5740, at para. 25.

4. CQLR c. A-10, s. 33.

5. CQLR c. A-23.001, s. 19.

6. CQLR c. P-40.1, s. 254 and seq.

7. Civil Code of Québec, art. 1260.

Originally published May 27, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.