General Security Agreement FAQs (Frequently-Asked Questions)
For financing-related legal matters contact our law firm at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
What is a General Security Agreement and how does it differ from a specific security agreement?
A General Security Agreement (GSA) is a legal document that grants a lender a security interest over all or substantially all of a debtor's present and after-acquired personal property to secure the performance of an obligation. In contrast, a specific security agreement is restricted in scope, encumbering only a particular, identified asset (i.e., a specific piece of equipment or a vehicle), rather than the debtor's entire pool of personal assets.
Which types of assets are typically covered under a floating charge in a GSA?
A floating charge in a General Security Agreement typically covers circulating or fluid assets that change in the ordinary course of business, such as inventory and accounts receivable. This allows a business to sell or use these assets freely until a default occurs, at which point the charge crystallizes and attaches to the specific property currently held.
How does a lender perfect their security interest once a GSA has been signed?
To perfect a security interest after a General Security Agreement has been signed, the lender must primarily register a financing statement in the provincial Personal Property Registry (PPR). This public registration provides notice to third parties and establishes the lender's priority ranking relative to other creditors regarding the debtor’s personal property.
What are the implications of the after-acquired property clause for a borrowing business?
An after-acquired property clause grants a lender a continuing security interest in all assets a business acquires after the loan agreement is signed, effectively tethering future growth to existing debt obligations. While this provides the lender with broader collateral coverage, it can restrict the borrower’s ability to use new assets as leverage for future financing unless the original lender grants a subordination or release.
What constitutes a default under a standard GSA, and what are the immediate consequences?
Under a standard GSA, a default typically includes not only a failure to make scheduled payments but also a breach of any financial covenants, the onset of insolvency or bankruptcy, or the occurrence of a material adverse change in the debtor's business. The immediate consequences of such a default include the lender's right to accelerate the entire debt (making it due instantly) and the ability to enforce its security interest by seizing collateral, appointing a receiver, or selling the business assets to satisfy the outstanding obligations.
How is the priority of claims determined if multiple lenders hold a GSA against the same debtor?
The priority of GSAs is primarily determined by the first to register rule under the jurisdiction's Personal Property Security Act. This means that a lender who perfects their security interest by registering a financing statement first generally holds priority over subsequent registrants, regardless of when the underlying security agreement was actually signed.
Can a GSA be limited to specific business locations or divisions, or does it always cover the entire enterprise?
A General Security Agreement can be specifically tailored to cover only certain business locations or divisions by clearly defining the collateral in the agreement's schedule. While many lenders default to a blanket lien over all enterprise assets, the parties are free to contractually limit the security interest to assets associated with a particular branch or operating unit.
What is the process for discharging or releasing a GSA once a loan has been fully repaid?
To discharge a General Security Agreement, the borrower must first obtain a release or discharge statement from the lender confirming that all secured obligations have been satisfied. The lender then files a financing change statement through the applicable provincial Personal Property Security Registry to formally terminate the registration and clear the public record of the lien.
How does a GSA impact a company's ability to sell or dispose of equipment in the ordinary course of business?
A General Security Agreement typically includes a license that allows a company to sell inventory or equipment in the ordinary course of business without prior lender consent. However, for significant disposals or sales outside normal operations, the company must usually obtain a formal release from the secured party to ensure the buyer receives the assets free and clear of the registered lien.
What rights does a secured party have to appoint a receiver or manager under the terms of a GSA?
Under a General Security Agreement, a secured party typically has the contractual right to appoint a receiver or receiver-manager privately once a default has occurred. This appointment allows the secured party to take possession of, manage, or sell the debtor’s collateral to satisfy the outstanding debt, subject to the notice requirements of the Bankruptcy and Insolvency Act and the applicable provincial Personal Property Security Act.
When you or your business requires the legal services of a financing lawyer to secure and advise upon the financial transactions that you are engaging in, contact our law firm in strict confidence, by telephone at 403-400-4092 [Alberta] or 905-616-8864 [Ontario], or via email at Chris@NeufeldLegal.com.
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