General Security Agreement (GSA)

A GSA is the standard all-assets security document in Canadian commercial lending. Banks commonly take one from business borrowers, sellers take one from buyers who owe part of the price, and parent companies take one from subsidiaries they fund. Ontario's Personal Property Security Act applies to any transaction that in substance creates a security interest in personal property, whatever the document is called, so a GSA, a chattel mortgage and a floating charge debenture are treated the same way.

A typical GSA contains:

• A grant of security over all present and after-acquired personal property, plus proceeds. The PPSA expressly allows a security agreement to cover after-acquired property and future advances.
• The secured obligations, often every debt the borrower owes the lender now or later, not only one loan.
• Covenants: insure the collateral, keep it in good repair, pay taxes, and grant no other security without consent.
• Events of default and remedies, including taking possession, collecting receivables, selling assets and appointing a receiver.

Personal property under the PPSA includes goods such as equipment and inventory, accounts receivable, instruments such as promissory notes, investment property such as shares, money, chattel paper and intangibles such as intellectual property. Land is outside the Act; a lender that also wants real estate takes a charge registered on title. Liens created by statute and deemed trusts also largely fall outside the PPSA.

Two separate steps make a GSA effective against third parties.

Attachment happens when value is given, the debtor has rights in the collateral, and the debtor has signed a security agreement that describes the collateral well enough to identify it. GSAs meet that test with a description of all present and after-acquired personal property, the wording lenders commonly use. Assets the debtor buys later become subject to the GSA as soon as the debtor acquires rights in them.

Perfection happens when the security interest has attached and the steps required for perfection are complete. For a GSA, that step is registering a financing statement in Ontario's personal property registry, and registration perfects a security interest in any type of collateral. Our entry on PPSA registration and search explains how financing statements work, including why lenders often register before the GSA is even signed.

Skipping perfection is costly. An unperfected security interest is not effective against a trustee in bankruptcy, and it ranks behind a perfected secured creditor and behind a judgment creditor who has the collateral seized. The secured party must also deliver a copy of a written GSA to the debtor within 10 days after it is signed.

The default rule is simple: between two security interests perfected by registration, the first to register wins, regardless of when each loan was made. A bank that registered in 2022 generally ranks ahead of a seller who registers in 2026. The main exceptions:

• Purchase-money security interest (PMSI). A lender or vendor that finances the purchase of specific assets can rank ahead of an earlier all-assets GSA in those assets. For equipment, the PMSI must be perfected before or within 15 days after the debtor obtains possession. For inventory, it must be perfected when the debtor receives possession, and the PMSI holder must first give written notice to earlier registered secured parties whose registrations cover inventory or accounts.
• Buyers in the ordinary course. Customers who buy goods sold in the ordinary course of the debtor's business take them free of the GSA, even if they know it exists, unless they also know the sale breaches the security agreement.
• Crown claims. Under the Income Tax Act, unremitted payroll source deductions are deemed held in trust for the Crown and paid in priority to security interests. Other statutory liens and deemed trusts can also rank ahead.
• Subordination. A secured party can agree to rank behind another, and that agreement is effective according to its terms.

Enforcement has its own timing rules. A creditor that intends to enforce against all or substantially all of the inventory, receivables or other business property of an insolvent debtor must send a notice under section 244 of the Bankruptcy and Insolvency Act and wait 10 days unless the debtor consents. Before selling collateral, the PPSA generally requires at least 15 days' written notice to the debtor, guarantors and other registered secured parties.

In a leveraged small-business purchase, two creditors want a GSA over the same assets: the bank funding most of the price, and the seller who takes back a promissory note for the balance through vendor financing. The bank will usually insist on first position, so the seller signs a postponement and subordination agreement, often called an intercreditor or priority agreement, that ranks the seller's GSA second whatever the registration order and limits when the buyer may pay the seller. The vendor financing entry covers how those terms are negotiated.

The seller should still register its own financing statement at closing. Postponed security that is perfected still ranks ahead of unsecured creditors and remains effective against a trustee in bankruptcy. A personal guarantee from the buyer's principals gives the seller a second route to recovery.

Government-backed lending adds constraints. Under the Canada Small Business Financing Program, a lender financing the purchase or improvement of real property or equipment must generally take first-ranking security in the assets its loan finances (or equal-ranking security where another lender co-finances them) and, where an existing GSA's after-acquired property clause would otherwise rank first, must obtain the postponements needed to put its security first.

Franchisors also take GSAs, typically to secure royalties, product accounts and lease obligations under the franchise agreement, and the franchisee's bank will often ask the franchisor to postpone. Related companies use them for intercompany debt, as our guide to intercompany loans explains.

Borrowers rarely avoid giving a GSA, but several terms are negotiable:

• Scope. A lender financing one machine may accept specific security instead of all assets. Excluded assets can include consumer goods and contracts or licences that cannot be charged without a third party's consent.
• Secured obligations. Wording that secures all present and future debts can sweep in unrelated liabilities, such as guarantees of other companies. Narrow it where possible.
• Negative pledge. Build in permitted liens for the equipment leases and purchase-money financing the business will need.
• Release on repayment. Require the lender to discharge its registration promptly once the debt is paid. The PPSA backs this up with a written demand procedure.

Lenders, for their part, focus on the debtor's exact legal name, registering before advancing funds, and searching for prior registrations so they know where they will rank. Lamba Law's free seller financing calculator models the note a GSA would secure, and our vendor take-back and earn-out service covers the full security package.

Yvonne Bakare sells the assets of her Mississauga sign manufacturing business to a corporation owned by Gareth Lloyd for $900,000. The bank lends $450,000 against a first-ranking GSA it registered two weeks before closing. Gareth's corporation pays $225,000 in cash, and Yvonne takes back a $225,000 five-year note secured by a second GSA and Gareth's personal guarantee. Her lawyer registers her financing statement on the closing date, and a postponement agreement lets the corporation pay her monthly unless the bank declares a default.

Three years later, sales fall and the bank has a receiver appointed. The assets sell for $560,000. After the receiver's court-approved costs of $45,000 and $15,000 of unremitted payroll deductions, which the Crown's deemed trust placed ahead of both lenders, the bank recovers its $360,000 balance in full. Yvonne's second-ranking GSA captures the remaining $140,000 against her $170,000 balance, and she sues Gareth on his guarantee for the $30,000 shortfall. Had she not registered and the company then gone bankrupt, her unperfected security would have been ineffective against the trustee, and the $140,000 would have been shared among unsecured creditors generally.