Written by: Bianca Kratt, Q.C.

The number of private lender fund-based vehicles has been on an upwards trajectory throughout 2020 and 2021. This trajectory indicates that more Canadian citizens are assuming the risks associated with being a lender, and although there are many, most lenders are wary about their exposure to one major risk: the risk of default. To mitigate the risk of default, one instrument at the lenders disposal is a General Security Agreement (GSA).

What is a General Security Agreement?

A GSA is a contract signed between two parties, a borrower and a lender. The GSA protects the lender by creating a security interest in all or some of the assets of the borrower. In sum, the GSA outlines the terms and conditions of the loan, and lists the assets used for security.

The GSA can serve to benefit the borrower as it allows them to secure a commercial or a personal loan while excluding certain assets from collateral exposure. On the contrary, the GSA functions as a sheet anchor and allows the lender to reclaim assets noted within the agreement as repayment.

Procedural Requirements to Effectuate a General Security Agreement

A GSA is a binding agreement, which means that both parties should take necessary and careful steps to ensure it becomes legally authorized. The general practice in Canada is that the borrower seeks a lawyer to provide a written legal opinion on the GSA prior to it being authorized. However, it is important that the borrower and lender understand that legal opinions will vary depending on the type of transaction. For example, the lawyer may need to provide an opinion to confirm that a financing statement has been issued and properly registered for the GSA and report on searches conducted in public registries. Regardless, the lawyer should provide an opinion on due diligence and corporate action. This would illustrate that the lawyer has reviewed the necessary laws related to the GSA, and that the borrower has taken the necessary corporate action to authorize the GSA.

All security agreements will need to be registered through the Personal Property Securities Register (PPSR). To become a registered GSA, a list of information such as method of payment, collateral details, secured party details, and grantor details will need to be provided. Depending on the type of assets being secured, the lender may be required to register the GSA in multiple provinces. If the listed assets include any type of “serial numbered good,” the serial numbers will also need to be accounted for and periodically reviewed.

The GSA contract has a validity of five years. Once the five years expires, the agreement will need to be renewed. Upon renewal, and at the inception of the agreement, the lender should ensure that the agreement is authorized by way of a written resolution.

Primary Elements of the General Security Agreement

Although the specifics from one GSA to the next may be somewhat dissimilar, the contents of each agreement must be clear, concise, and reviewed for consistency. Elements that are typically present in any given GSA include the following:

–        Definition of the parties’ obligations –        Consequences of default
–        Grant of security interest –        Remedies
–        Guarantor information –        Ownership of collateral
–        Covenants of the debtor –        List of borrower’s assets
–        Use and verification of collateral –        Miscellaneous
–        Events of default –        Copy of agreement

Each of the elements of the GSA should be periodically reviewed and updated because a single mistake can invalidate the agreement.

Obligations under a General Security Agreement

Due to it being a binding agreement, the borrower will be obliged to perform any of the actions described within the GSA. This may include making certain incremental payments, not selling any of the collateral assets to third parties, and not changing the ownership structure of the borrower company. To mitigate any risk associated the GSA, the borrower must keep an eye on the monthly balance it owes on the GSA. If the borrower defaults on the loan, the lender will be first in right to the listed assets, which they will be entitled to sell on the open market or retain for its own use.

As discussed, the GSA can list a variety of assets, which, upon default, the lender has a contractual right to secure as collateral. The listed assets can be tangible property of a business. For example, in the 2022 case of Weslease 2018 Operating LP v. Eastgate Pharmaceuticals Inc., the lender was entitled to obtain pieces of laboratory equipment. The listed assets can also be intangible. As was the case in the 2021 dispute of Perera v. Perera, the GSA granted the lender the right to secure a number of the borrower company’s shares. Other examples of assets that may be listed within a GSA include machinery, inventory, accounts receivable, trademarks, intellectual property, stocks, and bonds. The borrower must be aware that the GSA can secure either current or future debts, or both.

Although providing a loan and navigating the legal requirements involved with General Security Agreements can be overwhelming, a legal representative will be more than prepared to assist you in your journey towards a safe and secure credit arrangement.