A General Security Agreement (GSA) grants a security interest over personal property or assets, the collateral pledged for many types of financing. The contract is executed by a debtor (borrower) in favor of a creditor (lender).
A GSA can support various lender obligations, including personal and commercial loans. Unlike voluntary liens, a GSA may cover a broad range of assets but not real property (i.e., land, buildings, etc.), as rules and laws are often unique for mortgages (or deeds of trusts).
The GSA is a versatile contract and may include many elements, such as defining events or conditions of debt default and the lender’s rights and remedies over the collateral. The flexibility allows the cross-collateralization of various business assets. Examples include inventory, equipment, accounts, and intangible property that may support multiple loans.
A general security agreement (GSA) from a borrower or guarantor grants a security interest over personal property or assets as collateral to a lender to support debt obligations.
A GSA provides a creditor with legal certainty and enforcement rights in case of borrower default, and alternate repayment is required to settle the debt.
Elements found in a GSA include the parties involved, the classes of collateral pledged, the supported debt, debtor obligations, lender’s rights, and legal remedies.
Purpose of the General Security Agreement
If a lender’s claim to collateral is ambiguous (i.e., not legally defined), it would be difficult to properly assess credit risk, and a borrower may be unable to obtain financing.
Thus, lenders use a GSA to ensure collateral is legally enforceable. Borrowers granting security via this contract give lenders greater certainty about the collateral pledged to support financing. Collateral may be both “present and after acquired;” a GSA is a floating charge that covers a pool of assets that may fluctuate in value (rather than a specific asset such as a piece of equipment).
Jurisdictions may require that lenders register the executed instrument with a publicly available registry or database.
Registration allows lenders (and the public) to conduct collateral searches and determine if the asset is already pledged in support of obligations to other creditors. If there is an existing creditor, lenders may choose to define the rights to the collateral (via subordination, for example), or the existing debt may be settled and the interest removed before a new lender can rely on the asset (for example, refinancing).
Registration of the GSA contract varies by jurisdiction and lender preference. Before expiry, it may be renewed by the lender, often at the borrower’s cost.
Jurisdictions have specific contract laws that the GSA relies on, so consulting with legal counsel is appropriate when a borrower is uncertain of its implications.
What are the Debtor’s Obligations?
Other than the customary expectation that the borrower complies with local laws and regulations, there are four main categories of debtor obligations under a GSA. Failure to do so may result in default and legal ramifications, such as losing ownership of the pledged asset.
Repay the financing as agreed, including principal, interest, fees, and other charges stipulated in the lending documents. The GSA may cover present and future obligations, as a GSA is a reusable instrument covering collateral pools.
Maintain the collateral in good order. Aside from taking reasonable protection against damage or loss (such as proper storage and adequate insurance), the borrower must maintain the collateral condition within acceptable wear and tear expectations.
Notify of material changes. The borrower must notify the lender in situations that affect the collateral. Examples include disposal (i.e., sale and change of ownership) and loss of use due to extraordinary events (e.g., a disaster). Other scenarios may impact the borrower’s ability to repay the loan (for example, a lawsuit) or maintain the value of the collateral (e.g., costly and lengthy repair to critical equipment).
Other Representations and Warranties, including boilerplate language such as the accuracy of information provided to the lender, that pledged collateral is genuine and owned free of conflicting interests, that legal costs are borne by the borrower, etc.
What are the Elements of the General Security Agreement?
In addition to the debtor’s above-noted obligations, below are common elements of a general security agreement.
Particulars of the transacting parties, namely the entity pledging the collateral (debtor and/or guarantor) and the lender/creditor.
Description of the security interest granted, including the classes of collateral covered and any lists or schedules that cover specific assets that are uniquely identifiable.
Debt that is secured may include all obligations of the debtor to the lender (i.e., cross-collateralized), present and future. Unlike some mortgage instruments that are extinguished upon repayment, a GSA remains valid until the registration has expired or the lender releases the charge.
Covenants include the collateral being free of encumbrances (liens, claims due to legal action, etc.) and changes to use (i.e., rented or sold to another party).
Events of default covering circumstances such as non-repayment, bankruptcy, insolvency, or death (if it’s an individual granting the GSA, not a company). Acceleration rights are standard to demand repayment legally.
Legal remedies give a lender powers to take possession of assets, appoint a Receiver, or take other legal actions to recover the debt.
Assets pledged as collateral with prior claims (for example, from prior financing) may supersede the GSA and its registration. Furthermore, legal liens (taxes, court action, etc.) may also trump the lender’s rights to the asset; these are sometimes called superpriority claims.
Therefore, it is vital that due diligence, such as site visits and searches, are conducted upfront (and periodically) to confirm the security agreement remains legitimate and assets are exclusively available to the lender as collateral.
Practical Example of a General Security Agreement
Ryerson Canada, Inc. entered into a GSA contract with Bank of America; a copy of the document was filed with the SEC. Common elements found in this GSA are duplicated below:
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