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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.
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.
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.
In addition to the debtor’s above-noted obligations, below are common elements of a general security agreement.
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.
Ryerson Canada, Inc. entered into a GSA contract with Bank of America; a copy of the document was filed with the SEC[1]. Common elements found in this GSA are duplicated below:
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