What is a General Security Agreement (GSA)?

What is a General Security Agreement?

A General Security Agreement (GSA) is a contract signed between two parties a creditor (lender) and a debtor (borrower) to secure personal loans, commercial loans, and other obligations owed to a lender.

General security agreements list all the assets pledged as collateral to the lender and all possible events or conditions when the borrower is considered bankrupt, after which the collateral is repossessed by the lender.

A general security agreement (GSA) is the most common form of personal property security used in the Atlantic Provinces to secure commercial loans and other business obligations owed to a financial institution or other creditors (Secured Party).  A GSA is an effective and efficient way to obtain security over business assets to secure commercial obligations.

Despite its common use, however, the legal requirements for this security and the supporting documentation are often complex and Secured Parties can still fall into traps using GSAs.

General Security Agreement (GSA)

Purpose of the General Security Agreement

The main function of the general security agreement is to secure funds that were loaned to a business. Thus, to archive the security, all tangible and intangible assets that a company owns, or will own in the future, are described in the agreement.

Tangible assets include equipment, inventory, and machinery, whereas intangible assets include trademarks, patents, and intellectual property.

Both borrower and lender must sign the general security agreement. Additionally, the creditor may ask an individual or a corporation (e.g., insurance company) to sign as a guarantor. A guarantor is a person or organization that promises to pay back a loan if the borrower cannot handle it. After that, all security agreements need to be registered on the Personal Property Securities Register (PPSR).

See also :  What is an Unsecured Loan?

Below is a list of information that is necessary to provide for the registration:

  • Secured party details: Information on the creditor and debtor
  • Collateral details: Type of asset, its value
  • Grantor details: A grantor is a person or entity that creates a trust and transfers ownership of assets
  • Method of payment: Usually a credit card, but other types of payment can also be used.

Many banks use GSA when lending money to different entities.

WHAT TYPES OF ASSETS CAN A GSA SECURE?

A GSA can secure most types of personal property, both present, and future, including:

  • machinery and equipment the Debtor uses in carrying on its business
  • inventory
  • accounts receivable
  • trade-marks and other intellectual property;  and
  • securities such as stocks, bonds and investment accounts.

Often, a GSA states that it secures all of the Debtor’s present and after-acquired personal property, followed by a list of specific categories of the personal property charged; this is legally acceptable.

What are the Debtor’s Obligations?

After signing the general security agreement, the debtor is obligated to perform the actions mentioned in the agreement, such as repay a certain amount to the lender, not allowing third parties to take any actions concerning the security of collateral without the lender’s convention, and not change the control of the company without the lender’s consent.

The creditor must approve the guarantor of the company, which will take responsibility for the outstanding loan amount in case the borrower defaults.

If the borrower defaults on the loan, the lender owns the right to first become a legal owner of the pledged assets and then to sell them in the open market to recover the borrowed funds.

See also :  What is Business Loan?- Types of Business Loans

What must a good security agreement contain?

When drawing up a general security agreement, make sure to include the following clauses:

  • grant of security interest
  • delivery of the collateral
  • obligations of the debtor/borrower
  • the debtor or grantor’s representation, warranties, covenants and agreements
  • the grantor’s rights to the collateral
  • conditions of default and remedies in the event of default
  • reimbursement of secured party
  • termination of the agreement
  • what happens upon termination
  • notices