What is a General Security Agreement?
A General Security Agreement (GSA) is a document recording a security provided by a debtor company to its creditor over a specific group of assets or over all assets of the business. The GSA records the terms which include a right of the creditor to register their interest on the Personal Property Securities Register (PPSR) so that there is a public record of that financial interest in the assets of the debtor company.
We always recommend to directors/shareholders investing moneys into their business on start-up that they attend to completing the appropriate loan documentation (between company and individual) and a General Security Agreement recording the terms. It is important that this GSA is registered on the PPSR. It is also important that the registration is maintained and updated every five years to preserve the position as secured creditor.
Priority of Securities
The registration on the PPSR is an important step and “perfects” the security interest. Perfection of the security interest and the timing of that perfection establishes the order of priority of secured parties who have an interest in the company assets.
The main exception to the priority rule is the Personal Money Security Interest (PMSI) which is where a supplier of goods or equipment takes a security over the goods supplied (but not yet paid). For example, a hire purchase agreement over a refrigerator or a loan by a Finance Company secured over a motor vehicle (a serial numbered good). A PMSI creditor has “super” priority for the recovery of their unpaid goods and/or equipment.
The first to register on the PPSR will usually have priority in the event of insolvency – unless there has been a Deed of subordination between secured parties changing the priority or if the security is not valid.
Under a GSA, a debtor has obligations to the secured creditor to pay amounts owing to the secured party when due, to perform obligations under any agreement, not to allow another party to take security in the same assets without consent, or not to change control of the company without consent.
An important right under a GSA, is for a secured creditor following a default by the debtor, to appoint a Receiver, who then takes control and takes steps to pay the secured creditor.
It is common for banks when they advance moneys to a company that they do this by way of a GSA.
Where GSA’s go wrong
To maintain priority, the GSA needs to be registered immediately on execution of the GSA.
A financing statement has a life of 5 years and then falls off the register. It must be renewed before it lapses, or priority is lost;
The collateral description and accuracy with the registration of the security on the PPSR is important. If there are material discrepancies the security can be invalid.
It is important to register on the PPSR. It is the difference between having some right of recovery and running the risk of losing it all if the debtor company fails leaving a shortfall to creditors.