You may have been asked to enter into a General Security Agreement (‘GSA’) to provide security over your assets to a third party, before that party will advance you money, goods or services. What does this mean?
Every week, we come across companies that have given GSAs to banks that are unlimited or unnecessary, resulting in the bank having too much security.
Usually, banks require real estate security as full collateral for a company loan/overdraft and often this involves the Directors' securing the loan on their personal property (ie registering a first charge over the property). A GSA is not required in this situation but some banks ask for one anyway and it is provided without discussion.
GSAs need to be understood as they stop you from making full use of our company assets to raise finance efficiently, especially those that do business with large, slow-paying customers. An unlimited GSA makes it difficult to enter into separate security agreements with other financiers like ourselves.
WHAT IS A GENERAL SECURITY AGREEMENT?
A GSA is a common form of security often used to secure commercial loans or credit arrangements. It can be an effective way to obtain security over the assets owned by a person or company.
GSAs replaced Fixed and Floating Charges or Debentures when the Personal Property Securities Act 2009 ('PPSA') came into force.
When entering into a GSA with your bank or any lender, you or your company will often be asked to provide security over all of your present and after-acquired property, meaning the bank will have security over everything you own now and everything you will own in the future. A bank could, for example, require a GSA from you or your company to secure loan monies advanced by the bank.
When entering into a security agreement with one of your suppliers or for equipment purchases, you will typically provide security over just some of your assets (Specific Security Agreement, often classified as a 'PMSI'), usually the assets that they supply to you together with the sale proceeds of such assets.
A GSA will usually secure all moneys owed to the secured party now and in the future (called ‘secured moneys’). This will include collateral liability and the costs of enforcement.
Providing a GSA to a bank unnecessarily because they are already fully secured by, say, a registered first charge over Directors' real estate security prevents companies from entering into agreements with other finance firms unless a carve-out is agreed ('Priority Deed') or the bank agrees to de-register its GSA.
All security agreements need to be registered on the PPSR (Personal Property Securities Register), a central register operated by the government.
WHAT IF I DEFAULT?
The primary remedy of a GSA is that if you are in default of your obligations, the secured party can take possession of and sell the secured property. If a Company defaults on a GSA, the secured party can appoint a receiver to manage the company’s affairs. The receiver is then able to sell off Company assets in order to repay debts to the secured party.
To avoid defaulting under the GSA you will need to ensure you do not breach the specific obligations imposed under your agreement. Key obligations include:
- The obvious (but sometimes overlooked) obligation to pay to the secured party the secured moneys owed to them under any agreement, in accordance with the terms of that agreement
- You must not allow anyone else to take security over any property a secured party already has security in, without first obtaining the secured party’s consent. As a practical example this will mean you may need your bank’s consent before you open a line of credit with a supplier.
Banks provide mortgage finance and little else in terms of meaningful amounts of funding to grow your business. They often over-collateralise their loans by taking GSAs unnecessarily.
There are many more finance options available to growing companies in Australia these days so our advice is:
- Be careful in seeking business finance and agreeing terms
- Seek advice from your accountant or an experienced broker
- Don't restrict your search to banks
- Understand the security being provided and why you are providing it
- Review the PPSR from time to time to see what is registered against your company
- Keep an eye on your business credit score