PPSA Subordination Agreement: What You Need to Know
If you are a business owner, a lender, or a creditor, you may have heard of a PPSA subordination agreement. This legal document allows multiple parties to have security interests in the same collateral, but with different priorities in case the debtor defaults. Understanding the ins and outs of this agreement is crucial to protecting your interests and avoiding potential legal disputes.
What is PPSA?
PPSA stands for Personal Property Security Act, a Canadian law that governs the creation, registration, and enforcement of security interests in personal property. Personal property refers to any asset that is not real estate, such as inventory, equipment, vehicles, intellectual property, and accounts receivable.
Under PPSA, a creditor can register a security interest in the debtor`s personal property to secure a loan or other obligation. The registration creates a public notice that the creditor has a lien on the collateral, which gives them priority over other creditors who register later or do not register at all.
What is a Subordination Agreement?
A subordination agreement is a legal contract between two or more creditors who have competing security interests in the same collateral. The agreement specifies the order of priority if the debtor defaults or files for bankruptcy. The creditor with the highest priority gets paid first, and the others follow in order.
For example, let`s say a borrower takes out a loan from Bank A and pledges their inventory as collateral. Later, the borrower takes out another loan from Bank B and pledges the same inventory as collateral. If the borrower defaults, both banks have a claim to the inventory, but only one can get paid in full. The subordination agreement will determine which bank has the first priority to collect on the debt.
Why Do You Need a PPSA Subordination Agreement?
A PPSA subordination agreement is essential when multiple creditors have security interests in the same collateral, especially if the debtor has limited assets or financial difficulties. Without the agreement, the creditors may end up fighting over the same assets, or the debtor may use the assets to pay off one creditor, leaving the others empty-handed.
By having a subordination agreement, each creditor knows their priority and can plan accordingly. The agreement may also include provisions for notice, consent, default, termination, and other situations that may affect the creditors` rights.
How to Draft a PPSA Subordination Agreement?
A PPSA subordination agreement should be drafted with care and attention to detail, as it involves complex legal concepts and potential liabilities. The agreement should be in writing, signed by all parties, and registered with the PPSA if necessary.
The agreement should clearly identify the collateral, the creditors, the amounts owed, and the priority of each creditor. It should also describe the conditions under which the priority may change and the consequences of default or termination.
It is advisable to seek legal advice when drafting a PPSA subordination agreement, as the nuances of the law can vary depending on the jurisdiction and the specific circumstances.
Conclusion
A PPSA subordination agreement is a useful tool for managing competing security interests in personal property. By establishing the priority of each creditor, the agreement reduces the risk of disputes and ensures that each party gets a fair share of the collateral in case of default. If you are involved in lending or borrowing secured loans, it is essential to understand the PPSA and its subordination agreement provisions to protect your interests.