General Security Agreement

A General Security Agreement (GSA) is an agreement between a borrower and creditor/lender where the latter gains a legal right to claim the former’s current and future assets in case of a default. It outlines the loan requirements, collateral, and other details and protects the interests and assets of both parties.

A GSA specifies the rights, obligations, terms, collateral, and parties involved with respect to a specific loan. By enforcing a general security agreement, a lender creates a security interest in a borrower’s personal property or movable assets. It provides coverage against credit risk, whereby the lender’s dues are prioritized over other creditors in case of a default or bankruptcy.

• A General Security Agreement, or GSA, is a legal document between a borrower and a lender. Lenders create a security interest in collateral through this agreement, and borrowers receive credit facilities in return.
• Per the Personal Property Security Act (PPSA) 2009, lenders must register GSAs with the Personal Property Securities Register.
• If a borrower fails to repay the debt, the lender seizes assets and pledged collateral. In a GSA, multiple assets are involved, unlike in Specific Security Agreements SSAs), which involve only one specific asset.
• Several details are mentioned in a GSA, including collateral details, loan terms, rights of parties, obligations, remedies in the event of default or bankruptcy, etc.

The General Security Agreement definition states that it is a loan contract between a borrower and a lender. Through this contract, lenders create a security interest in a borrower’s assets. In return, borrowers get access to debt financing through a loan or mortgage. However, if the borrower fails to repay the loan, they will likely lose their assets. Hence, a breach of contract means the borrower's assets are under threat.

GSAs came into use after the Personal Property Security Act (PPSA) 2009 was introduced. This act gave lenders the right to create a security interest in a borrower’s personal property. Loan agreements typically involve inventory, equipment, intangible assets, accounts receivable, investment, and various other assets as collateral. Through a GSA, the borrower (property owner) creates positive covenants within the agreement and keeps the lender updated about the condition of the asset/s in question. A GSA’s validity is usually restricted to five years. Once the term expires, a General Security Agreement must be renewed.

The General Security Agreement registration is important. The parties registering this agreement must approach the Personal Property Securities Register (PPSR) to formalize the association. During registration, the following information is noted: interest applicable, collateral type, and lender and borrower details. However, if there are legal problems or technicalities, the parties can approach a lawyer, who will scan the document and approve the agreement.

A loan secured with this agreement allows a lender to claim the borrower's assets in the event of default. It creates an exchange of debt and collateral. So, borrowers obtain credit by offering collateral to lenders. This prompts them to adhere to the loan terms because a breach or default may force the lender to sell the borrower's assets. Borrowers must read the terms and conditions before signing a GSA.

Some elements of a GSA include:

• A security interest (a legal claim on a borrower’s assets)
• Indebtedness secured (a statement that a loan or debt is secured through collateral)
• A borrower’s representations and warranties (proof of the genuineness, upkeep, etc., of collateral)
• Covenants of debtor (obligations a borrower must fulfill)
• Collateral, investment property, and securities details
• Debt collection method

Any income, interest, profits, payments, etc., associated with collateral must be mentioned. In the event of a default, lenders request borrowers to repay the accrued amount. Also, remedies to address such situations are covered.

Let us study a few examples of general security agreements to discuss the concept further.

Example #1

Suppose Jenny runs a facilities management firm, CleanWorks Corp., in Texas. She needs capital to start a new project. Jenny approached FirstAdvantage Bank for funding. The bank agreed to extend a credit facility to Jenny’s firm. The loan was secured by a General Security Agreement of $1 million, which was formally registered. Jenny also noted the General Security Agreement expiry date at this time, in addition to other crucial loan details.

The bank asked Jenny to pledge collateral equal to the debt amount. She offered her company’s inventory (stock) as collateral to FirstAdvantage Bank. However, her company failed to adhere to the terms of the agreement. Citing a breach of contract, the bank seized the inventory to recover its money.

Example #2

A February 2024 article discusses the role of a general security agreement in a franchise arrangement. It sheds light on how important it is to pay attention to a GSA in addition to the rest of the documents. This is because a GSA outlines what happens in the event of a default. It further states that a lender or creditor can acquire every asset a borrower owns, including rights to revenue, accounts, and proceeds. This makes GSAs critical documents that can change the course of a borrower’s business with one wrong move.

These legal documents contain specifics about how an adverse situation will be dealt with to ensure no party is disadvantaged. Another significant aspect of GSAs that this article shows is their prevalence across industries. Nearly all lending agencies or entities require management of credit risks, which is possible through such agreements.

GSAs and Specific Security Agreements (SSAs) fall under the category of loan agreements. However, certain differences exist between them. They have been listed in the table below.

This article has been a guide to what is a General Security Agreement (GSA). We explain it with its examples & differences with Specific Security Agreement (SSA). You may also find some useful articles here -

• Escrow Agreement
• Subordination Agreement
• Intercreditor Agreement