Security and guarantees: the second way out
Security never repaid a loan. It prices the downside — and in Canada the downside has a statutory creditor ahead of you.
The concept
Security is not a repayment source; it is the secondary way out when cash flow fails. In the common-law provinces, personal-property security is created by agreement and perfected by registration under each province’s Personal Property Security Act — a general security agreement covers everything, a specific one covers named assets, and priority runs mostly on registration order. Québec writes it differently: the Civil Code uses hypothecs, movable and immovable, published at the RDPRM and the land register. The words change at the Ontario border; so does the statute.
The creditor a lender forgets is the Crown. Unremitted source deductions — and in much of the case law GST/HST — are held under a deemed trust that ranks ahead of a PPSA registration on the very receivables and inventory the line is margined against. The collateral looks whole until CRA claims its part of it first. A file that does not verify remittance status is reading a security value that is not fully there.
Guarantees are a different instrument with the same surname. A personal guarantee from an owner is partly security — a secondary source if the borrower fails — and partly conduct: it keeps the owner’s attention on the debt and makes asset-stripping costly. A guarantee from a related company needs its own credit analysis, because a guarantor that shares the borrower’s cash flow adds no second way out, only a second name on the file.
What a lender asks of it
- Registered where, and when
- The PPSA or RDPRM search answers who is ahead. Registration date is priority, and a forgotten renewal can erase the position entirely.
- What does the Crown take first
- Confirm payroll and GST remittances are current before you price receivable-backed collateral at face value.
- What would a receiver actually sell
- Book value is not liquidation value. Used equipment, specialized inventory and work-in-progress each have a real-world haircut the file should state.
- Does the guarantee add a source or a lever
- A guarantor with independent assets is a second way out; one who owns only the borrower is a behavioural instrument — worth having, not worth counting.
Where files get it wrong
- Margining receivables at face when deemed-trust exposure is unverified.
- Assuming Québec security works like Ontario’s because the memo says “PPSA” out of habit.
- Counting a spouse’s or holding company’s guarantee as collateral without valuing what is behind it.
- Letting a prior registration surprise the file at realization instead of at the search.
Training that covers it
- CA-107
- Security, guarantees and the Canadian legal framework — PPSA, hypothecs and the deemed-trust problem, in one module.
- TT-05
- The structuring checklist carries the registration and verification steps, so the file does not rely on memory.
- CA-204
- Structuring the financing — where security stops being a paragraph and becomes the term sheet.
What is missing today
The legal-framework module is specified, not delivered. The registry steps above are what the file needs today regardless.