Q: As part of my security package, I am obtaining an unlimited personal guarantee from the president of my corporate borrower. Can I also take a general security agreement from that individual in Ontario to secure his/her personal guarantee?
A: The answer really depends upon what type of assets you are looking to secure with the general security agreement. A general security agreement typically calls for the debtor to grant a security interest to the lender in all of the debtor’s present and after-acquired personal property.
If that personal property consists of assets used primarily in connection with the operation of a business (for example, when the debtor is the sole proprietor of a small business), then it is possible to charge all present and after-acquired business assets of an individual with a general security agreement.
However, if the personal property to be secured consists of consumer goods (generally defined as goods used or acquired for use primarily for personal, family or household purposes), then Section 12(2)(b) of the Ontario PPSA precludes a security interest from attaching to consumer goods under an after-acquired property clause unless the debtor acquires rights to them within ten days after the secured party gives value. Thus, an after-acquired property clause would simply not be effective over the natural term of any typical loan.
In addition, the Ontario Consumer Protection Act places further restrictions on after-acquired property clauses and on the ten day allowance period referred to above vis-à-vis any of the borrower’s goods other than those acquired by the borrower from the lender. There are also exemptions (which vary from province to province) which prevent a lender from seizing certain types of secured assets, including certain household furnishings, clothing, tools used to earn income and other assets within certain prescribed amounts.
In light of these restrictions on after-acquired property clauses affecting consumer goods, a personal guarantee from an officer or director of a corporate borrower is more customarily secured by a charge on his or her residence or recreational real property, or by a security interest granted over specific individual items of valuable personal property.