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WHAT IS A GENERAL SECURITY AGREEMENT ('GSA')?

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?

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.

When entering into a GSA with your bank, 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 GSA with one of your suppliers, you will typically provide security over just some of your assets, often 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.

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 (in accordance with the Receiverships Act 1993) 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.

Your obligations

To avoid defaulting under the GSA you will need to ensure you do not breach the specific obligations imposed under your agreement. Key obligations of the commonly used Auckland District Law Society GSA 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.
     
  • If the GSA covers farm land, you must farm and manage the land in accordance with established practice, including keeping the land clear of all weeds and noxious plants, animals and insect pests and taking reasonable steps to control disease, crops, pastures, plants and stock.
     
  • You must not sell any secured property, nor alter or remove any improvements, nor deal with any resource consent that affects secured property without the secured party's consent.
     
  • If a Company enters into a GSA they must not materially change the control of the Company without first obtaining the secured party's consent.
     
  • You must pay all rates, taxes, charges and other outgoings in relation to all secured property, must repair and maintain all improvements and must adequately insure all secured property.

A GSA is a complex legal document that imposes onerous obligations. It can provide powerful wide-ranging powers to the secured party to take control of your assets to recover moneys owed if a GSA is breached. With this in mind, a GSA should not be entered into lightly. Where in doubt you should always take legal advice.

Written by Default at 15:00

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