Specific Security Agreement: How It Ranks Against a GSA

An equipment or vehicle financier lends against the thing it finances. It prices the loan on the asset's life and resale value, not on the whole business, and it wants the right to take that asset back quickly and without competing with anyone else. A general security agreement over the whole company would give it more than it needs and would put it in a contest with the main bank. A specific agreement describes the excavator, the truck or the line of machinery by make, model and serial number, and claims that.

The same document is used by a bank for a single asset, or by a supplier that sells on credit and wants its goods back if it is not paid. In New Zealand and Australia, where both the term and the PPSR are at home, the name covers all of these. In the UK the term is little used: a company's charge over a specific machine is registered at Companies House, and much equipment is financed by hire purchase or leasing, where the financier keeps ownership instead.

The financier perfects its interest by registering a financing statement against the grantor that describes the collateral. On New Zealand's register a motor vehicle must be described by its registration number or VIN, and a chassis number where there is one. In Australia, a registration that does not carry the serial number of goods the regulations allow to be described that way can lose to a later buyer.

Ordinary priority favours whoever registered first, which is usually the bank with the older general security. The exception is a purchase money security interest: security given to the lender or seller whose money bought the asset. If it is registered in time, it ranks ahead of the bank's older all-assets security in that machine. In Australia, under section 62 of the PPSA, that means registered by the time the grantor takes possession, for inventory, or within 15 business days after possession for other goods, and the registration must say it is a purchase money interest. New Zealand sets a shorter window for goods other than inventory: registration no later than 10 working days after the debtor obtains possession. Miss the window and the specific security still exists, but it ranks behind the bank.

A quarry operator, constructed for this page like every figure in it, has given its bank a general security agreement registered five years ago. Its accounts show plant valued at US$3.2m. A register search shows three specific registrations by two equipment financiers, each a purchase money interest registered within days of delivery, over machines the bank values at US$1.4m and on which US$0.9m is still owed. Figures in US$m; the 60% forced-sale factor is this example's, not a market norm.

On the accounts the bank has US$3.2m of plant behind it. In a forced sale it has about a third of that, because the newest and most valuable machines belong first to someone else and their resale values no longer cover what is owed on them. Had one financier registered after its window closed, its machine would have fallen in behind the bank's earlier registration, and the bank's figure would have been larger by whatever that machine fetched.

A general security agreement takes all present and after-acquired property of the company; on New Zealand's register it is its own collateral type, all present and after-acquired personal property. A specific agreement takes what it names. Both extend to proceeds, so a specific financier whose machine is sold can follow the money. The difference for a lender is breadth: the general security catches what the company owns tomorrow, and the specific one catches only the asset described.

Not every specific security is a purchase money interest. A financier that takes specific security over a machine the company already owned, to secure a new loan, has no purchase-money priority; it ranks by the ordinary rules, usually behind a bank registered earlier. The register shows both kinds. In Australia the registration must say whether it is a purchase money interest, so the lender reads that; in New Zealand the lender compares the dates of delivery and registration and asks.

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It decides the security position at approval, when the search tells the bank how much of the plant its charge reaches first. It decides the terms: a general security agreement commonly carries a negative pledge that limits other security, and permits equipment finance up to an agreed amount, so a borrower who signs a new specific agreement may need consent or may already be in breach. And it decides the workout. An equipment financier with specific security can repossess the machine the business needs to keep working, which can stop the business before the bank has decided anything. A lender in that position reads who holds what, and sometimes pays a financier out to keep the plant on site.

EQUIPMENT LOAN OR LEASE → · PERFECTION OF SECURITY → · WHAT YOUR BANK HOLDS AS SECURITY →