- Ontario's Personal Property Security Act (PPSA) governs how security interests in a business's equipment, inventory, and other personal property are registered and ranked.
- - Sets out priority by agreement, not just by registration timing.
- The buyer arranges acquisition financing from a bank, secured against the purchased business's assets.
Many Ontario business purchases aren't financed by a single lender. It's common to combine a bank or institutional loan with vendor take-back (VTB) financing from the seller, or with a second lender filling a financing gap. The moment more than one party has a security interest in the same assets, someone has to decide whose claim comes first if things go wrong — and that's what an intercreditor agreement is for.
This article explains why priority isn't automatic, what an intercreditor agreement actually covers, and how a typical bank-plus-VTB structure gets ranked.
Why Priority Isn't Just "Whoever Registers First"
Ontario's Personal Property Security Act (PPSA) governs how security interests in a business's equipment, inventory, and other personal property are registered and ranked. As a general matter, registration and timing affect priority — but relying on the statutory default alone is risky when multiple lenders are involved in the same deal, for a few reasons:
- The statutory rules are technical and fact-specific; small timing or drafting differences can change the outcome in ways that surprise a lender who assumed it was "first."
- A bank providing the primary acquisition loan almost always wants certainty, not a rule that depends on how carefully every registration was filed.
- A vendor take-back seller may be willing to accept a subordinate position in exchange for getting the deal done — but only if that's spelled out clearly, not left to chance.
An intercreditor agreement replaces uncertainty with an explicit, negotiated ranking that all the secured parties sign onto.
What an Intercreditor Agreement Actually Does
- Sets out priority by agreement, not just by registration timing. The parties contractually agree who gets paid first from the collateral, regardless of what the PPSA's default rules would otherwise produce.
- Restricts the subordinate lender's remedies. A VTB seller who agrees to rank behind the bank typically also agrees not to enforce its own security, demand payment, or take collection action while the senior lender's loan is outstanding — often called a standstill.
- Controls payments to the subordinate creditor. The agreement may block or limit payments to the VTB seller if the borrower is in default to the senior lender, even if the VTB seller would otherwise be entitled to payment under its own loan terms.
- Sets notice and consultation rights. The subordinate lender typically gets notice of a default by the senior lender, even though it can't act on it independently.
- Addresses what happens on enforcement. If the senior lender ever has to enforce its security, the agreement usually specifies how proceeds get split and in what order.
A Typical Scenario: Bank Senior, Vendor Take-Back Subordinate
- The buyer arranges acquisition financing from a bank, secured against the purchased business's assets.
- The seller agrees to finance part of the purchase price through a VTB, also secured against some of the same assets.
- The bank requires the VTB seller to sign an intercreditor (or subordination) agreement as a condition of funding — this is standard, not unusual or a sign the deal is troubled.
- The VTB seller agrees its security ranks behind the bank's, and that it won't take enforcement action or, often, accept certain payments while the bank loan is in default.
- Both security interests are registered under the PPSA, but the intercreditor agreement — not the registration order alone — governs how the parties actually behave toward each other.
What Happens Without One
If a bank and a VTB seller both take security over the same assets with no intercreditor agreement in place, a bank will very often simply decline to fund the deal — the uncertainty is exactly what this document exists to remove. Where a bank does proceed without one, both creditors are left relying on the PPSA's general priority rules to sort out a dispute after the fact, which is a far worse position for everyone than agreeing on the ranking up front.
Key Terms Worth Negotiating
| Term | Why It Matters |
|---|---|
| Priority ranking | Confirms who gets paid first from the collateral |
| Standstill period | How long the subordinate creditor must wait before acting on a default |
| Permitted payments | Whether the VTB seller can still receive scheduled payments absent default |
| Notice rights | Whether the subordinate creditor learns about a default early enough to respond |
| Amendment rights | Whether the senior lender can change its own loan terms without the subordinate creditor's consent |
Frequently asked questions
Is an intercreditor agreement the same as a subordination agreement?
The terms are often used loosely and can overlap significantly, but "subordination" usually refers narrowly to the priority ranking itself, while a fuller intercreditor agreement typically also covers standstill obligations, payment restrictions, and notice rights between the creditors.
Does a vendor take-back seller have to agree to be subordinate?
No — it's a negotiated position. A seller offering VTB financing can decline to subordinate, but doing so may make the deal harder to finance if a bank is only willing to lend on a first-priority basis. This trade-off is usually worked out during deal negotiations.
Who prepares the intercreditor agreement?
Typically the senior lender's lawyer drafts it, since the senior lender is the one requiring it as a financing condition. The subordinate creditor's own lawyer should still review it carefully before signing.
Can an intercreditor agreement be renegotiated later?
It can, if all parties agree — for example, if the business refinances or the VTB is paid off early. Absent an amendment, the original terms continue to govern the parties for as long as both loans remain outstanding.
This is a business purchase or sale question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.