- The PPSA's general priority rules — mainly, first-to-register, with an exception for properly registered purchase-money security interests — provide a baseline for sorting out competing…
- - Priority ranking — a clear, agreed statement of which lender's claim ranks first, second, and so on, for specified collateral or generally.
- A subordination agreement is often a simpler, narrower tool — typically one creditor agreeing to step back behind another.
Growing businesses often outgrow a single lending relationship. A bank might handle the day-to-day operating line, while a separate lender finances specific equipment, and a third provides additional growth capital secured against the same pool of assets. Once more than one secured lender is in the picture, Ontario's default priority rules under the PPSA are only a starting point — the lenders themselves usually want a more detailed, negotiated rulebook.
That rulebook is an intercreditor agreement: a contract among the lenders (not the borrower alone) that spells out how they'll deal with each other, particularly if something goes wrong.
Why Multiple Lenders Need Their Own Rulebook
The PPSA's general priority rules — mainly, first-to-register, with an exception for properly registered purchase-money security interests — provide a baseline for sorting out competing claims. But lenders financing the same business often want far more certainty and detail than the statutory default gives them: who can act first if the business defaults, how enforcement proceeds get shared, what one lender is allowed to do without the other's consent, and how any recovery is actually split up.
Rather than leave those questions to be fought out after a default, sophisticated lenders negotiate the answers in advance, in an intercreditor agreement signed alongside the loan documents.
What an Intercreditor Agreement Typically Addresses
- Priority ranking — a clear, agreed statement of which lender's claim ranks first, second, and so on, for specified collateral or generally.
- Permitted actions — what each lender can and can't do unilaterally (for example, demanding repayment or seizing collateral) without the other's consent.
- Standstill periods — a window during which a junior lender agrees not to enforce, giving the senior lender room to act first.
- Sharing of enforcement proceeds — the formula or order for distributing whatever is recovered if the business defaults and assets are sold or collected.
- Notice obligations — requirements to notify other lenders of specific events, such as a default or a proposed amendment to loan terms.
- Consent rights on amendments and refinancing — limits on how much a borrower and one lender can change their arrangement without the other lenders' agreement.
How This Differs From a Subordination Agreement
A subordination agreement is often a simpler, narrower tool — typically one creditor agreeing to step back behind another. An intercreditor agreement usually governs a broader, more active relationship between multiple secured lenders who each expect to remain actively secured (rather than one party essentially deferring entirely to the other), and tends to include more detailed operational and enforcement mechanics. In practice, the two concepts overlap, and some agreements combine elements of both — what matters is the actual terms negotiated, not the label on the document.
When These Agreements Come Up in Practice
- A business has a bank operating facility alongside additional secured financing from a second lender for growth or acquisition purposes.
- Different lenders finance different categories of the same business's assets — for example, one against receivables and inventory, another against specific equipment.
- A business raises layered financing (sometimes described informally as senior and subordinate or "mezzanine" facilities) from more than one source, with each lender wanting clarity on where it stands relative to the other.
- An existing lender agrees to allow new secured financing into the business, on the condition that the relationship between the two lenders is formally documented.
What Changes With an Intercreditor Agreement in Place
| Without an intercreditor agreement | With an intercreditor agreement |
|---|---|
| Priority determined largely by PPSA registration timing and any PMSI exceptions | Priority explicitly agreed and documented between the lenders |
| Each lender free to enforce independently, subject only to statutory rules | Enforcement coordinated, often with standstill periods and notice requirements |
| Proceeds split according to default statutory priority | Proceeds split according to the agreed formula |
| Uncertainty for the borrower about how a default would unfold | Clearer, more predictable process (though not necessarily faster or easier) |
Frequently asked questions
Do I need an intercreditor agreement if my business only has one secured lender?
No. Intercreditor agreements exist specifically to manage the relationship between two or more secured lenders. A single-lender arrangement doesn't raise the same coordination issues, though the lender will still rely on the ordinary PPSA registration and priority framework.
Can an intercreditor agreement override the PPSA's registration-based priority rules?
As between the lenders who sign it, yes — a properly drafted intercreditor agreement can set out an agreed priority order that differs from what registration timing alone would produce. It generally doesn't affect the rights of creditors who aren't party to the agreement.
Who typically prepares the intercreditor agreement?
It's usually negotiated by the lenders' own lawyers, often initiated by whichever lender is extending new financing into a business that already has an existing secured lender in place. The borrower is often a party too, but has limited ability to dictate its terms.
What happens to my business if the lenders disagree during a default?
This is exactly the scenario an intercreditor agreement is meant to prevent from becoming unpredictable. A well-drafted agreement sets out a clear process for who acts first, how disputes between the lenders are resolved, and how proceeds are shared — reducing (though not eliminating) the risk of the lenders working at cross purposes.
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