Sorting Out Two Lenders' Priorities Before a Hamilton Closing

The situation

Gurpreet spent fifteen years as a Hamilton police sergeant while building a steel fabrication shop on the side, starting with a single rented bay and a part-time welder. By the time the company was doing roughly $9 million a year manufacturing custom structural components, Gurpreet had left policing to run it full time. The business carried a $4 million operating line from its bank, secured in the usual way: a general security agreement, or GSA, giving the bank a claim over essentially everything the company owned or would later acquire, registered under the Personal Property Security Act, the Ontario law that governs who gets paid first when a business borrower has more than one lender.

Then the company won a contract that required new capability: a set of computer-controlled cutting and forming machines costing about $3 million. The bank's operating line was not structured for that kind of purchase, so Gurpreet approached an equipment finance lender that specializes in exactly this — loans secured against specific machinery, repaid over its useful life. Giulia, the account manager handling the file at the equipment lender, was willing to fund the purchase, but only if her employer could be confident its security over the new machines would actually come first if anything went wrong. The equipment supplier needed a signed order and a deposit within six weeks to hit the delivery date the new contract required, which meant the financing had to close fast.

The lending problem

The complication was not whether the new lender would fund the deal. It was where its security would rank. Under the Personal Property Security Act, priority between two lenders with claims on the same collateral generally follows the order in which their security interests were registered — and the bank's GSA, registered years earlier and worded to cover all of the company's present and future property, was registered first. Read literally, that registration already covered the new machines the moment they arrived on the shop floor, even though the bank had put no money toward buying them.

There is a mechanism built into the law for exactly this situation: a purchase-money security interest, or PMSI. A lender that finances the specific purchase of an asset can claim priority over that asset ahead of an earlier, broader security interest — effectively jumping the queue for that one piece of collateral — but only if it registers its interest correctly and within a strict window after the debtor takes possession of the asset. Miss that window, and the earlier blanket registration wins by default, regardless of who actually paid for the machines.

The new lender wanted that PMSI priority confirmed and documented before it would advance funds. The bank, for its part, was not obligated to agree to anything — a PMSI can achieve statutory priority without the earlier lender's cooperation, provided the technical requirements are met — but the bank's loan agreement contained a cross-default clause and a covenant restricting new secured debt without its consent. Closing the equipment loan without addressing that risked putting the company in default on its existing operating line, which would have been far more damaging than losing the new contract. On top of that, the equipment lender asked for a personal guarantee from Gurpreet, secured in part against the family home, which was titled in Gurpreet's name alone. Because it was their matrimonial home, Gurpreet's spouse, Elena, an air traffic controller with no role in the company, had statutory rights in it regardless of whose name was on title — raising a separate issue under the Family Law Act about a non-owner spouse's rights in a matrimonial home, and about Elena needing her own advice before signing away any claim to it.

What we did

1. Mapped the existing security first. Before negotiating anything, we pulled the bank's registration and reviewed the GSA and the loan agreement's covenants, so we knew exactly what consent rights and cross-default triggers were actually in play, rather than relying on the bank's summary of its own position.
2. Advised on the PMSI timeline and got it perfected correctly. We confirmed the equipment lender's security interest was drafted and registered within the statutory window tied to the company taking possession of the machines, which is what gives a purchase-money lender its super-priority over the earlier blanket registration for that specific collateral.
3. Approached the bank early, not after the fact. Rather than let the equipment lender's counsel negotiate directly with the bank under time pressure, we opened the conversation as soon as the deal was likely, giving the bank's own counsel time to review the request without the six-week deadline forcing a rushed answer.
4. Negotiated an intercreditor agreement. This is a contract between the two lenders — not the company — that sets out, in writing, which lender's security ranks first over which assets. We proposed a carve-out: the equipment lender would hold confirmed first priority over the new machines specifically, while the bank kept its existing priority over everything else, including receivables and the shop's other equipment.
5. Arranged independent legal advice for Elena. Because she was being asked to guarantee a business debt secured in part against the couple's home, we made sure she received separate advice from a lawyer with no role in advising Gurpreet or the company, so her consent could not later be challenged as uninformed.
6. Reviewed the bank's counter-conditions. The bank agreed to the carve-out but wanted something in return: quarterly financial reporting instead of annual, and a minimum working capital covenant. We negotiated the reporting frequency down from monthly to quarterly and had the covenant tested against the company's actual cash flow projections before Gurpreet agreed to it, rather than accepting the bank's first draft.

The outcome

The financing closed inside the six-week window, and the equipment order went in on schedule. The equipment lender got the priority it needed over the specific machines it financed, properly perfected as a purchase-money security interest and confirmed in writing by the intercreditor agreement rather than left to a technical reading of the registration record. The bank kept its priority over the rest of the company's assets and its operating line stayed in good standing.

This was not a clean win for either side, and it was not meant to be. The bank's price for cooperating was tighter oversight — quarterly reporting and a working capital covenant the company had not carried before, adding a real ongoing compliance cost. Elena's guarantee was ultimately limited, after her own lawyer negotiated a cap tied to the equipment loan balance rather than an open-ended personal guarantee, but she still took on real exposure she had not had before. Gurpreet got the machines and the contract went ahead, but the business now answers to two lenders with two sets of reporting obligations instead of one, and both have to be kept satisfied going forward.

That is what a workable compromise between competing lenders generally looks like: nobody gets everything they asked for, but the deal that was actually needed gets done, on paper that holds up if either relationship later sours.

What you can learn from this