What if the seller pledged the same equipment to two lenders?

Two lenders can each hold a security interest in the same equipment, and the law ranks the two claims rather than cancelling one. What matters to a buyer is which claim ranks first, and what happens to both when the equipment changes hands. This page uses Ontario’s Personal Property Security Act; other provinces have their own. How do I check for liens on business assets? covers the search, and this page covers what to do once a double pledge turns up.

Ranking is by registration, with an exception

Where priority is between security interests perfected by registration, the Ontario Act says the order of registration decides, regardless of the order of perfection. The lender that registered first generally ranks first. A purchase-money security interest, held by whoever financed the purchase of the equipment, can outrank earlier registrations if it meets the Act’s timing rules, so a later lender is not automatically junior. A lender can also agree to subordinate its security interest, which the Act allows.

What a buyer inherits

A security interest continues in the collateral after a sale unless the secured party expressly or impliedly authorized the dealing free of it. A buyer who takes the equipment can therefore end up holding it subject to both lenders. The Act lets a buyer of goods take them free of a security interest the seller gave when the seller sells in the ordinary course of business, unless the buyer also knew the sale breached the security agreement. That protection depends on the sale being in the seller’s ordinary course, which is a question for your lawyer when the equipment is part of a business sale.

Finding it and clearing it

Search the registry by the seller’s legal name and by serial number. Alberta’s registry supports both, and British Columbia’s lets registrations be changed, renewed or discharged. A registration shows who claims security, not what is owed, so ask the seller to require each lender to state in writing the amount of the indebtedness and the terms of payment, which Ontario’s Act lets a debtor do by written notice. Then make payout from the closing proceeds, against a discharge of each registration, a condition of closing.

Why your own lender cares

A lender financing your purchase will look at ranking too. The Canada Small Business Financing Program’s guidelines require, for a term loan that finances equipment, a valid and enforceable first charge on the assets financed, so a prior pledge can stop that financing even if you are willing to accept it.