What if the seller refuses to subordinate the VTB to my bank loan?

Suppose the bank financing your acquisition asks for its security to rank ahead of the seller’s vendor take-back. If the seller refuses to sign a subordination, you are not stuck with a fixed answer, but you do need a plan before any commitment from the lender lapses. The rules below are Ontario’s, and other provinces run their own regimes.

Ranking without an agreement

Section 30(1) of Ontario’s Act says that, if no other provision applies, priority between security interests in the same collateral that are perfected by registration is determined by the order of registration, regardless of the order of perfection. Section 33 gives purchase-money security interests their own priority rules. So whether the seller or the bank ranks first can depend on registration dates and the type of collateral, and a lawyer’s search of the registry will show what is registered.

What a subordination does

Section 38 says a secured party may subordinate its security interest to another in the security agreement or otherwise, and that the subordination is effective according to its terms. The seller decides whether to sign one. A seller who refuses is not breaking the Act. The question becomes whether the lender will lend on the structure that results.

Questions to put to your lender and the seller

• Ask the lender whether it needs first ranking on every asset or only on some, and whether it would accept the seller ranking behind it for limited assets.
• Ask the seller what it is worried about, such as payment blocks or losing its security, and whether a written term answers it.
• Ask whether the seller’s note could be unsecured, or secured on assets the lender does not need.
• Ask your lawyer whether the purchase price or the amount of the note should change.

BDC says a financing structure may combine your own investment, a business loan and seller financing, and that it assesses the complete structure when it reviews a request. Show your lender the proposed structure early, and compare the bank loan and vendor financing options.