Subordination agreements, inter-creditor agreements and
priorities agreements come in a variety of forms (each, a
Subordination Document). Although some are
unilateral in nature with all subordination covenants granted in
favour of one secured party, it is not uncommon for some
Subordination Documents to feature mutual subordinations by
multiple secured parties to the extent necessary to give effect to
the different priority rankings over different assets that they
have agreed upon.
Section 50 of the Ontario PPSA1 provides a useful
tool to reflect on the Ontario PPSA register the existence of a
subordination of rank pursuant to any Subordination Document. This
section states that where a security interest is perfected by
registration and that security interest has been subordinated by
the secured party to any other security interest in the applicable
collateral, a financing change statement may be registered at any
time during the period that the registration of the subordinated
interest is effective.2 Mechanically, the financing
change statement is registered as an "Other" change to
the subordinated creditor's registration (the
Subordination FCS) and details of the
subordination or the applicable Subordination Document are inserted
in Lines 25 to 28 of that financing change statement, all in
accordance with the terms of Section 12 of the Minister's
It should be noted that Section 50 is permissive rather than
mandatory, so it is not necessary for every subordination or
Subordination Document to be recorded. However, even if a senior
secured creditor's filing appears on the Ontario PPSA register
prior to that of the subordinate creditor, it may be a good idea to
register a Subordination FCS against the registration held by the
subordinate creditor. Although Subordination Documents will
typically include a clause binding the successors and assigns of
the subordinated creditor, the subordinated creditor may
inadvertently or purposely fail to disclose the existence of the
subordination to a potential assignee. The proposed assignee will
however likely conduct an Ontario PPSA search to verify the
existence of the registration, and in doing so will acquire actual
knowledge of the existence of the Subordination Document. In most
cases, the proposed assignee will make inquiries following its
search as to the terms of that Subordination Document, which will
typically include a series of covenants that extend beyond a simple
subordination. Thus, registering a Subordination FCS might serve to
avoid costly litigation with the assignee alleging that it was
unaware of the subordination terms.
To facilitate the completion of the Subordination FCS, a clause
can be added to the Subordination Document outlining the specific
text of the description to be used in Lines 25 to 28 of the
Subordination FCS, and authorizing the senior secured
creditor's counsel to make the registration on behalf of the
subordinated creditor. In this way, the senior creditor does not
have to pursue the subordinated creditor post-closing, or obtain
its further co-operation in order to complete the registration.
1.Personal Property Security Act,
R.S.O. 1990, c. P. 10, as amended ["Ontario
PPSA"] 2. Ontario PPSA, Section 50. 3. Minister's Order made under the Ontario PPSA,
dated June 5, 2007 [the "Minister's
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