Anonymised, illustrative composite. An Ontario seller signed a postponement of claim as a condition of the buyer's acquisition financing. Fourteen months later, a covenant breach unrelated to the note stopped every VTB payment — for reasons the postponement agreement, not the note, controlled.
At a glance
A specialty printing business sold its assets for $4,200,000. The seller agreed to take back a $900,000 vendor take-back note at 6% interest over five years, with blended monthly payments of roughly $17,400. The buyer financed $2,650,000 of the price through a Schedule I bank, which required, as a condition of its own credit agreement, that the seller sign a subordination and postponement of claim agreement together with a standstill: the seller's note ranked behind the bank's security, and no payment on the note could be made while any default subsisted under the bank's credit agreement — not limited to a payment default on the note itself — with no cure right of the seller's own; only the bank, in its sole discretion, could waive.
Fourteen months after closing, the buyer breached a fixed-charge coverage ratio covenant in its credit agreement, after two slow quarters. The covenant had nothing to do with the VTB note, the seller, or the printing business's own performance under the buyer's ownership. But the standstill's default definition was drafted by cross-reference to the entire Event of Default article of the bank's credit agreement, not to a shorter, VTB-specific list — so the covenant breach triggered the payment blockage automatically. The seller had no visibility into the buyer's covenant compliance and no notice obligation ran to him under the standstill; he learned why payments had stopped only three months in, after calling the buyer directly.
The blockage lasted fourteen months, covering roughly $243,600 in scheduled principal and interest that the standstill deferred rather than forgave — it became payable once the block lifted, but with no interest provided on the arrears themselves, which made it, in substance, a fourteen-month interest-free deferral the seller had not agreed to and could not shorten. The bank waived the covenant breach once trailing performance recovered, charging the buyer a $22,000 amendment fee. The seller received nothing for the fourteen months and no notice when the blockage began.
The Personal Property Security Act (Ontario) addresses subordination only at the level of registration. Section 50 provides that “where a security interest is perfected by registration and the interest of the secured party has been subordinated by the secured party to any other security interest in the collateral, a financing change statement may be registered at any time during the period that the registration of the subordinated interest is effective.”
Read the unit. Section 50 is a registry mechanic — it lets a subordination that the parties have already agreed to be reflected on the record. It says nothing about how long a resulting payment blockage may last, what has to happen to trigger it, or whether the subordinated creditor gets any cure right. None of that content comes from the PPSA, or from any other statute. It comes entirely from the subordination and standstill agreement the seller signs at closing — a document distinct from both the VTB note and the purchase agreement, usually presented to the seller as a condition the bank will not move on, and easy to sign without reading it against the credit agreement's own, much broader, default definition that it incorporates by reference.
Counsel also considered the Courts of Justice Act (Ontario) s.98, which lets a court grant relief against penalties and forfeitures, since the standstill's object was to secure the bank's own payment ahead of the seller's — a fact pattern courts do treat as relevant to whether relief is available at all. It did not fit. Relief against forfeiture answers whether a party should be relieved from permanently losing an interest or right because of a breach of covenant or condition. The seller was not in breach of anything, was not losing the note permanently, and the blockage was a temporary deferral under a clause he had voluntarily signed, not a forfeiture triggered by his own default. No authority was found extending relief against forfeiture to a non-breaching party's own bargained-for subordination.
The seller had no statutory lever and no contractual cure right. His only path back to being paid was the passage of time and the buyer's own recovery. Counsel retained after the blockage began confirmed there was nothing in the PPSA, in the Courts of Justice Act, in the general law of subordination, or in the note itself that limited the blockage's length or its trigger — the standstill he had signed gave the bank complete discretion, and fourteen months later the bank exercised it however it saw fit, having no obligation to coordinate with, or even notify, the seller.
The market fix, negotiated at signing rather than discovered afterward, is to cap the blockage period — 90 to 180 days is common — narrow the trigger to payment defaults or insolvency events rather than any covenant breach, and require the bank to notify the seller when a blockage starts. None of that existed here because none of it was raised before the seller signed.
The tell was in the standstill's own default definition, which incorporated the bank's entire Event of Default article by cross-reference rather than naming specific triggers. A seller's counsel who reads only the intercreditor agreement — not the credit agreement it points to — will not see how far the trigger actually reaches.
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