This hub already covers why a vendor take-back exists in the capital stack. What it does not yet cover is the specific PPSA mechanism that can let a seller's security on an asset-purchase take-back jump ahead of a bank's earlier, broader registration — if the seller does one thing correctly, at the right time.
Key takeaways
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Ontario's Personal Property Security Act sets a default priority rule based on timing: “Where priority is to be determined between security interests perfected by registration, priority shall be determined by the order of registration regardless of the order of perfection.” (Personal Property Security Act (Ontario), s.30(1), para. 1) On an ordinary asset purchase financed partly by a bank and partly by a seller's take-back, the bank's general security agreement is typically registered first and would, under this rule alone, outrank the seller's take-back on the very assets the seller just sold.
That default outcome is why the article on balancing vendor financing against bank debt (already published in this hub) treats subordination of the take-back as standard practice — but the PPSA also gives a seller a narrower route to something better than subordinate status on the specific assets it sold.
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The PPSA gives special priority to a lender — which can be a vendor — whose security interest financed the buyer's actual acquisition of the specific collateral. For inventory, the rule is exacting on timing and notice: a purchase-money security interest “has priority over any other security interest in the same collateral given by the same debtor, if… the purchase-money security interest was perfected at the time… the debtor obtained possession of the inventory… [and] before the debtor receives possession of the inventory, the purchase-money secured party gives notice in writing to every other secured party who has, before the date of registration by the purchase-money secured party, registered a financing statement” describing similar collateral. (Personal Property Security Act, s.33(1)) A separate, less demanding rule applies to collateral other than inventory under s.33(2).
Applied to an asset purchase: where a vendor take-back specifically finances the buyer's purchase of defined equipment or other non-inventory assets, and the seller perfects promptly, the PPSA's purchase-money rule can let that specific security interest outrank a bank's earlier-registered general security agreement on those same assets — even though the bank registered first under the ordinary s.30(1) rule. Getting the inventory branch of s.33 right is materially harder, because it adds the pre-possession written-notice step the non-inventory branch does not require.
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A seller cannot simply assert PMSI status in the purchase agreement and expect it to hold — the priority comes from meeting s.33's specific conditions on what was financed and how the security interest was perfected, not from how the parties labelled the note. A bank negotiating around this risk will typically want either an acknowledgment that the take-back is subordinated regardless of its PMSI status, or will scrutinize exactly what the take-back financed to confirm it does not inadvertently create a PMSI ranking ahead of the bank's own security — the same underlying concern Treadstone Law's answer on blending a bank loan, a vendor take-back and the buyer's own cash addresses from the buyer's blending perspective.
The PPSA also confirms that ordinary contractual subordination remains available regardless of any of this: “A secured party may, in the security agreement or otherwise, subordinate the secured party's security interest to any other security interest and such subordination is effective according to its terms.” (s.38) That is the mechanism the article on vendor financing in a management buyout and the glossary entry on a general security agreement describe as standard market practice; PMSI status is the narrower, statute-driven exception to it, worth knowing before assuming every take-back is automatically subordinate as a matter of law rather than as a matter of agreement.
Not necessarily. The default rule ranks registered security interests by order of registration, which would ordinarily put an earlier-registered bank GSA ahead — but a take-back that qualifies as a purchase-money security interest is a statutory exception that can outrank it on the specific assets it financed.
Two things, both timing-sensitive: perfect the security interest before the debtor takes possession of the inventory, and give written notice to every other secured party that had already registered a financing statement on similar collateral, before the debtor receives possession. Non-inventory collateral is governed by a separate, less demanding rule.
No. Priority comes from actually meeting the PPSA’s conditions on what was financed and how the security interest was perfected and registered, not from how the parties label the note in the agreement — a bank will typically scrutinize exactly what the take-back financed rather than accept the label at face value.
Sources
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