Meaning
A security instrument establishes a secured party’s legal control over a debtor’s deposit account maintained with a custodian bank. Under a typical account control agreement, the bank agrees to follow instructions from the secured party without the debtor’s further consent. This arrangement provides a perfected security interest in the cash balance.
Control Execution
The execution of the arrangement involves the custodian bank and the lender. When the account control agreement goes into effect, the custodian bank shifts its primary duty of obedience to the secured party. That shift occurs upon a defined notice of exclusive control, allowing the lender to block all outbound transfers and liquidate investments.
This transition must be handled with precise operational instructions to avoid liability for the bank.
Deposit Priority
Priority on the funds depends on the type of control established, which can be active or passive. In an active control arrangement, the debtor cannot access the funds without the lender’s signature. In a passive model, the debtor conducts regular trading and operations until a default trigger occurs.
Default Enforcement
Enforcement of the remedy permits the secured party to sweep or freeze the funds. If the debtor defaults under the credit facility, the secured party directs the custodian to block further withdrawals by the debtor. This process ensures immediate liquidity to satisfy the outstanding obligations.