Meaning
Tri party contracts between a lender, a borrower and a depository institution establish legal control over bank accounts. The account control agreement provides the lender with a perfected security interest in the cash held within the specified accounts. This arrangement ensures that the lender has the authority to direct the flow of funds if the borrower fails to meet their obligations.
It is a standard requirement for asset based lending and structured finance transactions.
Agreement Structure
Roles and responsibilities are defined for each of the three participating parties. The bank agrees to follow instructions from the lender regarding the 25cr super duplex proceeds or other collateral funds without further consent from the borrower. This setup creates a direct link between the cash flow of the business and the security requirements of the loan.
Detailed clauses specify which accounts are covered and how the bank should handle routine transactions versus emergency notices.
Control Trigger
Operational control typically remains with the borrower until a specific event of default occurs. Once the lender issues a notice of exclusive control under the account control agreement, the bank must stop following the borrower’s instructions.
Legal Priority
Enforceability against other creditors depends on the proper execution and filing of the document. Having an account control agreement ensures that the lender has a senior claim to the funds in the event of a bankruptcy. Without this document, the cash might be considered an unperfected asset available to all creditors.
The agreement protects the lender from the risk of the borrower moving funds to another institution.
