Meaning
Contractual promises within a deposit account control agreement that govern how funds are managed for secured parties. Adherence to daca covenants provides a lender with the legal power to take control of a borrower’s bank account upon a default. These rules define who can initiate transfers, which expenses are permitted and how often account statements must be shared.
They transform a standard bank account into a security instrument.
Account Restriction
Operations are limited by the requirement to maintain a minimum balance or to route all sales proceeds through the controlled account. These daca covenants prevent the diversion of cash to unmonitored accounts or third-party creditors. Management must ensure that every dollar earned by the production facility enters the designated channel.
Security Enforcement
Control shifts entirely to the lender if a notice of exclusive control is issued. Under such conditions, the daca covenants dictate that the bank will only follow the instructions of the secured party, effectively locking the borrower out of their own funds. This capability is the primary defense against cash leakage during a financial restructuring.
Operational Boundary
Flexibility is maintained through the use of a shifting control model where the borrower manages the account until a specific trigger event occurs. While the daca covenants remain in a passive state, the company can fund its daily manufacturing and payroll obligations without interference. This balance allows for normal production while preserving the lender’s ultimate priority.
