Meaning
Control mechanisms in deposit account control agreements grant lenders immediate access to debtor cash flows upon the occurrence of specified trigger events such as financial covenant breaches. Under springing control, borrowers maintain full operational control over deposit accounts during normal operations, issuing checks and moving cash freely until a default notice is served. Secured credit providers activate these control mechanisms to sweep cash directly into debt paydown accounts when credit risk escalates.
Upon activation, depository banks follow lender instructions exclusively, bypassing debtor management entirely.
Activation Mechanism
Default events trigger formal notice deliveries from secured lenders to depository banks, shifting account control immediately. Executing springing control blocks borrower cash withdrawals and redirects daily account inflows to lender-controlled sweep accounts. Cash sweeps continue until the borrower cures the default or the lender executes full debt recovery.
Depository institutions face liability if they honor borrower payment requests after receiving valid activation notices from secured lenders.
Operational Shift
Borrowers lose cash management autonomy instantly upon activation, requiring lender approval for operational disbursements. Cash sweeps absorb daily revenues to accelerate debt reduction.
Collateral Capture
Sweeping cash directly into repayment accounts prevents distressed borrowers from diverting funds away from secured lenders. Immediate cash control protects credit providers during corporate insolvency events. Springing control secures immediate lender access to operating cash flows upon default activation.
