Show me the money! How secure is your interest over cash in a borrower’s bank account?

‘Cash is King’ right?  Well yes, mostly!

Cash is a ‘circulating asset’

If you’re lending money and taking security over the proceeds in a bank account you may find that cash isn’t the best asset to take security over, unless you’re certain that you’ve perfected the security, have absolute control of that cash and an agreement with the bank.

Taking security over cash can be problematic because cash is considered a ‘circulating asset’ under the Personal Property Securities Act 2009 (Cth) (‘PPSA’). This means that the borrower can continue to deal with that cash and, on an insolvency event, security interests over circulating assets will rank after some statutorily preferred creditors (including employees and the Australian Taxation Office) (‘Statutory Creditors’).

In addition, the bank at which an account is held automatically has a perfected security interest over cash held with the bank arising as a result of the bank being deemed to have control over that account. These deeming provisions give rise to a superior priority which would defeat your interest.

Perfecting the interest in the bank account

Security interests can typically be perfected by registering a financing statement on the Personal Properties Securities Register. As noted above, the bank that holds the account has automatic perfection by control and the security interest this creates has a superior priority. This superior priority would defeat your interest unless you have ‘perfected’ your security interest, taken control of the bank account and agreed with the bank that your interest will rank ahead of theirs. In the case of cash, if you take control of that cash, you can create a fixed charge under the PPSA, which creates a priority interest over Statutory Creditors.

Controlling the bank account

In order to control a bank account, you need to control the disposition of funds from the account without further consent by the borrower. This is typically done as follows:

  • an agreement between you and the borrower that gives you the right to dispose of funds without the borrower’s consent. These provisions are typically seen in the loan agreement; and
  • an agreement between the borrower, the secured party and the relevant bank where the bank agrees to act on your instructions (rather than the account holder) in relation to dealing with cash in the account. This is typically dealt with in an account control deed.

An account control deed also typically creates a contractual relationship whereby the account bank agrees that your security interest ranks higher than any security the bank may have. The combined effect of the above arrangements is to create a fixed charge over the cash and elevate your priority ranking. This not only promotes the ranking of your security ahead of the bank but also ensures that your interest ranks ahead of Statutory Creditors and other creditors that have a preferred ranking over security of circulating assets.

If you’d like to know more about the operation of account control deeds, please contact Gerry Cawson or Michael Chrisohoou.

Written by Sophia Laparidis