What Is an Account Control Agreement?

An Account Control Agreement (ACA) is a contract, often tripartite, involving a debtor, a secured party, and a financial institution like a bank or brokerage. Its function is to grant a secured party control over a debtor’s deposit or securities accounts, perfecting the secured party’s interest in those assets. This agreement helps ensure lenders can access collateral if a borrower defaults.

What is an Account Control Agreement

ACAs cover deposit accounts, such as checking or savings accounts, and securities accounts. For deposit accounts, control is the exclusive method for perfecting a security interest under Uniform Commercial Code (UCC) Section 9. This means that merely filing a UCC financing statement does not perfect a lien on a deposit account.

The requirement for control ensures the secured party possesses the ability to directly access or direct the disposition of funds or securities within the account. This mechanism protects the secured party’s interest by providing a clear and legally recognized claim to the collateral. Without such control, a lender’s claim to these assets could be compromised in the event of a debtor’s financial distress or bankruptcy.

Methods of Establishing Control

Establishing control over a deposit or securities account is defined by the Uniform Commercial Code (UCC). For deposit accounts, UCC Section 9-104 outlines three methods. One method exists if the secured party is the bank where the deposit account is maintained, granting automatic control.

Another method involves a written agreement among the debtor, the secured party, and the bank. This agreement stipulates the bank will comply with the secured party’s instructions regarding funds without requiring further consent from the debtor. A third way to establish control is for the secured party to become the bank’s customer with respect to the deposit account, re-titling the account in the secured party’s name.

For securities accounts, control is established through mechanisms in UCC Section 8-106, which are also referenced in UCC Section 9-106. These methods include the secured party becoming the entitlement holder or the securities intermediary agreeing to act on the secured party’s instructions without further consent from the debtor.

Essential Terms in an Account Control Agreement

A written Account Control Agreement contains clauses defining the rights and obligations of the debtor, secured party, and financial institution. A common provision is the “no-adverse-claim” language, where the financial institution agrees not to assert its own claims, such as set-off rights, against the account that would be contrary to the secured party’s interest.

The agreement details how the secured party can issue instructions to the financial institution regarding the account and outlines the financial institution’s obligation to comply. This includes provisions for the debtor’s rights before a default. Upon a defined default event, the agreement specifies the secured party’s remedies, which often include taking sole control and liquidating the assets.

The “notice of exclusive control” mechanism allows the secured party to notify the financial institution to cease taking instructions from the debtor and only follow the secured party’s directions. ACAs include indemnification clauses protecting the financial institution from liabilities arising from compliance. The agreement also specifies termination conditions.

Scenarios Where Account Control Agreements are Used

Account Control Agreements are employed in financial contexts to secure obligations and manage risk. In asset-based lending (ABL), where a company’s deposit or securities accounts serve as collateral for a loan, ACAs perfect the lender’s security interest. This provides the lender a direct claim to the cash or investments, reducing exposure.

Project finance and special purpose entities (SPEs) frequently utilize ACAs to secure cash flows or reserves held in dedicated accounts. This ensures that funds intended for a project’s debt service or operational needs are accessible to lenders. For secured transactions, ACAs are used whenever a lender requires a security interest in a debtor’s financial accounts.

Individuals or entities pledging their investment portfolios as collateral for loans also rely on ACAs to grant the lender control over these accounts. This allows the lender to access the pledged investments in case of default. ACAs are also a component of bankruptcy remote structures, which are designed to isolate certain assets from the general creditors of a debtor in the event of bankruptcy. Additionally, in some escrow arrangements, ACAs ensure the escrow agent receives instructions from a third party, facilitating fund release or management.