Taking security over a bank account is a common element of many security structures. The Personal Properties Securities Act 2009 (Cth) (PPSA) creates a new regime applicable to bank account security and should be considered carefully, particularly if the account is of particular value to security structure.
The PPSA rules and best practice are considered in this article.
How are bank accounts classified under the PPSA?
The PPSA applies to all “personal property” including bank accounts. The specific PPSA rules relating to bank account security differ depending on whether the secured party is:
- the account bank (i e. the bank is taking security over an account held with it). This is often referred to as a charge-back; or
- not the account bank (i.e. the account is held with a third party bank).
The PPSA uses the term “ADI account” rather than bank account. An “ADI account” is defined as an account, within the ordinary meaning about term, kept with an Australian authorised deposit-taking institution (ADI).
Perfecting security interest over bank accounts
A valid security interest over an ADI account must be “perfected” to ensure that it enjoys the highest possible priority. Failure to perfect a security interest may result in it being defeated by a subsequently perfected security interest or rendered unenforceable in the grantor’s insolvency (see sections 55(3) and 267, PPSA).
You can perfect security over an ADI account in two ways:
- Registration on the Personal Property Securities Register (PPSR)
- By taking control over the ADI account (but this method is only available if you’re the account bank taking security over a customer’s account held at your bank)
These options are summarised in the table below.
|Perfection by control||Perfection by registration|
|Who can perfect?||Only an ADI that takes security over an account held with it can perfect by control (section 25, PPSA).||Any person who takes security over an ADI account can perfect by registration on the PPSR.|
|Steps required to perfect||Perfection occurs automatically without the need to register a financing statement (section 21, PPSA).||Requires a financing statement be lodged online with the PPSR.|
|Advantages||Security interests perfected by control will defeat security interest perfected in any other way (section 57, PPSA).||If a secured party has control over an ADI account for the purposes of Part 9.5 of the PPSA it can make a registration on the PPSR disclosing that it has control. This avoids the ADI account being a “circulating asset” and the security interest being subject to certain statutorily preferred creditors.
Note, the concept of “control” for the purposes of Part 9.5 is different from the concept of perfection by control. The former concept is the level of control the secured party needs to exercise over the ADI account to avoid it being a circulating asset. The latter concept refers to a method of perfecting a security interest over an ADI account (which is only available to an ADI taking security over an account held with it). See ADI account and circulating assets below for more information on this advantage.
|Disadvantages||Only available to the ADI that holds the account.
A security interest over an ADI account (other than a term deposit) will be a “circulating security interest” subject to certain statutorily preferred claims. See ADI account and circulating assets below for more information on this disadvantage.
|Security interests perfected by registration alone will rank behind a security interest perfected by control (section 57, PPSA).|
As can be seen, perfection by registration and by control each has its own advantages and disadvantages. Accordingly, an ADI taking security over a customer’s account held with it will often perfect by registration to improve its automatic position of perfection by control.
ADI account and circulating assets
An ADI account (other than a term deposit) is a “circulating asset” under the PPSA. This means that your security interest in an ADI account will rank after certain statutorily preferred creditors in the grantor’s insolvency (such as the claims of employees and the Australian Taxation Office) (section 561, Corporations Act 2001 (Cth)). To avoid your security interest being a circulating asset, you will have to:
- take “control” over an ADI account for the purposes of Part 9.5 of the PPSA; and
- register its security interest on the PPSR, disclosing that control (by ticking the control box in the financing statement) (see section 340, PPSA).
Taking these steps will mean that the ADI account will no longer be treated as a circulating asset.
The way “control” can be established will depend on whether the secured party is the account bank or a third party.
Secured party is the account bank
If you’re the account bank, you will automatically have control over the ADI account (section 341A(a)(i), PPSA). Even though control is automatic in these circumstances, you will still need to register its security interest on the PPSR disclosing that control to avoid its security interest being a circulating asset.
Secured party isn’t the account bank
If you’re not the account bank, control is established if you’re able to direct disposition of funds from the account without the grantor’s consent (section 340(1)(a)(ii), PPSA). This is usually achieved by entry into an account control deed (or account bank deed) under which the account bank agrees to comply solely with your instructions (as secured party) about the transfer of funds from the ADI account without further consent from the grantor. Under this arrangement the secured party will usually also be the (sole) signatory to the account.
However, many grantors need to use accounts without interference to continue operations. In these cases a “springing” arrangement is commonly used so that control is obtained once a notice has been given (usually after an event of default occurs) to the account bank stating that the secured party has the right to control account transfers without grantor consent. But is this enough to establish control under Part 9.5 of the PPSA and permit registration disclosing that control? The generally held view in the Australian market is that it does create the necessary control. This is supported by section 341A(2) of the PPSA that confirms that a secured party will have control even if the grantor retains rights to direct disposition of funds from the ADI account.
Practical Law Australia Banking and Finance offers expert guidance on the Personal Property Securities Act, loan documentation and the rules of governing set-off. Our expertly drafted resources help lawyers to decide what questions to ask, what law applies and why. To learn more about Practical Law Australia or to request a trial, visit the website.