Account banks can take valid security over bank accounts held with them¹. Previously there was some doubt about whether security granted by an account holder to an account bank (a so-called “charge-back”) was valid. The doubt related to logical difficulties with taking security over an amount the bank itself owes.

Only an account bank at which an ADI account (bank account) is held can perfect a security interest by control over the account². In fact, account banks are automatically perfected by control if they hold security interests over ADI accounts held with them.

The practice in Australia of entering into tri-partite agreements to take control over a bank account will likely continue, particularly for account banks to (effectively) cede their "control" priority to others by way of priority or intercreditor agreements. That is, if Bank A lends money to a borrower and the borrower holds an important cash or proceeds bank account with another bank, Bank B, it will remain common for Bank A to take security over the account held with Bank B and enter into a tri-partite agreement with Bank B and the borrower to agree (amongst other things) that (A) all (or most) withdrawals and operations on the account require the consent of Bank A, to give Bank A control over the ADI account so that it is not a circulating asset, (B) that Bank B will not itself take a security interest over the ADI account (which would be perfected by control), and (C) that Bank B will turnover the funds to Bank A following default by the customer (bank account control agreement).

This is because, under the PPSA, Bank B (the account bank) can (if owed money) itself take a security interest at any later stage and potentially defeat Bank A because Bank B will be perfected by control as the account bank. Security interests perfected by control defeat all others regardless of priority time or knowledge of prior security interests, except transitional security interests.

Lending banks will likely require that important ADI accounts are held with them, to ensure the security they hold over the ADI accounts is perfected by control.

Project accounts and proceeds accounts in large syndicated and project financings will be best held with the agent or security trustee bank, not syndicate banks which could trade out of the debt on the secondary market.

Bank account control agreements (see paragraph 29.6.3 above) are likely to remain in use to take control over ADI accounts to prevent these assets being circulating assets. Circulating security interests are security interests over circulating assets – they are subordinated to employee entitlements and liens of administrators upon the grantor’s insolvency. Where the secured party is itself the ADI account bank and holds a registration that nominates control over the ADI account, there is no need for a bank account control agreement – the ADI account will not be a circulating asset³.

In summary, “split banking”, where a grantor (borrower) holds important ADI accounts at one bank, yet borrows from another bank, is likely to become far less common in Australia. See paragraph 18.17.1 and below of Chapter 18 (Priority) for discussion of scurity over ADI accounts.