Meaning
Direct authority over a borrower’s bank account is established through a tripartite contract involving a custodian. A control agreement involves the lender, the borrower, the custodian bank and the account agent. This ensures that the custodian will follow the instructions of the lender regarding the funds without further consent from the borrower.
It is common in asset based lending and structured finance.
Financial Duty
Financial institutions take on specific duties to manage the flow of capital in a pledged account. Under a control agreement, the bank agrees to freeze or divert funds upon receiving a notice. This protects the lender from the borrower withdrawing the collateral.
Custodian Mandate
Daily operations of the account continue under predefined limits until a triggering event occurs. The control agreement allows the borrower to use the funds for ordinary business expenses while no default exists. If the lender perceives a risk, it can revoke this access immediately.
This balance allows the business to function while the lender remains protected. Monitoring the balance is a constant requirement.
Seizure Power
Power to seize assets resides in the specific clauses governing the disposal of the account contents. By entering a control agreement, the lender bypasses the need for a court order to secure the cash. This speed is an advantage in volatile markets.
The agreement stays in force until the loan is paid in full.
