Meaning
A contractual agreement establishes a lender’s security interest over a specific cash deposit held within a bank account. Under a pledged deposit agreement, the borrower grants the lender a lien on the account balance while retaining ownership of the account. This arrangement ensures that the lender can access the cash if the borrower defaults on the underlying loan.
Account Control
The contract must be signed by the borrower, the lender, and the bank holding the deposit. Through the pledged deposit agreement, the bank receives instructions to block the borrower from withdrawing or transferring the funds without the lender’s written authorization. This establishes the necessary level of control required by commercial laws to perfect the security interest.
The account bank agrees to follow the instructions of the lender in the event of a default.
Security Interest
Drafting this instrument carefully ensures it survives bankruptcy proceedings. A properly executed pledged deposit agreement gives the lender priority over other creditors in relation to the cash collateral. The lender holds the right to apply the funds directly to the outstanding debt without waiting for court approval.
This priority is established on the date of execution.
Release Condition
The lender will release the lien once the borrower satisfies all obligations under the credit facility. Upon receiving a release notice, the account bank restores full access to the borrower.
