Lenders typically purport to take a fixed charge over a borrower’s accounts and any money standing to the credit of the accounts. This security is usually – for borrowers incorporated in England and Wales - contained in the Debenture. 

The Debenture will oblige the borrower to serve a notice (an ʺAccount Noticeʺ) on the bank which operates the charged accounts (the ʺAccount Bankʺ). This isn’t unusual given that borrowers – under a standard Debenture – will need to serve notices on several third parties; including, any insurers, counterparties to assigned agreements and tenants. 

However, what is unusual is that borrowers must use reasonable endeavours[1] to obtain an acknowledgement from the Account Bank. This is because the notice – instead of perfecting the security - details how the charged account must be operated pursuant to the loan agreement and lenders will want to ensure that any Account Bank complies with the relevant provisions. 

[1] https://www.maplesteesdale.co.uk/wp-content/uploads/2022/05/Reasonable-Endeavours-April-2022.pdf

The loan agreement will contain an account waterfall, which dictates the flow of cash receipts within a structure. For example, any rent from occupational tenants will be paid into the rent account, lenders will then use the monies to service any interest and other finance costs due with the lender taking the agreed deductions in the prescribed order set out in the agreement. 

Any surplus monies will then typically be transferred to the borrower’s general account. Generally, the specified accounts in the waterfall, for example the rent account, deposit account, disposal account and cure account, are blocked, except for the general account which is unblocked until a default. This means that a borrower can freely access any funds held to its credit. 

Lenders can block accounts by ensuring that they have sole signing rights over them. For new accounts this can be done as part of the account opening procedures.  For accounts that are already opened lenders will require the bank mandates to be updated to note the lender as sole signatory so that no payments out of the account can be made without their consent.

However, while a borrower may agree that the accounts should be operated pursuant to the terms of the loan agreement the Account Bank may not always be willing or able to operate the accounts in the way envisaged.    

In the past Account Banks have been happy to issue acknowledgements in relation to any served Account Notice in the form appended to the notice. However, lately we have seen an increase in the number of banks using their own form of acknowledgment or refusing to acknowledge the account notices entirely. 

It is important to review any own-form acknowledgement an Account Bank issues to ensure that it meets the lender’s requirements under the loan agreement. Alternatively, if an Account Bank refuses to acknowledge the notice there may be a question as to whether the lender is able to exercise sufficient control over the account for the purported fixed charge to actually be deemed a fixed charge in practice rather than a floating charge. This may impact the lender’s recourse to any funds held in the charged accounts during enforcement proceedings, as, particularly on a borrower insolvency, other creditors may have recourse to such funds in the account.

Both issues can be avoided by ensuring the Account Bank is involved before completion of the loan agreement and before any drawdown under it. Borrowers should check that their Account Bank can, and is happy to, comply with the provisions in the loan agreement. Otherwise, if necessary, a lender may require new accounts to be opened with a different Account Bank who is willing to comply with the lender’s requirements. 

Borrowers would therefore be well advised to arrange for the acknowledgements to be signed in advance or ask the Account Bank to issue a written confirmation that they will sign the acknowledgements once issued. Either way, by contacting the Account Bank early on in the process, borrowers and lenders can flush out any potential reservations that an Account Bank may have – helping to avoid any issues or negative impact on timings further down the line.