Charges over deposits

The PPS Act permits registration from 30 January 2012 of a “flawed asset arrangement” such as a charge over a deposit of funds in a bank account. (It is “flawed” because a deposit is actually a debt due by the bank with conditions as to repayment and sometimes there is a right of set off).

Bank of Western Australia Limited v National Australia Bank Limited [2011] QSC 379 considered a dispute between Bankwest and NAB about funds deposited with NAB by the second defendant Cabarita who had borrowed from Bankwest and given it a fixed and floating charge over its assets in June 2008. Part of the loan was deposited by Cabarita with NAB as security for a guarantee for a loan to a related company. Bankwest claimed that its charge became a fixed charge over these deposits (because the guarantee by Cabarita to NAB was a breach of its agreement with Bankwest) and that NAB must account to it for the funds.

Cabarita had agreed with NAB in August 2008 that the term deposits need not be repaid by NAB whilst Cabarita remained liable as a guarantor for the related company and that NAB could set-off the debt under the guarantee against NAB’s liability to Cabarita for the term deposits. NAB applied the term deposits towards that debt by terminating the deposits.

Bankwest failed in its claim because its floating charge did not become fixed until Cabarita gave the guarantee to NAB.

Under PPS, the highest level of perfection of a security interest over a deposit is control, that is where a lender has the deposit in its own financial institution. But even if the deposit is with another financial institution the security interest can still be registered.

PPS does not recognise “fixed” and “floating” interests: it introduces new priority rules based on control and registration.

Bankwest would have been in a different position if its security interest was registered in priority to NAB. But that would have affected Cabarita’s financial arrangements.

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