Banks have a recognized right to set off amounts owing by the bank to its customer (i.e. a credit balance in the customer’s bank account) against the customer’s debt to the bank. However, banks frequently wish to have the additional comfort of obtaining a security interest in the customer’s credit balance in a designated bank account. Banks frequently refer to this security as a pledge of cash collateral.
The Personal Property Security Act (Ontario) (the "PPSA") provides that a security interest may be perfected by the registration of a financing statement, or in some cases by the secured party taking possession of the collateral. Some may think that a security interest in a bank account may be perfected by possession, because the account is held at the bank which holds the security interest. However, the concept of "possession" in the PPSA only applies to tangible personal property. Coins and bank notes are tangible, but money in a bank account is intangible. A credit balance in a bank account is merely evidence of a debt owing by the bank to its customer. The bank’s security interest in the account can therefore only be perfected by the filing of a financing statement, not by possession.
Therefore a bank should file a PPSA financing statement against its debtor to perfect its security interest in a cash collateral account. The bank should also conduct a PPSA search against its debtor to ensure that no other secured creditors have registered financing statements against the debtor which rank in priority to the bank’s financing statement. If any such prior registrations are found, subordination agreements should be obtained from the secured parties in question to ensure that the bank’s security interest has priority over such other security.