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International Banking Law And Sebb Co
A Commitment letter, Letter of Intent, Heads of Terms or Memoranda of Understanding are terms often used interchangeably and commonly used during the process of negotiation, to establish and set down terms which may later form the basis of a formal contract.  It had been widely assumed that such letters of intent were not legally binding and merely acted as an outline of the parties' intentions or the basis for the negotiation of a contract.  Although the letter of intent may or may not be legally binding, it is at least firm evidence that the parties do intend to enter into the final contract and so creates a strong moral commitment to the commercial relationship.  Most commitment letters issued today are agreements by the borrower to pay diligence and other lender costs and expenses, including syndication costs if applicable. They are more likely to be considered letters of intent by lenders to make a loan subject to many conditions, including due diligence. 
A commitment letter (or the term sheet attached to it) may not be binding, it is an offer letter which is very initial in its nature. Generally it is supposed to be containing the main terms of the proposed loan such as the amount of the loan, the interest rate, repayment terms, collateral and other credit support, financial covenants, borrowing base requirements, closing conditions, fees and other costs payable by the borrower, governing law and dispute resolution. 
In addition, the commitment letter will require that the borrower reimburse the lender for its costs, including attorneys' fees and other fees and expenses associated with due diligence in connection with preparation and negotiation of the loan documents, regardless of whether the loan closes. The "commitment" in the commitment letter usually develops into the final loan agreement i.e. it is a document which is agreed by both the parties before a formal document (agreement) is drawn up. 
To what extent are such documents legally binding?
Generally speaking, as a matter of contract law, just because parties contemplate further terms to be agreed, or the execution of a more formal document, does not mean that they do not intend to be bound immediately.  Failure to reach agreement or execute the formal document does not of itself invalidate the earlier agreement. There are as many types of commitment letter as there are prospective loans. In general the legal character of commitment letters depends on their individual nature. 
However, a recent case in the High Court has highlighted the fact that letters of intent may be fully binding.  In this case, the High Court held that a letter of intent entered into by RTS and Muller, which contained no express indication of whether its terms were intended to be binding, did amount to a legally binding contract between the parties. The court found that the comprehensive terms included and the language used meant that the letter of intent was sufficiently certain and complete to be given contractual force. 
As supported by Cranston  , it’s immaterial whether a commitment letter is binding or not. Even if it’s not binding it does not mean that the expenses and fees mentioned in it are not payable. The fees may be characterized as fees payable for considering whether to grant the proposed loan, for an ‘in-principle’ commitment to lend, or for the issue of the commitment letter itself. The fees are a sort of processing cost. Therefore, Sebb and Co has a liability to pay the fees and expenses worth £75,000 as demanded by Olympic Bank for its costs, including attorneys' fees and other fees and expenses associated with due diligence in connection with preparation and negotiation of the loan documents, regardless of whether the loan closed or not. If still Sebb and Co does not reimburse Olympic Bank for its services then the Bank can sue the company considering that it’s very easy to prove that both the parties intended to create a legal relationship taking into account the steps preceding the negotiations and subsequent to, the completion of the commitment letter, the fact that the parties drew a commitment letter along with a term sheet stating the “main" terms of the proposed loan, belief by the parties that it will be binding as well as the fact that the loan agreement was definite to be signed had the terrorist explosion not happened. Thus legally, we can say that the commitment letter is valid and makes both the parties bound to each other and therefore the Olympic bank must be paid its due processing fee for the commitment letter thus issued by it to Sebb Co.
The accessibility of borrowing credit is an important element of the commercial world. Similar to natural persons, a company may require borrowing money in order to expand or promote in some other way their commercial activity. Companies can borrow on security typically in two ways, either by way of a fixed or a floating charge. 
In practice fixed charges were secured on fixed assets, such as a building or a land. Floating charges were secured on assets which, of their nature, the debtor had to be free to deal with on daily basis for example assets like raw materials, work in progress, finished products and book debts.  We can define both kinds of charges as follows:
To create a fixed charge over an asset, the concerned asset must be specific, although it doesn’t need to be in existence at the time of the creation of the charge.  The main characteristic of a fixed charge is that once a company has put a fixed charge over its assets it is not allowed to deal with that asset then without the consent of the creditor.  Fixed charges are generally created over the permanent capital structure of a company, such as the company premises or land or, to a lesser extent, over fixed plant and machinery.  Land can be assumed as an appropriate subject matter of a fixed charge as it does not usually depreciate in value. However, there is hardly any doubt that for a creditor, a fixed charge represents the best type of security. The creditor is most likely to strive to have a fixed charge. In any negotiation for the concerning a debenture the creditor, usually a bank, will be in the stronger position as a negotiator.  The creditor will insist for a fixed charge over the assets and because of the unequal bargaining position the debtor will often have to give in and accept the terms set out by the creditor. 
A company may hold assets which are not suitable for allowing a fixed charge over them. This is mainly due to the variable character of the asset such as raw materials or stock in hand or considering it would be unreasonable to limit the use of the asset by obligating the need to get permission of the creditor to deal with that asset. A floating charge will be considered where all or most of the fixed assets are subject to a fixed charge.  In some situations there may be some advantages attached with a floating charge as far as a creditor is concerned. The ability of the debtor to use the charged assets in the ordinary business routine may make it easier to generate the profit and consequently repaying the loan, an outcome any creditor would desire. 
Normally, the most common terms in a loan agreement will be that a floating charge will crystallize on the occurrence of an event mentioned in the debenture. The event usually mentioned will be default in the repayment of principal or interest.  When a floating charge crystallizes it converts into a fixed charge (Re Griffin Hotel 1941) 
There have been several judicial endeavours to describe the nature of a floating charge. The best characterization has been presented by Romer LJ in Re Yorkshire Woolcombers case  . He suggested three main characters to determine a floating charge:
“(1) If it is a charge on a class of assets of a company present and future; (2) if that class is one which, in the ordinary course of business of a company, would be changing from time to time; and (3) if you find that by the charge it is contemplated that, until some further step is taken by or on behalf of those interested in the charge, the company may carry on in its business in the ordinary way…" 
The presence of a fixed charge would make it impossible for a company to conduct its business in the ordinary way without the consent of the creditor. Therefore, the ability to conduct business without the consent of the creditor is not compatible with a fixed charge. 
Since last twenty years, lenders have tried several times to draft a debenture that would allow fixed charge over book debts. A book debt (often nowadays included in the term receivables) is an uncollected debt owed to the company and the actualized proceeds of such debts (i.e. the debt itself and the monies when collected).  Book debts can fluctuate erratically from any one accounting period to the other. At one time the debts may be high but the debts will be settled and the proceeds paid into a bank account.  This will lessen the bulk of the book debts. However, the next period the debts could have accrued again. The justification for the desire to allocate a charge (and to take a charge) is because book debts are usually the biggest asset owned by a company. In fact, some companies (e.g. those in service industries) may have something more than book debts to put as monetary deposit. 
Initially, it would seem illogical that a book debt could be the subject of a fixed charge. A book debt is an asset that varies all the time. After all, the chief element of a fixed charge is that the holder of the charge has an instantaneous proprietary interest in the assets subject to the charge. Unless it acquired the consent of the holder of the charge, the company would be unable to deal with its assets. As Lord Millett put it in Re Brumark : “In short, a fixed charge over all of a company’s assets, [including its book debts], would deprive a company of access to its cash flow, which is the life blood of a business."  On the contrary, a floating charge provides a security upon a set of assets, simultaneously leaving the company free to deal with its assets and pay its business creditors in the ordinary course of business without having to acknowledge the holder of the charge.  It is the general priority position of a floating charge that makes it less appealing for a creditor to take such a security. Whenever possible, the creditor would prefer taking a fixed charge. Until now creditors have attempted to place a fixed charge on book debts. Nevertheless, they have usually been unsuccessful in these attempts the reason being that a court must interpret a debenture contract to find out the true nature of the charge. In many cases a debenture has tried to create a fixed charge; the debenture may even expressly denote the charge as being fixed. However, a court may hold that in spite of the express “label" as fixed, the parties have indeed created a floating charge.  There’s one more important concept concerning the Sebb Co. case which must be defined, that is:
Cross-default means that a default on one loan automatically comprises a default on all loans covered by this clause. Consequently, debt obligations under a credit agreement and indentures could become instantly due and payable even if there is no violation of other agreement terms or default of payment on the loan. 
A cross-default clause provides the creditor the advantage of the default provisions in other credit agreements with the debtor. These provisions can thus create a domino effect. 
Usually, cross-default provisions are restricted to counter party defaults. Nevertheless, they can be further extended and may then be activated by counter-party associate defaults or even defaults under agreements with particular independent third parties. 
Few Early Apprehensions:
When this practice of creating a fixed charge over book debts was first observed, a number of scholars questioned whether conceptually it was possible to have a fixed charge in these circumstances. 
Although initially, the courts did not seem to share these apprehensions. It was in the Siebe Gorman & Co Ltd v Barclays Bank  Ll.L.R 142  case that the possibility of placing a fixed charge over book debts was considered for the first times ever.
In this case, the debenture expressed that the charge on book debts was fixed. It required the borrower to pay any receipts under the book debts into a specified bank account and prevented the borrower from doing anything to charge or from withdrawing these sums. Slade J held that the debenture provides adequate control to the bank as to make the charge fixed. 
At every level of the decision it was held to be a floating charge ( 2 Ch D 284 per Farwell J at p 288, in the Court of Appeal per Romer LJ and Cozens-Hardy LJ at p 297; in the House of Lords sub nom Illingworth v Houldsworth  AC 355 per Lord Halsbury LC at p 359). 
This decision was reiterated and further developed by the Court of Appeal in Re New Bullas Trading Limited  1 BCLC 485. Here the lender was 3i plc instead of a bank. The charge enjoyed by the lender was expressed to be a fixed charge as long as book debts were outstanding the borrower. 
The borrower was supposed to pay the proceeds into a designated bank account and consequently the security held by the lender would only be the floating charge. The Court of Appeal found that such a hybrid of fixed and floating charge was possible. This decision was seriously criticised by several academicians and writers. 
The decision in Siebe Gorman was adopted by the Supreme Court of Ireland in Re Keenan Bros Ltd  BCLC 242. Even so, in this case the bank’s level of control over the book debts was considerably stronger compared to that in Siebe Gorman. The debenture between the bank and the company prohibited the company from disposing of its book debts or creating other charges over them without the consent of the bank.  The debenture deed granted the company to collect the book debts but expected the company to pay the proceeds into a specified bank account from which the company could not make any withdrawals without the prior consent of the bank. This requirement was an express restriction and went much further than any implied restriction that may have existed in Siebe Gorman. The bank account in Re Keenan Bros was, indeed, a blocked account. 
It’s not very surprising that the court held that the charge was a fixed charge. In Re Keenan Bros, McCarthy J confirmed that “mere terminology" was not determinative of whether a charge was fixed or floating. One had to look “not to the declared intentions of the parties alone, but to the effect of the instruments whereby they aimed to accomplish that intention."  The vital characterstics, which led the court to determine that the charge was a fixed charge, was that the proceeds of the book debts had to be paid into a blocked account, from which withdrawal was impossible without the prior consent of the bank. 
Change of Direction:
It remained a good law until June 2001 when the Privy council heard an appeal from the Court of Appeal of New Zealand in the matter of Richard Dale Agnew and Kevin James Bearsley v The Commissioners of Inland Revenue and the Official Assignee for the estate in bankruptcy of Bruce William Birtwhistle and Mark Lesley Birtwhistle  BCC 259, also known as the Brumark case.  In this case, the Privy Council stated that a debenture supposedly created in the same way as that in Re New Bullas, and which in effect left the company free to accumulate in the debts and then use the proceeds in the ordinary course of business, could nothing else but a floating charge. 
Lord Millett, in giving the judgement of the Privy Council, said that in his view Re New Bullas had been wrongly adjudged: “A restriction on disposition which nevertheless allows collection and free use of the proceeds is inconsistent with the fixed nature of the charge". 
The judgment in Brumark which is not binding in English law was questioned by the bank in the High Court in the case of National Westminster Bank plc v Spectrum Plus Limited and others All ER (D) 76, popularly known as Spectrum Plus case. The significant judgment in Spectrum Plus finally resolves the long debated issue of book debts and the certainty it creates is to be welcomed.  The hundreds of pending liquidations, administrations and receiverships that have been frozen pending this judgment can now be resolved. There have, of course, been many liquidations etc that have long since been resolved, the parties having placed trust on Siebe Gorman case. In those cases the book debts would have been dealt with as a fixed charge and the claims of the preferential creditors would have been defeated. We now know that this is wrong. There may be the possibility that some preferential creditors may bring an action to govern their treatment under the law. 
The Spectrum Case:
The fundamental legal issue in this case is whether the charge over present and future book debts, provided by Spectrum to National Westminster Bank Plc under a debenture was a fixed charge (which it was expressed to be), or simply took effect as a floating charge. The bank claimed that it was a fixed charge, and the Crown creditors (mainly the Inland Revenue and Customs) argued that it was a floating charge.  If adjudged to be a floating charge, Spectrum's preferential creditors (including the Crown creditors) would be entitled to have their debts disbursed from the proceeds of the book debts in priority to the bank's claims (Insolvency Act 1986 s 175). If the court pronounced it not a floating charge, the preferential creditors will not be given priority, and the bank would be entitled to the whole of the proceeds. 
On 30 June 2005, seven Law Lords unanimously held that the decision of Slade J in Siebe Gorman v Barclays  2 Ll Rep 142 was wrong and should be overruled. It was held that the accepted form bank debenture extensively used since 1979 does not create a fixed but only a floating charge over book debts.  A fixed charge over book debts is only created to the extent that the borrower does not have ‘freedom to deal’ with the book debts, for instance if there is a contractual obligation on the chargor to have those debts to be paid into a blocked account. The hundreds of liquidations put on hold expecting the decision can now go forward, and banks will recover considerably less. 
The Floating Charge Issue:
As Lord Scott commented, the amounts at risk were comparatively small but the case was a test case. 
The law concerning the depiction of floating charges had been in a state of doubtfulness for some time. The contributing authority had been a decision of Slade J in Siebe Gorman & Co Ltd v Barclays Bank  2 Lloyd's Rep 142. That decision had been subject to severe academic criticism, and had been questioned by Hoffmann J in In re Brightlife Ltd  Ch 200. But Siebe Gorman was adopted (and arguably extended) by the English Court of Appeal in In re New Bullas Trading case. 
In the Court of Appeal, it had been indicated that, despite the failings of Siebe Gorman, it should be allowed to stand as it had been relied on as a judicial precedent for nearly 25 years.  None of the speeches in the House of Lords suggested that precedents that were otherwise flawed should be upheld for commercial expediency. 
Their Lordships held that the trait of a floating charge and a feature incompatible with a fixed charge is that the chargor is allowed to use the assets subject to the charge, and consequently allowed to withdraw them from the scope of the security. Lord Scott suggested that following characteristics of the debenture under consideration should be taken into account. 
The degree of the restrictions levied by the debenture.
The rights held back by Spectrum to deal with its debtors and collect the money owed by them.
Spectrum's right to draw on its account with the bank into which the collected debts had to be paid, provided it kept within the overdraft limit.
The description "fixed charge" assigned to the charge by the parties themselves. 
Nevertheless, Lord Scott instantly certified his own list by suggesting that restrictions on Spectrum's right to deal with its uncollected book debts would not be very helpful in supporting the characterisation of the charge as a fixed charge.
Although Lord Scott did not list out these factors in an order to determine the validity of fixed charges over book debts, it seems likely (based on similar judicial declarations) that in time they may come to have that effect. 
In the final analysis it was held that because Spectrum was free to deal with its debtors and utilise the proceeds of the debts, these were incompatible with fixed security, and that the charge would characterised as a floating charge despite being described as a fixed charge. Siebe Gorman was officially overruled. The fundamental legal question in relation to characterisation was defined as whether the charge holder in Spectrum had exercised enough control over the proceeds of the book debts to sustain a fixed charge. 
Taking the case between Sebb Co. and Commonwealth Bank into consideration:
Upon the agreement to provide the necessary loan finance of £5m over a five year term to Sebb Co, the terms of the loan agreement create a negative pledge whereby Sebb Co is not permitted to divest itself of assets above £500,000 and cannot charge other assets held by the company except with the assent of Commonwealth Bank. Additionally, the company is able to charge its book debts as security for a loan in the following terms:
“As a continuing security for the payment of the Secured Liabilities, the Borrower charges in favour of the Bank the following assets (or the Borrower’s interest therein), both present and future, from time to time owned by way of first fixed charge:
…all book, and other debts, revenues and monetary claims of the Borrower…"
It is to be noted that the bank has expressly referred to the charge over the book debts as being ‘fixed’. However, all the circumstances in the given case signify that the charge is in fact floating as it fulfils the criterion defined in the Yorkshire case to differentiate between fixed and floating charge. This opinion is strengthened by the fact that practically Commonwealth Bank had taken no steps to restrict Sebb Co. from withdrawing money from its account.
Lastly, the bank has incorporated a cross-default provision in its loan agreement.
One year later, Sebb Co takes a further loan of £3m over five years to acquire the Ovett Co from Grandprix bank which demands security in the form of an equitable charge over the shares in Ovett Co (post acquisition) to the value of £1.5m. Following the signing of the loan agreement, the share certificates are deposited with Grandprix together with a blank transfer form and a power of attorney authorising Grandprix to complete the transfer.
Later Sebb Co develops cash flow problems because it deals with large scale orders for customers who are very slow in making payment against invoices. Sebb Co misses a repayment date on their loan with Grandprix Bank. It has missed five payment dates on earlier occasions but Grandprix Bank has taken no action in the past. Now Grandprix Bank declares an event of default. As soon as Grandprix Bank declares Sebb Co as a defaulter the company will automatically become a defaulter to Commonwealth Bank as well through domino effect as there exists a cross-default clause in its loan agreement with Commonwealth Bank.
Commonwealth bank can approach the court and request the appointment of a receiver. The moment a receiver is appointed, crystallization of floating charges will take place thus converting them into fixed charges. Thus, Commonwealth Bank will have a fixed charge over the book debts and consequently be granted a right to set off against the monies outstanding under the loan.
As Sebb Co develops cash flow problems and misses a repayment date which in case of Grandprix bank it has missed five time already on earlier occasions, Grandprix Bank has declared an event of default. It demands repayment of the outstanding loan demanding both the capital and all compounded interest over the outstanding period of the loan. Grandprix also states that money in Sebb Co’s current account, made up of payments made by customers in settlement of invoices, will be set off against the monies outstanding under the loan. These monies seem to have been paid into an account at Grandrix by Sebb Co notwithstanding the charge over book debts in favour of Commonwealth Bank. Now the issue which arises is whether the owner of an equitable charge on specific property of the defendant company had or had not priority over the general floating charge created by certain debentures issued by the company and the trust deed by which they were secured.
We must consider the circumstances which arose in Re Connolly Brothers case as they are similar to our case and whose facts are as follows:
A company issued debentures to M1, creating a floating charge over all its property, present and future, the debenture providing that the company was not to be at liberty to grant any other mortgage or charge in priority to the debenture. 
Subsequently, the company applied for a loan to M2 to enable it to purchase certain premises and agreed to give M2 a charge on the property purchased. 
The company then entered into a contract to buy the premises, and the purchase was subsequently completed with the advance provided by M2, with whom the title deeds were deposited as security. 
A memorandum of deposit was subsequently drawn up and executed by the company in favour of M2. 
Also taking into consideration the Wilson v Kelland  case, where the purchase price of the new property was not advanced by a third party but was left outstanding by the vendors, who were held to have priority over an earlier debenture because the purchased property had been continuously subject to their equitable lien as unpaid vendors before the execution of a legal mortgage in their favour. 
We can conclude that even if Grandprix Bank took Sebb Co. To the court it will only be entitled to the value of shares which it holds as security in Ovett Co. And can later liquefy or sell those instruments.
Grandprix bank further plans to demand repayment of the outstanding loan demanding both the capital and all compounded interest over the outstanding period of the loan as well as the money in Sebb Co’s current account, made up of payments made by customers in settlement of invoices, to be allowed to set off against the monies outstanding under the loan. It Grandprix Bank argues and thereby could prove that Commonwealth has a floating charge over the book debts of Sebb Co it would be entitled to have their debts paid out of the proceeds of the book debts in priority to the bank's claims (Insolvency Act 1986 s 175). If the court declared it not a floating charge, then Grandprix bank will have no such priority, and the bank would be entitled to the whole of the proceeds (as decided in the Spectrum case).
Considering that Sebb Co has become a defaulter to Commonwealth Bank as well due to the presence of cross-default clause in its agreement, Commonwealth can sue it in the court and apply for a receiver. Once the court will grant a receiver, the floating charge will automatically crystallize and as we know that when a floating charge crystallizes it automatically turns into a fixed charge. The Grandprix bank will then be paid out its due security in the form of an equitable charge over the shares in Ovett Co. to the value of £1.5m and the Commonwealth Bank would be entitled to the rest of the shares (i.e. £1.5m) along with the book debts of Sebb Co.
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