A Current Affair – an event of default?

Traditionally secured lenders have been loathe to enforce their securities in circumstances where a ‘monetary’ event of default has not occurred.  The impact of the GFC has resulted in some lenders taking a different approach and relying on non monetary events of default.

One recent example was the decision of Einstein J in Brighten Pty Ltd and Ors v Bank of Western Australia Ltd and Anor [2010] NSWSC 133.

The background facts of that decision are interesting and require some explanation.

In late 2006 Noble Growth Investment Ltd (Noble) applied to the Bank of Western Australia Ltd (Bank) for a loan to purchase the Fairmont Resort at Leura (Leura Resort).  The Bank approved the loan and advanced $32,150,000 to Noble for a term of five years to enable the purchase of the Leura Resort. Brighten Pty Ltd (Brighten) guaranteed the loan, and granted a registered charge over its assets as security for its obligations under the guarantee.

The relationship between bank and customer seemed to proceed swimmingly until 20 April 2009, when Channel 9 transmitted a very critical report of the standard and condition of the Leura Resort on A Current Affair on that date.  The first A Current Affair report was followed by a further report on A Current Affair on 22 April 2009 which was equally critical of the state of the Resort.

The state of the Leura Resort also made headlines in other media publications.

As a result of the A Current Affair reports, the Bank issued notices of default on Brighten and Noble, relying on (primarily) a material adverse change in financial condition and material diminution in value of the Leura Resort by reason of the two A Current Affair reports and consequent downgrading of the rating and reputation of the resort, as the relevant event of default.

Brighten then instigated proceedings seeking:

• declarations that the events of default had not occurred; and

• orders restraining the Bank from appointing a receiver or a receiver and manager.

Brighten challenged the accuracy of the A Current Affair reports and argued that no event of default occurred and accordingly that the notices of demand issued by the Bank were invalid.  Alternatively, that in all the circumstances, the Bank was acting unconscionably.

The Bank contended that it was irrelevant whether or not the allegations made in the A Current Affair reports were true or not, because the effect of the reports was such that it constituted a material adverse change for the purposes of the transactional documents.

Before the proceedings were ultimately resolved, it was agreed that an independent receiver be appointed to furnish an independent report.  The receiver’s report was also critical of the state of the Leura Resort.  After considering the arguments, Einstein J in dismissing Brighten’s claims in their entirety stated:

The finding at an interlocutory level is that there is no prima facie case or serious question to be tried that the Bank has acted outside its rights or capriciously or with an ulterior purpose.  It was reasonably open to the Bank to come to the view that there had been materially adverse changes and it remains the right of the Bank in the future to come to that view if circumstances point in that direction and there are accordingly no grounds for any interlocutory relief.

Conclusion

While the facts of this case may seem far fetched and out of the ordinary, it serves as a salutary reminder that:

• borrowers have an obligation not only to ensure that they make payments on time, and keep the balance of their loans within agreed limits, but to ensure that the value of the assets (be it land, buildings, plant and equipment, and even a company’s reputation/goodwill) is maintained and not diminished; and

• standard bank documentation provides banks with the right to enforce their securities in circumstances where there may not be a monetary default, but where there has been a non monetary default, such as a material adverse change in the value of a company’s assets.

Since the introduction of the Uniform Defamation Laws in Australia in January 2006, the causes of action for defamation for all corporations (apart from excluded corporations) have been abolished.  Interestingly, by reason of the pro media protection provisions in the Trade Practices Act, if the substance of the A Current Affairs reports were false, Brighten would be left without a remedy.

If you have queries please contact:
Associate Joseph Abberton on 08 9288 6765 / joseph.abberton@lavanlegal.com.au.