In the recent decision of Einstein J of the New South Wales Supreme Court in Brighten Pty Limited & Ors v Bank of Western Australia Limited & Anor  NSWSC 133, the Court considered the circumstances in which a ‘material adverse change’ would trigger a default entitling the secured lender to appoint a receiver.
In late 2006, Bank of Western Australia Limited (Bank) provided a loan facility of $32,150,000 to Noble Growth Investment Limited (Noble) to enable the purchase of the Fairmont Resort in Leura, New South Wales (Leura Resort). Among other things, the loan was secured by a mortgage given by Brighten Pty Limited (Brighten) as owner of the land upon which the Leura Resort was situated, and by a charge over its assets and undertaking.
Not unusually, the loan and security documents contained default provisions providing for the Bank to determine in its absolute discretion if there had been a ‘material adverse change’ in the business, property or financial condition of the loan parties or the Leura Resort.
In April 2009, Channel 9 aired two reports on its A Current Affair programme (ACA reports), highly critical of the standard and condition of the Leura Resort’s accommodation and facilities.
The Bank formed the view that the ACA reports had a major impact on the business, assets and financial condition of the Leura Resort. The Bank contended that the ACA reports, coupled with the consequent downgrading of the Leura Resort’s rating and reputation, constituted a ‘material adverse change’ for the purposes of the loan and security documents from the position at the inception of the loan. As a result, the loan was in default and the Bank was entitled to appoint a receiver.
Brighten responded by commencing proceedings seeking a declaration that no default had occurred, which if successful, would have the effect of restraining the Bank from appointing a receiver.
In December 2009, the Court appointed a receiver. The appointment was by agreement and gave the receiver limited powers. The receiver’s report was furnished to the court in February 2010 following which Brighten sought an extension of the existing interlocutory injunction. Among other things, the receiver’s report concluded that there were serious public health and safety issues associated with the air conditioning systems and fire safety measures at the Leura Resort. Whilst the plaintiffs submitted they had dealt with these matters, there was a clear inference that the plaintiffs had 'woefully and over a considerable period of time neglected to operate the resort in a competent fashion'.
Einstein J dismissed the application finding, among other things:
Lavan Legal comment
This decision highlights the absolute discretion that lenders have, in the absence of the lender having acted in bad faith or unconscionably, in relation to suitably drafted ‘material adverse change’ clauses in loan and security documents.
However, we recommend that to the extent possible, lenders also identify and rely on other defaults which may have also been triggered such as, for example, monetary defaults, a diminution in the value of security, breach of any applicable loan to value or other ratios and so forth, as those types of default events may be more readily identifiable and objective.
For borrowers, the decision also serves to highlight the dangers of adverse media reports, which could lead to a lender determining that a default under relevant borrowing arrangements has occurred.
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