The recent decision of Justice Hammerschlag in the New South Wales Supreme Court in Chameleon Mining NL v International Litigation Partners Pte Limited [2010] NSWSC 972 concerned (amongst other things) the ability of a secured creditor to appoint a receiver and manager to a company in reliance on a breach of confidentiality undertaking.
By way of background:
- In November 2007 Chameleon Mining NL (Chameleon) commenced proceedings against Murchison Metals Limited (Murchison).
- In order to prosecute its claims against Murchison, Chameleon entered into an arrangement with International Litigation Partners Pte Limited (the Funder) pursuant to which the Funder agreed to provide litigation funding to Chameleon in order to prosecute its claim against Murchison.
- Clause 11 of the funding agreement provided that both Chameleon and the Funder had obligations to keep the terms of the funding agreement and any discussions or information obtained by reason of the funding agreement confidential.
- The Funder’s rights under the funding agreement were secured by a first registered fixed and floating charge over all of the assets and undertakings of Chameleon (the Charge). The Charge relevantly provided (as fixed and floating charges commonly do), that a breach of any term of a 'Transaction Document' (which was defined to include the funding agreement) constituted an event of default under the charge such that the Funder could immediately appoint receivers and managers without notice.
- On or about 10 August 2010, Chameleon entered into a strategic alliance with Cape Lambert Resources Limited (Cape Lambert) pursuant to which Cape Lambert (amongst other things) obtained the right to appoint 50% of the directors of Chameleon’s board.
- The agreement between Chameleon and Cape Lambert constituted a change in control for the purposes of the funding agreement such that the funding agreement was immediately terminated and Chameleon was required to pay an early termination fee ($9 million) to the Funder.
- After entering into the arrangement with Cape Lambert, Chameleon wrote to the Funder and tendered payment of what it considered to be the early termination fee.
- The Funder rejected Chameleon’s tender on the basis that it contended the early termination fee was significantly more than $9 million. In order to protect its position, it appointed receivers and managers over all of Chameleon’s assets and undertakings.
- Chameleon immediately sought and obtained injunctive relief preventing the receivers and managers from dealing in any of its assets and acting as receivers and managers, until these proceedings could ultimately be determined.
In these proceedings, the Funder argued that Chameleon had clearly breached its confidentiality undertaking by disclosing the terms of the funding agreement to third parties. The evidence that Chameleon had disclosed the terms of the funding agreement to a third party was not disputed at trial.
Chameleon argued that reliance on a non monetary event of default (such as a breach of a confidentiality undertaking) to appoint receivers was not in good faith because the remedy (the appointment of receivers) was completely out of proportion with the nature of the default (the breach of the confidentiality undertaking not being a serious breach).
Justice Hammerschlag rejected Chameleon’s arguments, finding that a breach of a confidentiality undertaking was not a trivial breach, and the appointment of receivers and managers in reliance on such a breach was not (on the evidence before him) lacking in good faith.
Accordingly, he made declarations that the receivers and managers’ appointment was valid.
This decision (and the decision of Einstein J in Brighten Pty Ltd and Ors v Bank of Western Australia Ltdand Anor, where the secured creditor relied on a material adverse change in financial condition as an event of default that entitled it to appoint receivers and managers) demonstrate that standard bank documentation (generally) 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 breach of a confidentiality undertaking or a material adverse change in the value of a company’s assets.
If you have any queries in relation to this matter or any other insolvency matters, please do not hesitate to contact:
Partner Dean Hely on 08 9288 6772 / dean.hely@lavanlegal.com.au or
Associate Joseph Abberton on 08 9288 6765 / joseph.abberton@lavanlegal.com.au.
