Minumbra Lancewood v AM Lancewood Investment Nominees [2013] NSWSC 1929

In this case, the borrower sought orders to prevent the lender from enforcing a default notice under a loan agreement.

A joint venture was set up by two companies to acquire and operate an accommodation village. The joint venture operated under a 50/50 unit trust between the parties. The borrower was trustee under the trust and also the borrower under a loan agreement (the Agreement).

Clause 9, which was the subject of the present proceedings, gave the lender the right to issue a default notice on the borrower, which the borrower had to comply with, if an event of default occurred. The lender sought to exercise its right under this clause by claiming that there was a material adverse change in the borrower, which constituted an event of default. A material adverse change was defined under the Agreement as:

“Any situation occurs which in the opinion of the Lender gives it grounds to believe that a material and adverse change in the business or financial condition of the Borrower has occurred or that the ability of the Borrower to perform its obligations under this Agreement has been or will be materially and adversely affected or that any other Event of Default is likely to occur.”

According to the lender, the “situation” giving rise to the material adverse change, was the poor financial performance of the accommodation village and that it was not meeting budgets under the parties’ initial business plan. Specifically, the lender argued that the borrower had:

performed at substantially lower levels of occupancy and profitability, had shown no improvements and this was likely to occur in the future;
an inability to replace, take or pay contracts;
a high degree of under performance compared with the budgets including occupancy, revenue, expense ratio and net income, set out in parties’ business plan.
In contrast, the borrower argued that the failure to meet budgets was not a material adverse change in their business or financial circumstances, but rather only constituted “failure to meet an expectation, hope or business intention”. They submitted that the lender could not, on the evidence, form the opinion that the changes were material and adverse. Robb J rejected this argument and stated:

“With due respect, the plaintiffs’ argument is tantamount to a submission that a person who falls out of an aircraft has not suffered a material adverse change until the person hits the ground”.

Robb J found in favour of the lender and held that the evidence established that there were grounds to believe that there was a material and adverse change in the borrower.

Some notable principles arising from Robb J’s decision are as follows:

  • The onus is on the lender to prove on the balance of probabilities that an event of default has occurred;
  • An event of default only arises if the adverse change is significant;
  • Interpretation of a material adverse change clause depends on the facts of each case;
  • Changes will be material and adverse, not only when they affect the borrower’s ability to meet their obligations, but also extend to changes that would cause the lender to either wish not to be bound under the existing terms of the Agreement, or to continue on significantly different terms;
  • The evidence should support a finding of an adverse change which is significant. If this can be shown the material and adverse change provision is applicable;
  • The lender must honestly hold its opinion that a material adverse change has occurred;
  • If the Lender acts honestly and not capriciously in forming its opinion, then the opinion is valid, unless no reasonable person in the lender’s position could have formed that same opinion;
  • There is no requirement that the lender’s opinion be based on objective facts to prove and support their claim, only that the opinion is one which is reasonably based;
  • The lender in forming its opinion does not, in addition to their own interest, need to have regard to the interests of the borrower.
  • Click here to view the full judgement.
Scroll to Top