Australia: "Can an Affair Be Bad for Business?" - Brighten Pty Limited & Ors v Bank of Western Australia Limited
Financial Services Recovery Update

In April 2009, Channel Nine's A Current Affair program aired two damaging exposes which were highly critical of the management of the Fairmont Resort at Leura and the standard of its accommodation and facilities.

Material adverse change

As a result of the programs, the secured creditor became concerned about the operation and maintenance of the resort, and formed the view that a material adverse change had occurred. The secured creditor issued a notice of event of default based on a material adverse change provision in its security.

Injunction application

The customer and the guarantors, concerned that the secured creditor would seek to appoint a receiver to the resort, applied to the court for an injunction restraining the secured creditor from enforcing its security.

The customer and the guarantors maintained that it would be unconscionable for the secured creditor to seek to enforce its security in circumstances where:

1. the customer disputed the accuracy of the A Current Affair reports; and
2. the required repayments were being made on the facility as and when they fell due.

The secured creditor opposed the injunction and sought to enforce its security on the basis of the material adverse change, contending that it was irrelevant whether the material contained in the A Current Affair programs was true.

Court appointed receiver

At the suggestion of the court, and with the agreement of the parties, a court appointed receiver was appointed to the resort on 11 December 2009.

Having investigated the affairs of the resort, on 22 February 2010, the court appointed receiver reported to the court that he had serious concerns about the operation of the resort, and the existence of risks to public health and safety due to poor maintenance of the fire safety and air-conditioning systems.

The decision

The court determined that the secured creditor was entitled, at its absolute discretion, to conclude that events had occurred which had resulted in an adverse material change in the business, assets and financial position of the resort.

Having reached that conclusion, the secured creditor was entitled to exercise its rights on default, including by appointing a receiver to the resort. The position of the secured creditor was assisted by the court appointed receiver's report, which confirmed concerns the creditor had about fire safety and the overall condition of the resort.

The danger of adverse publicity

The case is unusual as it is the first time that the court has upheld material adverse change on the basis of a broadcast television program.

It highlights that the publication of adverse reports in the media as to a customer's affairs may be used by a lender as a basis for calling default and appointing a receiver.

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