By implementing a Material Adverse Change clause (MAC) in agreements, lenders are often able to hold back – or even cease – providing finance to a client if there is (or will be) a material adverse change in the business, financial condition or ability to operate.
The courts can be reluctant to enforce a MAC clause in favour of a lender, not least because often they do not specify the event or events on which the lender can act, and the courts do not like this uncertainty.
Some guidance was given in the case of Grupo Hotelero where the court stated that a change is only material and adverse insofar as it is sufficiently significant and affects the borrower’s ability to repay the loan.
Commentary suggests that presently the courts would not regard a temporary adverse change to be either material or significant.
However, COVID-19 is sadly having a profound effect for many. Countless businesses have been severely financially affected and no one knows for how long the restrictions currently imposed will last – but it is expected that they will be temporary. The longer term effects are, however, now expected to last much longer: it is generally forecast that a world recession is likely, if it has not already begun.
It is therefore unclear if the decision in Grupo Hotelero gives reliable guidance given the likely long term effects of COVID-19.
If a lender intends to rely on a MAC clause in order to refuse or cease to advance funds under a loan agreement, it would be wise to conduct a full review of the borrower’s ability to meet its loan obligations notwithstanding the impact of COVID-19, as well as changes to the economy as a whole and the likely longer term impact. A renegotiation of the terms of the facility may well be the best course of action.
For further guidance on MAC clauses, please do get in touch with Chris Willison.