Minumbra Lancewood Pty Ltd v AM Lancewood Investment Nominees Pty Limited

Loan Agreement 12The Lender entered into a Loan Agreement on 3 July 2012 in two separate capacities as trustee for the Lancewood Investment Trust and the Lancewood Investment Trust 2. The Borrower, as trustee for the Trust, was the borrower. 13Clause 1.5, which is part of the Definitions and Interpretation provision, provides: "Unless otherwise provided for in a Finance Document, if the Lender has the discretion to require or determine something, consent to something, or act in a certain way under a Finance Document, that discretion is unfettered and absolute. It may be exercised without obligation, despite any previous waiver and in addition to any other rights or remedies conferred by the Finance Document or by law. Any determination made by the Lender will be in the Lender's sole and absolute discretion and will (sic) conclusive and binding, except in the case of obvious error." 14The Lender did not specifically rely upon this provision, but it may be relevant to the proper construction of clause 9.2(i). 15Under clause 2.1 the Lender agreed to make advances to the Borrower in aggregate up to the Principal Sum (defined in clause 1.1 as being $11,785,000). 16The evidence shows that a drawdown of $11,550,000 occurred on 4 July 2012 and of $241,425 on 30 August 2012. 17The Loan was, as stated in clause 2.2, secured by the Security Documents (as defined). 18It is material that one of the conditions precedent, in clause 3.1(c), was that the Borrower was required to provide to the defendant evidence of the execution of occupation agreements which would lead to the operation of the Lancewood Village generating $4 million in revenue in the first 12 months of operation. 19Clause 4 required the Borrower to use the Loan to pay $8,250,000 to acquire the Lancewood Village and $3,300,000 to convert the leasehold on which the Lancewood Village was situated to freehold title. 20Clause 6.1 required the Borrower to pay interest at an agreed rate monthly in arrears. Under clause 6.3: "If interest is not paid by the due date it will automatically be capitalised on and from that due date and form part of the Principal Sum". 21Under clause 7.1(a)(i)(A) the Borrower was required to repay the Principal Sum 30 months after the date of the first drawdown, so the repayment date is 4 January 2015. 22There is no requirement for the Borrower to make any repayments of principal before the repayment date 23Materially, clause 7.1(b) to (e) provided: "(b) The Borrower must no later than: (i) if Freehold Conversion occurs on or before 31 December 2012, 28 months after the date of first draw down; or (ii) if the Freehold Conversion does not occur on or before 14 December 2012, 14 December 2012, (c) submit a plan to the Lender detailing options, recommendations and costing as to how the Borrower will repay the Principal Sum (the "Repayment Plan") including whether: (i) the Principal Sum will be refinanced by the Borrower and, if so, on what terms and within what timeframe; (ii) the chattels and equipment purchased by the Borrower should be sold and at what price and whether any potential buyers exist; (iii) the chattels and equipment should be relocated to another mining village and, if so, details about how this would proceed; and (iv) any other options should be explored. (d) Within 7 days of the Lender receiving the Repayment Plan, the parties must meet to consider and discuss in good faith the Repayment Plan and determine whether or not the parties agree to implement any proposal. If the parties agree a proposal, then they must each use best endeavours to implement that proposal. (e) If the parties are unable to agree within the period referred to above, the date for repayment will be either the date in clause 7.1(a)(i)(A) or the date in clause 7.1(a)(i)(B) (as the case requires), and the Lender may enforce any or all of its rights including under this Agreement and the Security Documents and, without limitation, the Lender will be entitled to require that the Lancewood Village be sold by the Borrower on such terms determined by the Lender". (The inclusion of "(c)" in the provisions extracted above was an error, and the words that followed could not have been intended to take effect as a separate subclause). 24The provisions of the Loan Agreement which are paramount to the present dispute are the relevant aspects of clause 9 concerning Events of Default. 25Clause 9.1(a) relevantly provides that "if an Event of Default occurs and while it subsists, the Lender may declare part or all of the Outstanding Amount due and payable within the period set out in a written notice to the Borrower and the Borrower must comply with the terms of that notice". 26As the Lender submits, this provision does not require that the Lender must stipulate in the written notice which Event of Default is relied upon, or that any reasons be given to justify the notice. 27In pars 12 to 15 of their points of claim the plaintiffs allege a breach by the defendant of clause 9.1(b). As I have mentioned, the plaintiffs abandoned that claim during submissions on the final day of the hearing. Therefore it is not necessary to set out the provision. 28The Event of Default upon which the defendant relies is that contained in clause 9.2(i) which provides: "Material Adverse Change: 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." 29Clause 11.2 imposes on the Borrower a requirement that the Borrower provide information about the business "in the same format as provided to the unit holders in the Trust under the Securityholders Deed." That format is found in Schedule 3 of that deed. Materially, information must be provided in a manner that compares actual results with budget. Furthermore, under clause 11.2(d) the Borrower is required to provide to the Lender, before the commencement of each financial year, "copies of the draft budget (if any) and business plan (if any) of the Trust for the Financial Year".

Security Documents 30Also on 3 July 2012 the Lender, separately in its capacity as trustee of the two trusts, entered into two deeds called Specific Security Deeds. The second plaintiff was a party to one of those deeds, under which it charged its ownership interest in the shares in the Borrower to the Lender to secure repayment of the debt owed by the Borrower to the Lender. The third plaintiff was a party to the other deed, under which it charged its interest in the units in the Trust to secure repayment of the same debt. 31On the same date the Borrower, as trustee for the Trust, entered into a general security deed under which it granted a Personal Properties Securities Act 2009 (Cth) Security Interest over all the Borrower's present and after-acquired personal property, as well as a fixed and floating charge over all of the Borrower's other property, to secure the debt.

Securityholders Deed 32The final document entered into between the parties on 3 July 2012 was a Securityholders Deed. The parties were the Lender, separately in its capacity as trustee of the two trusts, Ashe Morgan, as shareholder in the Lender, and the Borrower and the second and third plaintiffs. 33Clause D of the Background recited that the parties had agreed that the operation and business of the Trust and the Borrower and their relationship as unitholders and shareholders would be governed by the terms and conditions set out in the deed. The deed, in effect, contains many administrative arrangements designed to govern the relationship between the parties and the administration of the affairs of the Borrower, the Trust, and the business of the Lancewood Village. 34Clause 2.1 made it a condition precedent to the operation of the deed that the Lender was obliged to make the loan to the Borrower under the Loan Agreement. 35Under clause 3(b) the parties were required, for the benefit of the Trust, to use reasonable endeavours to consult with each other and to give each other the benefit of their skill and experience in order to grow and develop the Trust and its business. 36Clause 3(c)(i) required the parties to use all reasonable endeavours within their power or control to do or cause to be done all things reasonably necessary or desirable to carry out the deed. 37Under clause 5.2 the shareholders in the Borrower were empowered to appoint two directors each. A quorum for board meetings was at least one director appointed by Ashe Morgan and one director appointed by Transpac: clause 5.8. Clause 6.1 required all decisions of the board of directors to be made by ordinary resolution, which meant that director resolutions needed the support of at least three of the four directors to be approved. Clause 6.5 required, in relation to various listed matters, that the board of directors must obtain the prior approval of the unit holders by ordinary resolution before taking any decision in relation to those matters. 38Clause 7 set out terms governing the management of the Trust, including in clause 7.3 that the business of the Trust was to be "the acquisition, management, operation, maintenance, development and expansion of the Lancewood Village". Clause 7.5 required the parties to use all reasonable endeavours to maximise the use of the Lancewood Village, whether as a Mining Village" or a village for mine construction or otherwise. "Mining Village" is relevantly defined as a facility of "providing accommodation for employees in the mining or construction industry on a temporary basis". 39Under clause 8.1: "The initial Budget and Business Plan for the Trust for the period from the date of this Deed until 30 June 2013 will be as set out in Schedule 2." 40Schedule 2 consists of a document called "Lancewood Village Business Plan", which is one of a number of documents agreed between the parties at the inception of their joint venture. I will return to this document below. 41Clause 8.2 requires the parties, for each Financial Year following the initial period referred to in clause 8.1, to use reasonable endeavours to ensure that the Trust adopts an annual budget in a form approved by the unitholders. 42The effect of clause 9.1 was that the initial funding of the Trust was to be provided by the loan made by the defendant under the Loan Agreement. Clause 9.2 concerns the manner in which the Borrower could obtain additional funding. In the events that have happened no additional funding was obtained. The provision makes it clear that the parties were not obliged to provide additional funding other than that to be made available under the Loan Agreement. 43Clause 10.1 required the Borrower to give information to the parties about the business and the operations of the Trust, including monthly reports in the form set out in Schedule 3. That schedule consisted of a pro forma monthly account. The monthly accounts that were created by the Borrower in performance of this obligation provide much of the financial evidence that is relevant to the determination of the present dispute, and will be considered in some detail below. 44Clause 18 provided for the circumstances in which the parties contemplated they would exit the joint venture and stated that the intention was "for an Exit to occur at such time that will align with the expiry of the Lancewood Village Lease (as may be renewed or extended from time to time)."

Management Agreement 45On 3 July 2012 the Borrower entered into an agreement with Transpac under which Transpac was appointed as the administration manager of Lancewood Village to provide management and administration services. Those services, which were required to be provided by clause 4, were listed in Schedule 1. Transpac was required to provide monthly reports in the form set out in Schedule 3, which is the same as Schedule 3 of the Securityholders Deed. 46Clause 4.4 made provision for Key Performance Indicators (KPIs) which, if not met for two consecutive calendar quarters, triggered a procedure under that clause that might ultimately lead to the termination of the appointment of Transpac as administration manager. The relevant KPIs were listed in Schedule 2 as being - "(a) The Trust achieving Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA) per quarter which is not less than 70% of the forecast EBITDA in the current Budget. (b) The Administration Manager ensuring that the reports to be provided by the Trustee under clause 10 of the Securityholders Deed are provided within the timeframes set out in that clause." 47While the Management Agreement appointed Transpac as administration manager, under a separate agreement the day-to-day management of the operation of Lancewood Village was in the hands of a subsidiary of Leighton Holdings Ltd.

Lancewood Village Business Plan 48As mentioned above, at the inception of their collaboration the parties agreed on a number of documents that constituted the initial Budget for the venture, as contained in Schedule 2 to the Securityholders Deed, as well as the detailed financial projections upon which the Budget was based. The Budget was set out in a document called "Lancewood Village Business Plan". 49The Objective, as stated in the Business Plan, was "to maximise profit through the active management of accommodation revenue and associated costs." 50The Budget was proposed by Transpac for the next two financial years, and agreed by the board of the Borrower. It was to form the basis of all reporting. The Business Plan stated - "Budget Financial Year 2012/13 EBITDA - $6,836,324 Financial Year 2013/14 EBITDA - $7,044,881" 51On the subject of Revenue, the Business Plan budgeted for an occupancy rate of 90% generally and 80% in December and January. The Room Rate contemplated was - "No less than $125 per night occupied in 2012 increasing at percentage in line with cost thereafter No less than $90 per night unoccupied in 2012 increasing at percentage in line with cost thereafter" 52Transpac was required to seek to maximise Lancewood Village's occupancy through accommodation agreements plus the efficient facilitation of shorter-term users. The Business Plan contained an acknowledgement that "take or pay contracts accommodation agreements are in place with Bechtel, BMA, Acciano and Synergy. In addition, Peabody is expected to formalise their arrangements in July 2012". 53The Business Plan dealt with the manner in which Transpac would market the Lancewood Village in two categories of occupation described as "Take or Pay Accommodation Contracts" and "Casual & Short Term Users". The former was described as - "Contracts for 3 months or greater with top tier mine operators, mine service providers or infrastructure groups In the event that a party occupies Lancewood Village, Transpac shall seek to extend the agreement tenures and pricing structures Transpac shall actively market to and seek to accommodate any significant parties with interests or potential interests in the catchment area of Lancewood Village" 54The latter category was described as: "Smaller organisations looking to satisfy shorter term requirements or casual users of the Village".

Cash flow spreadsheets 55The parties agreed on detailed cash flow forecasts that supported the 2013 and 2014 EBITDA estimates in the Budget in the Business Plan, which are contained in a number of spreadsheets. 56The EBITDA estimates are derived from monthly estimates of revenue in a cash flow assessment for 24 months. The estimated revenue included $1,558,854 received from Bechtel over a 3 month period beginning in July 2012, $73,913 from BHP for July 2012, $1,750,248 from Peabody for six months beginning in July 2012, $4,204,242 from Acciona over a 15 month period beginning in July 2012, and $431,404 from Synergy over seven months from August 2012. The major item of revenue was described as "Other Budget" and amounted to $34,970,460 for the balance of the 24 months commencing September 2012. Finally, there was an allowance of $499,144 for the provision of office accommodation for parties who contracted to hire accommodation at the Village. The total revenue estimated over the two-year period was $43,488,264. The EBITDA estimates were made after allowing for estimated operating costs. 57In the spreadsheets the calculations that supported the revenue estimates assume that the occupancy rates and room rates set out in the Budget will be maintained on average over the two-year period. The room rates for the "Other Budget" category of revenue assume $138 per day occupied and $90 per day unoccupied. This room rate structure is the same for the identified parties to the take or pay accommodation contracts, although the actual room rates in dollar terms differ for different parties. This suggests that the parties assumed that at least a substantial portion of the Other Budget revenue would arise out of take or pay contracts. 58The spreadsheets do not specifically allow for the payment of interest under the Loan Agreement.

Information Memorandum 59Ashe Morgan prepared an Information Memorandum dated 12 May 2012 to provide to potential investors in the two trusts of which the Lender became trustee. 60The plaintiffs do not in their points of claim put any specific case based upon the contents of the Information Memorandum. However, the plaintiffs submit that aspects of the Information Memorandum throw light upon the real state of mind of the Lender in serving the Notice of Demand on the Borrower. It will be necessary to consider selected aspects of the contents of the Information Memorandum. 61The Market Commentary in par 4.2 suggested that there was a "chronic shortfall of accommodation across the Bowen Basin". The short to medium term demand was primarily due to the implementation of committed capital expenditure in mine development and expansion. The Information Memorandum canvassed the relationship between committed capital expenditure and the growth of the non-resident workforce at a rate of 9% per annum, which was forecast to lead to an increase of a further 7000 non-resident workers over the next two years. 62Paragraph 5. 2 is entitled "Investment Analysis" and summarises the target returns of investors in four alternative scenarios being "1. Base Case - with Senior Debt", "2. Base Case - with No Senior Debt", "3. Upside (or expansion) Case", and 4. "Downside (or early exit) Case". 63As the Borrower did not acquire senior debt, scenario 1 is not relevant. Further, scenario 3 will not be relevant because, on the evidence, no expansion is contemplated. Scenario 2 is that which most readily applies in the events that have happened. The expected outcome is set out in par 5.4, entitled "Return Assumptions". The forecast was that on a total investment of $11,975,000 the investor internal rate of return would be 57.39%, investor profit $13,541,086, and investor cash multiple of 2.13. Significantly, it was forecast that: "Equity and Coupon Repaid (mths) 24". That is a suggestion that investors would receive from the Lender the entirety of their investment plus return in 24 months. Notwithstanding this forecast of the period for the return of equity, the target returns were based on a 5-year investment term, and the transaction allowed for the investment to continue for up to 20 years. 64An "Alternative Case Analysis" is given in par 5.5, which in relation to "Early Exit Scenario" states: "This scenario assumes demand declines significantly following the maturity of the existing occupancy agreements. The investment assumptions are as follows: Transpac unable to procure senior debt A 3 year investment term. The room commitment declines to 75% in the 2nd year of operation and 50% in the 3rd year. Asset disposal at the end of the 3rd year for $3 million." 65A repayment of equity and coupon within 24 months was also forecast for the early exit scenario.

Operation of Lancewood Village 66The evidence clearly establishes that the expectations of the parties that are reflected in the Business Plan and the supporting revenue and operating costs estimates were not realised, and for a number of reasons Lancewood Village performed significantly worse than was expected. The decision by the Lender to serve the Notice of Default based upon clause 9.2(i) of the Loan Agreement was made by the Lender as a result of the change in financial fortune that was experienced by Lancewood Village. 67The financial performance of the Lancewood Village and the market circumstances which dictated the results which were achieved can be determined from an analysis of the business records created in the course of the operation of the business, which include the Lancewood Village Monthly Financial Reports prepared by the administration manager as required by the Management Agreement and the Securityholders Deed, reports to the board of directors of the Trustee (which usually included a "Project Overview") as well as the minutes of meetings of the board, and other documents. It is possible that the recording of precise amounts in the following paragraphs taken from the various financial reports will include minor errors because of limitations in the legibility of the documents produced by the photocopying process and the small font size of some of the reports. 68It will be convenient to begin with an historical review of material observations contained in the various documents concerning the financial performance of the Lancewood Village and market trends relevant to the future prospects concerning the profitable operation of the business. A reasonably accurate picture of the developing trends can be established by isolating the more significant statements contained in the documents. 69The Project Overview in the July 2012 Leighton report noted: "During the month of July the entire camp was reserved to Bechtel, Peabody, Acciona/BMD & BMC." 70The July Monthly Financial Report reported net income that was 115% of budget and occupancy at 112% of budget. 71A report by Transpac to Ashe Morgan dated 12 September 2012, that appears to refer to a meeting of the directors of the Trustee concerning performance in August 2012, reported that net income was 133% of budget, and that total rented rooms, including occupied and unoccupied but charged, was 104% for the month. 72The equivalent report by Transpac for the month of September showed that net income was 114% of budget and that total rented rooms was 95%. 73Transpac reported that Peabody had changed its strategy, in that it would in the future book rooms on a month-by-month schedule, and that it would no longer book rooms on behalf of its contractors. Those contractors were required to set up accounts directly with the Lancewood Village. The report contained positive news about the room requirements of other substantial companies, including Bechtel, Rio Tinto and New Hope Coal. 74Leighton's report for September in the Project Overview section reported that the room allocation rate for the month was 100%, although Peabody had indicated that it would not be utilising the camp during October. 75The September Monthly Financial Report forecast operating profit to 31 December 2012 of $3,862,994, and net income after paying a total of $839,597 interest under the Loan Agreement of $3,023,397. It also forecast that by 31 December 2012 a total of $2,540,000 of the loan under the Loan Agreement would have been repaid, leaving a closing balance of $6,952,850. 76The Project Overview in Leighton's October 2012 report noted: "During the month our room allocation rate was at 84% with an average daily occupancy of 42% (146 rooms) this was the (sic) similar to last month. We had slight room usage increases from a number of the other companies using the camp which has kept our usage rates up". 77The October Monthly Financial Report made forecasts out to the end of 31 January 2013, which complicates the making of comparisons with the previous month's report. However, it reported a capital repayment of $750,000 in October, and forecast repayments of $1,260,000, $270,000, $130,000 and $190,000 over the next four months, after the payment of interest under the Loan Agreement for each of those months. 78Transpac's report for November addressed to Ashe Morgan on 19 December 2012 reported that net income was 47% against budget, and that total rented rooms was 58%. The report noted that: "Decreases in occupancy have come mainly due to Bechtel, Synergy & BMC moving out in November. Also other users, having lower levels of staff for upcoming wet season" 79The Project Overview in Leighton's November 2012 report stated: "During the month our room allocation rate was at 65% with an average daily occupancy rate of 35.6% (133 rooms) this was the (sic) similar to last month. We had (sic) fall in room usage due to Bechtel and Synergy withdrawing from room allocation". The evidence did not explain the differences between the Transpac and Leighton reports. 80The November Monthly Financial Report made forecasts out to the end of May 2013. It forecasted that interest under the Loan agreement would be paid for each month during the period. It stated that $750,000 had been repaid against the capital of the loan during the month (compared to the $1,260,000 that was forecast the previous month). It forecasted loan repayments of $400,000, $400,000, $200,000 and $200,000 for the next four months (the report is illegible for April and May 2013). 81The evidence did not include Transpac, Leighton or a Monthly Financial Report for December 2012. 82Transpac's report to Ashe Morgan dated 13 February 2013 concerning January 2013 noted that total rented rooms for that month was 32%. The decrease in occupancy was explained as having been caused by the Christmas and New Year break running from 26 December to 7 January coupled with the wet season. 83The January Monthly Financial Report appears to show that the net income was about $15,923 against a budget of $525,827, or 3%. (These figures may not be precisely accurate as the legibility of the document is limited). Year to date net income is shown as $2,902,507 against a budget of $3,587,509, or 72%. 84A profit and loss forecast to 30 June 2013 is included. It shows a forecast operating profit of $4,738,009. In the Business Plan that was Schedule 2 to the Securityholders Deed the forecast EBITDA for the year was $6,836,324. Payment of a total of $1,538,749 in interest under the Loan Agreement was forecast, leaving a total forecast annual net income of $3,199,260. 85The January Monthly Financial Report showed that net income, after payment of interest under the Loan Agreement was a deficit of ($96,578) in December 2012 and ($118,546) in January 2013. This means that the operating profit available to the Trustee was not sufficient to cover the full amount of the interest due under the Loan Agreement for these months. 86Transpac's February report addressed to Ashe Morgan dated 20 March 2013 contained the following material statements - "Room's Occupancy Summary Room allocation occupancy was 33% and occupied usage of 21%. Room's usage was heavily affected by the heavy wet season for Feb 2013 ... Market Some accommodation in Moranbah and Nebo (both not directly competition) have reduced prices to $110 per night. Goal is to keep competitive in offerings to new clients and tenders. Acciona Update Acciona during the month of February requested to move out of the camp approximately mid-May. The main job scope has been changed from the client, and has been requested to speed up job near Lancewood and moved to a further job afterwards. TC met with them recently and they are aware of the termination clause in the contract. They have offered a Contra deal to subsidise exposure - TC to table in meeting." 87The February Monthly Financial Report also contained a profit and loss forecast to 30 June 2013. The operating profit forecast was $3,623,051, compared to the forecast made in the previous month of $4,738,009 for the same period. 88There was a deficit in repayment of monthly interest under the Loan Agreement of ($80,128) for February, and a deficit of ($62,209) forecast for March. Thereafter it was forecast that interest could be paid fully for April, May and June 2013. 89A repayment of $370,000 under the Loan Agreement was made in January 2013. The cash flow forecast was that no further repayments would be made in the months February to June 2013. 90The Project Overview in the Leighton report for February 2013 stated: "During the month our room allocation rate was at 41% with an average daily occupancy rate of 28.9% (62 rooms) this was down again." 91The Transpac report to Ashe Morgan for March 2013 contained an Occupancy Summary that stated: "Room allocation occupancy was 25% and occupied usage of 17%. Room's usage was heavily affected by heavy delay wet season for March 2013 and also the market levels (more below)." 92The Leighton report for the same month stated: "During the month our room allocation rate was at 41.8% with an average daily occupancy rate of 29.8% (41.7 rooms) this was down again. (This is working on 140 rooms being available)." 93The March Monthly Financial Report showed a deficit in operating profit for the month of ($30,563) and a deficit in net income of ($163,519), against a forecast the previous month of ($62,209). Whereas for the previous month the forecast operating profit to 30 June 2013 was $3,623,051, in the March Financial Report it had reduced to $3,148,583. 94An operations strategy for 2013 sent by the Borrower to Leighton, apparently in about early April 2013, contained the statement: "Current reducing size of camp temporary - 248 rooms available - with the plan to keep only 140 rooms open in the short term. This can be increased with short lead time." 95Minutes of a board meeting of the Borrower held on 11 April 2013 recorded that "occupancy averaged 25% in March and currently there are approximately 85 people in the camp." The minutes contained the following commentary on the "Outlook" -

• "TK outlined market conditions and demand. The meeting noted change in competition with substantial reduction in room rates and vacancy levels more generally. Cited example of 3/4 bed house in Moranbah previously $2000 now closer $650.
• TK says need to meet competition which is charging $105 in Nebo for a serviced and en suite room. Have offered $108 to Burton and Peabody for overflow. TK believes will generate positive response. LM suggested if possible these arrangements could be put in HOA with each party.
• Miners managing cost more closely.
• Longer term potential for contract with GVK or contractor installing rail infrastructure.
• Rail duplication of existing northern under separate discussion is likely to go ahead regardless.
• PK also mentioned potential for demand from potential Eagle Downs mine owned by Peabody. This was mentioned as a new and major initiative with the likelihood for a 1200 man mine construction camp and the need for a camp such as Lancewood to accommodate the workers constructing the other camp." 96The minutes also noted in relation to "Accounts and Forecast" that: "HB tabled analysis of break-even position for rooms at various $ rates. In summary showed need in excess of 125 users at rates at or above current." At this time there were 85 people staying in the Lancewood Village. 97The minutes of a meeting of the Board of Directors of the Borrower held on 8 May 2013 recorded that Transpac was going to resign as administration manager with effect from 8 May 2013, as it had not met the KPIs for two quarters. Further - "The meeting agreed that the performance and profitability of the Camp had been substantially affected by a number of factors including market conditions beyond the control of Transpac." 98The May Monthly Financial Report (the April Monthly Report was not in evidence) showed a deficit in net income after allowing for interest expense for every month between December 2012 and May 2013. 99The declining financial fortune of the Borrower's business emerges clearly from the extracts from relevant business records. The decline was not ephemeral. A number of unexpected changes in the market occurred, apparently driven by depressed circumstances in the coal market. The large companies that had entered into lucrative take or pay room hire contracts became much more cost conscious. They ceased the practice of making block bookings for workers employed by their subcontractors. Overall room demand steadily reduced. Competitive pressure led to reductions in average rates of room hire. Transpac itself resigned as administration manager because it could not achieve 70% of Budget EBITDA. The Borrower was forced to mothball a progressively substantial numbers of rooms. Lancewood Village actually shrunk.

Material Adverse Change Analysis 100In June 2013 Ashe Morgan prepared on behalf of the Lender a material adverse change analysis that outlined why the Lender was of the opinion that there had been material adverse changes as defined in the Loan Agreement, that would enable the Lender to serve a notice of default. 101Under the heading "General Background" Ashe Morgan listed the following three matters: "Sustained nature of market change - the borrower has performed at substantially lower levels of occupancy and profitability since December 2012. The market and borrower performance has shown no improvement and it is reasonable to assume that the market conditions on which the business plan was formulated will not return to budgeted levels in the short to medium term. Key assumptions underlying business plan no longer valid - inability to replace take or pay contracts has exposed the borrower to more reliance on short-term users at a time of limited demand. Degree of underperformance - The borrower's financial status indicates a dramatic underperformance compared to budget (forecasts) including all key financial metrics of occupancy, revenue, expense ratio and net income. The key occupancy and revenue metrics over the past 6 month period (December 2012 to May 2013) averaged 19.8 % and 30.5 % of the levels assumed in the business plan dated 3 July 2012." 102The analysis then set out a more detailed discussion as to why the assumptions in the Business Plan had not been achieved by comparison with the actual results over the period July 2012 to March 2013. Points of particular relevance include the following: (1)The Business Plan forecast occupancy rates of 90% per month apart from 80% for December and January. Actual occupancy of 90% was never achieved, it tracked down after September 2012 and from December 2012 to May 2013 it averaged 19.8%. The occupancy rate dropped dramatically in December 2012 and had not recovered. (2)The market's increased focus on costs reduced the level of reserved but unoccupied rooms (3)The Business Plan assumed revenue of $13.34 million for 11 months, giving a monthly average of $1.21 million. In fact the amount of revenue for July 2012 to March 2013 was $7.26 million, or a monthly average of $660,000. This comparison substantially understated the degree of underperformance. The revenue for the September 2012 quarter was only 10% below budget. Thereafter the gap increased in the December 2012 quarter to 40%, and widened in the period January 2013 to May 2013 to 29% of budget. (4)The Business Plan forecast EBITDA of $630,000 per month apart from December and January. Actual EBITDA ranged between $0-$55,000 per month in calendar year 2013. 103The material adverse change analysis was supported by detailed spreadsheets prepared by Ashe Morgan's Mr Borghilt. 104For these, and other reasons the following conclusions were set out in the document: "Material and adverse change in the business or financial condition of the borrower As set out above, the analysis of the borrower's financial status indicates dramatic underperformance compared to budget, including all key financial metrics (occupancy, revenue, expense ratio, net income), which has been exacerbated by the management failures identified above. In our opinion, this has given rise to a material and adverse change in the business and in the financial condition of the borrower. The ability of the borrower to perform its obligations under the agreement has been or will be materially adversely affected The dramatic underperformance compared to budget, and the expectation that this will continue in the short to medium term, means that in our opinion the borrower's ability to perform its obligations, including its obligations under the loan agreement, has been and will continue to be materially and adversely affected." 105I have not attempted to reconcile and confirm the financial data contained in the material adverse change analysis and its supporting spreadsheets with the financial reports and other business records outlined above. The plaintiffs did not attack the validity of the financial analysis in the document. 106At a management meeting of the Borrower on 19 June 2013 Mr Tim Knight, a director of the Borrower who represented Transpac, stated (according to the minutes of the meeting) in relation to the ability of the Borrower to meet financial obligations: "He still believes in the long term value and outlook of market to improve of the asset but accepts that the financial commitments currently cannot be met through performance of the Trust."

Notices of Default 107On 24 June 2013 the Lender served on the Borrower and the third plaintiff a notice of default for the purpose of triggering the process of consideration and discussion as to alternative possible courses of action required by clause 9.1(b) of the Loan Agreement. As the plaintiffs have abandoned their claim that the Lender did not properly perform this obligation, it is not necessary to consider this notice of default further. 108The lender served a formal notice of default under clause 9.1(a) of the Loan Agreement on the plaintiffs dated 5 August 2013. The notice relied upon an Event of Default having occurred and continued and demanded repayment of $10,644,426.20 by no later than 5 PM on 9 August 2013. 109This is the notice of default whose validity is challenged by the plaintiffs in these proceedings.

Subsequent financial performance of the Borrower 110The evidence of the Borrower's subsequent financial performance cannot assist in establishing the bona fides of the Lender at an earlier time. It may be that such evidence is of limited relevance in determining the reasonableness of the Lender's conduct, if that be relevant. However, in this context, where the plaintiffs attack the validity of the reasoning process followed by the Lender, as well as the reasonableness of the forecasts made, the accuracy of the forecasts must be relevant to the issues raised by the plaintiffs. 111The June Monthly Financial Report recorded an annual operating profit of $3,079,863, and net income after interest expense of $1,229,307. Of a total interest expense for the year of $1,610,556, there was a shortfall in payment of $820,530, all of which had been incurred in the last six months of the financial year. The EBITDA forecast in the Business Plan attached to the Securityholders Deed for the year to 30 June 2013 was $6,836,324. 112The Borrower's Business Development Plan for July 2013 showed that average occupancy per night was 79 against a target of 130, giving a variance of (51). Break even was assessed in April 2013 as requiring 125 room users at current room hire rates. 113In July 2013 according to the Monthly Financial Report total revenue was $278,073 and the operating loss after expenses was ($15,308). The net loss after allowing for interest expense of $177,304 was ($212,612). 114The August Monthly Financial Report showed an operating loss for the month of ($77,752) and a net loss after income expense of ($475,371). 115The Leighton Report for August 2013 stated that the average daily room usage was 24, and that September's figures would be prepared on the basis of 56 rooms being available for use. Lancewood Village had shrunk again. 116The same report for September 2013 stated that during the month of September the average daily room use was 13. 117The balance sheets for the Borrower show that the total equity at 31 December 2012 was $1,976,256, at 31 March 2013 it was $1,612,493, at 30 June 2013 it was $1,253,751, but at the end of August 2013 it had fallen to $778,380. 118The evidence contains two draft profit and loss forecasts for the Borrower for the financial year ending 30 June 2014. The first contains actual figures for July 2013, and the second actual figures for both July and August. The first forecasted an operating loss of ($681,941) for the year and a net loss after interest expense of ($3,215,313). It forecast negative working capital for every month from 30 June 2013, and a working capital deficit at 30 June 2014 of ($456,919). The later draft profit and loss forecast was more optimistic. It forecasted an operating loss as at 30 June 2014 of ($242,929) and a net loss after interest expense of ($2,876,300). The forecast working capital deficit at 30 June 2014 was ($104,083). 119Adopting the more optimistic forecast of an operating loss of ($242,929) to 30 June 2014, the total operating profit to that date, when added to the actual operating profit to 30 June 2013 of $3,079,863, was forecast to be, $2,836,934. The total EBITDA forecast for this period in the Business Plan was $13,881,205.

Consideration 120The burden lies upon the Lender to prove on the balance of probabilities that an Event of Default under clause 9.2(i) of the Loan Agreement occurred and subsisted at the date of the 5 August 2013 notice of default: see Australian and New Zealand Banking Group Ltd v Pan Foods Company Importers and Distributors Pty Ltd [1999] 1 VR 29 per Kenny JA at [45] (Winneke P agreeing at [27]); Vision Telecommunications Pty Ltd v Australian and New Zealand Banking Group Limited [2001] WASC 139 per Pidgeon AUJ at [77]; and Grupo Hotelero Urvasco S.A. v Carey Value Added S.L. [2013] EWHC 1039 per Blair J at [331], [364]. 121There are apparently relatively few decisions in which the courts have considered the construction of material and adverse change provisions. Blair J in Grupo Hotelero at [334] - [364] conducted a useful review of the authorities that his Lordship discovered. Precedent is in any event of limited utility in the construction of similar terms in different contracts: see Lewison and Hughes, The Interpretation of Contracts in Australia, 1st Aust ed (2012) Lawbook Co. at [4.07]. Material and adverse change clauses are by no means standard, and there are significant differences in the wording and effect of those provisions that have been considered by the courts. 122It will be convenient to deal with the issues in dispute generally in the order in which they are raised by the plaintiffs' points of claim (POC). However, as the plaintiffs' closing written submissions make clear, there is an issue which raises a fundamental difference between the parties as to whether the Lender acted in good faith when it served the notices of demand, that does not emerge clearly from the plaintiffs' points of claim, but which so greatly influences the resolution of the dispute, that it calls for an early consideration.

Event of Default 123The only Event of Default relied upon by the Lender is the alleged material and adverse change event of default contained in clause 9.2(i), and the issue is whether the 5 August 2012 notice of default is void because that Event of Default did not occur: POC pars1 and 2.

Situation 124Subject to one matter, there is no real issue between the parties as to whether relevantly a "situation" had occurred: POC par 3(a). The plaintiffs' case is that the situation does not satisfy the requirements of clause 9.2(i). It is not necessary to make any observations on the meaning of the term "situation" in this context. It is likely that the presence of a relevant situation is more easily recognised when it exists than it can be described. 125At one point in their oral submissions the plaintiffs seemed to suggest that to the extent that the Lender relied upon the failure of the Borrower to perform to budget, that is neither a situation nor capable of being a material change (T 111.10). That may be true for a relatively inconsequential shortfall in performance, but the disparity between the Budget and the financial performance of the Borrower in this case is sufficiently great for that outcome to be a situation for the purposes of clause 9.2(i). 126It will be convenient to use the plaintiffs' description of the three alternative bases upon which the Event of Default may arise, being the first, second and third limbs: POC par 3(b). The lender relies upon the first and second limbs.

Subjective approach of Lender to forming opinion 127The plaintiffs' claim in POC par 3(c) is contentious, in that the plaintiffs assert "the Lender's opinion must be formed in good faith and be based on facts which objectively prove and support the particular limb being relied upon". 128The Lender's position is that its entitlement to issue a notice of demand based upon clause 9.2(i) cannot be exercised dishonestly, capriciously or unreasonably in the sense that no reasonable person would act in that way. The opinion must be honestly formed and held. The Lender submits they are the only limitations and the Lender is not required to substantiate the opinions formed by proving their validity on the basis of the objective facts. 129Although the plaintiffs do not say in POC par 3(c) that the lender must honestly hold the opinion, they appear to accept the Lender's submission that the opinion must be honestly formed and held. They submitted that the Lender must "actually believe" in the opinion that it acts upon. 130The requirement that the opinion must be honestly held is supported by Vision Telecommunications at [83], and is at least implicit in Pan Foods at [45]. The issue of the need for the opinion to be held honestly did not arise on the appeal to the High Court from Pan Foods, but it is arguably implicit in the judgment of the High Court, in finding that the bank had formed the necessary opinion, that the opinion must be genuine: Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579 at [4], [5] and [63]. The term of the contract under consideration in Grupo Hotelero required that there be a material adverse change; not that the lender have an opinion that such a change had occurred. 131However, the plaintiffs go further than requiring that the Lender must form and hold the opinion honestly. They submit that, at least in the circumstances of the present case, the Lender is required to act in good faith in forming the opinion required by clause 9.2(i). 132As I read the points of claim, they do not make clearly, or perhaps at all, a claim that the Lender did not act in good faith. Paragraph 7 of the points of claim, in which the plaintiffs detail the grounds upon which they claim that the Lender could not, in good faith, form an opinion that either of the first or second limbs had occurred, seems to me to focus primarily on whether the situation in context objectively gave rise to relevant material and adverse changes. 133However, it is clear from pars 19 to 31 and 56 to 59 of the plaintiffs' closing written submissions, as well as their oral submissions, that the plaintiffs vigourously challenge the good faith of the Lender in issuing the notices of default. 134As a result of the absence of pleadings, on 13 September 2013 the Lender's solicitors wrote to the plaintiffs' solicitors to ask for confirmation of their "understanding having regard to the relief your clients seek that your clients' case is limited to the question of whether there has been a material adverse change within the meaning of clause [9.2(i)] of the Unitholder Loan Agreement dated 3 July 2012." The plaintiffs' solicitors effectively confirmed that understanding in their reply dated 17 September 2013. However the reply is interpreted, it does not specifically raise any issue of lack of good faith. 135Notwithstanding the doubts that exist as to whether the plaintiffs have properly put the question of good faith on the part of the Lender in issue, I propose to deal with it as if it had been properly raised. 136I am able to do that because in my judgment the plaintiffs' claim in this respect should be rejected. It is preferable that the parties have my reasons for rejecting the argument. 137The Lender's case on the issue of honesty was relatively simple. It accepted that it had to act honestly. It submitted that, within the context of the terms of the Loan Agreement, the evidence clearly demonstrated that Mr Moss and Mr McKinnon honestly formed the opinions required by clause 9.2(i). Moreover, it submitted, it was not put to Mr Moss and Mr McKinnon in cross-examination that they did not honestly hold the opinions they claimed to hold. 138The plaintiffs do not appear to say that Mr Moss and Mr McKinnon did not honestly hold the opinions that they professed. They do say that Mr Moss and Mr McKinnon did not act in good faith. The considerations that may underpin findings concerning honesty and good faith may overlap, but the plaintiffs' submission that the Lender was required to act in good faith seems to require that the Lender in forming its opinion must act not only in its own interests but also have regard to the interests of the Borrower. They submit that the Loan Agreement cannot be viewed in isolation from the suite of agreements that were entered into by the parties on the same date, including most importantly the Securityholders Deed, and also the overall commercial background to the joint venture. The plaintiffs in effect submit that the wording in the Loan Agreement should not necessarily be given its ordinary meaning, and that the meaning must bend to accommodate the position of the Loan Agreement within the array of other transaction documents. 139Specifically, the plaintiffs submit: "The defendant is both lender and 50% investor, and it should not be permitted to ignore its role as a 50% investor in exercising its rights as lender" (closing submissions par 43). They also submitted orally that the Loan Agreement was "a friendly loan - that is, a loan between parties who jointly own as to 50% each the undertaking which the loan was given to fund - and that brings into existence the over-arching agreement within the suite of agreements that the loan agreement sits within" (T 99.44). 140This argument proceeds upon the basis that the Lender is not only the lender under the Loan Agreement, but also holds 50% of the units in the Trust on behalf of Ashe Morgan. I will assume the truth of the proposition that the Lender holds the units in the Trust, as the Lender did not put the claim in issue. However, I note that par 20 of the affidavit of Peter Knight sworn on 16 August 2013 that deposed to this fact was rejected on the grounds of form. I have not detected any proper evidence as to the ownership of the units in the Trust. 141The plaintiffs rely upon a suite of arguments to make good their submission that the Lender was required to temper the exercise of its rights under the Loan Agreement to ensure that its actions conformed with the underlying intent of the joint venture as well as all of the transaction documents. It will be necessary to examine the validity of each of these arguments. 142The plaintiffs start by pointing to the fact that the Borrower acquired the lease of the site of the Lancewood Village on terms that, with the exercise of options, would allow the Borrower to operate the Lancewood Village on behalf of the Trust for up to 20 years. Even Ashe Morgan's Information Memorandum stated to potential investors: "The Investor Trust term is expected to be 20 years. The term of the Investor Trust will be aligned with the freehold lease and the term of the Development Approval. The initial approval will be for a 5 year period with subsequent DAs expected to extend the approval of use". 143The plaintiffs submit that the joint venture was a long-term investment and because of the 50:50 nature of the investment, it contemplated both good faith and ongoing and necessary cooperation between the parties. They rely in particular on clauses 3(b), 3(c)(i), 5.2, 5.8, 6.1, 6.5 and 7.5 of the Securityholders Deed, which have been set out above, to support this submission. 144Of particular importance to the plaintiffs' argument are the terms of clause 18(a) and (c) of the Securityholders Deed. Those provisions establish that the expected "Exit" was to occur at a time that aligned with the expiry of the lease, as it may be renewed or extended from time to time. If an agreement to complete an Exit has not been agreed by the date that is six months prior to the date of expiry of the lease, then a unitholder may require the Borrower to sell the Lancewood Village and wind up the Trust. 145The plaintiffs also rely upon a number of terms of the Loan Agreement itself. Clause 6.3 has the effect that, even though clause 6.1(b) requires the Borrower to pay interest monthly in arrears, interest that is not paid by the due date will automatically be capitalised and form part of the Principal Sum. They submit that the existence of this term "plainly reflects that the parties understood and accepted that it was inherent in the nature of the Village business that it would not generate sufficient revenue, in each and every month, to repay the interest under the Loan Agreement". 146The plaintiffs' submission overstates the significance of clause 6.3. The primary obligation imposed upon the Borrower was to pay interest monthly in arrears under clause 6.1. The Loan Agreement does not make the performance of that obligation discretionary. Clause 6.3 does recognise the possibility that in particular months the Borrower may not be able to pay interest. That outcome may occur in relation to many businesses for cash flow reasons. The parties' recognition of the possibility cannot properly be erected into an acceptance of the probability that the nature of the business of the Borrower would inherently undermine its capacity to pay interest. Were it otherwise the parties would not have started by including clause 6.1. 147The plaintiffs place great emphasis on the provisions of clause 7.1 concerning the timing of payments of Principal. Relevantly, the Borrower is only required to repay the Principal 30 months after the date of the first draw down. The provisions of clause 7.1(b), (d) and (e) have been set out above. Relevantly, 28 months after the date of the first draw down the Borrower must submit a plan to the Lender detailing options, recommendations and costings as to how the Borrower will repay the Principal Sum. That may involve refinancing by the Borrower, the sale or relocation of the Borrower's property, or other options. The parties must meet and discuss in good faith the Repayment Plan within 7 days, and if the proposal is agreed, they must use their best endeavours to implement the proposal. However, if the parties are unable to agree, upon the repayment date, "the Lender may enforce any or all of its rights including under this Agreement and the Security Documents and, without limitation, the Lender will be entitled to require that the Lancewood Village be sold by the Borrower on such terms determined by the Lender". 148The plaintiffs go so far as to submit, based upon these considerations, "that the parties left the issue of repayment at large and subject to further good faith discussion between the parties about repayment proposals": (closing submissions par 28). 149I reject the plaintiffs' argument that by reason of the terms of the Loan Agreement itself, or the terms of any of the other transaction documents, or the underlying intention of the joint venture, the Lender was not entitled to exercise all of its rights under the Loan Agreement in accordance with the ordinary meaning of its terms. 150It cannot be ignored that the parties chose a structure whereby, even though the Lender held Ashe Morgan's 50% of the units in the Trust, it contributed all of the Trust's capital by way of loan under a separate Loan Agreement that contained commercial terms. As I understand it, neither of the unitholders contributed significant capital as the price for the issue of their units. The capital was loan capital acquired through the Lender. 151The Loan Agreement clearly required that the Principal Sum, including any capitalised interest, be repaid 30 months after the first draw down. The plaintiffs' argument does not do proper justice to this circumstance. 152It is true that the provisions of clause 7.1 (b) and (d) created a process whereby there would be good faith discussions between the parties as to how the Borrower would finance the repayment of the Principal. That arrangement reflected the fact that, while the loan made by the Lender was only for a term of 30 months, the aspiration was that the joint venture would continue by means of the operation of the Trust for up to 20 years in all. It was therefore in the interests of all parties that arrangements be in place to try to ensure a smooth transition between repayment to the Lender and the refinancing of the venture. 153Circumstances can be imagined that may have caused difficulties for Mr Moss and Mr McKinnon, by reason of their roles as directors of the Borrower and the Lender, which may have given rise to conflicts of interest. No issue of this nature is raised in these proceedings (notwithstanding that, in the plaintiffs' solicitors letter of 17 September 2013, which is referred to above, an assertion was made that a conflict of interest existed). 154The plaintiffs also relied on the presence within the Loan Agreement of clause 9.1(b). Under that provision the lender was required, before it served the notice of default, to "reasonably consider and discuss with the Borrower and the Transpac Unitholder alternative possible courses of action in order for the Outstanding Amount to be repaid. If agreement cannot be reached within 5 Business Days, the Lender may then serve its notice under clause 9.1(a)". As I have noted above, the plaintiffs originally claimed that the Lender had failed to comply with this requirement, but that claim has been abandoned. The requirement in clause 9.1(b) that the Lender engage in discussions with the Borrower does not have the effect that the Lender is not entitled to act in its own interests in deciding to serve a notice of default, if the discussion with the Borrower does not bear fruit. That is expressly recognised by the wording of the clause. 155I find, therefore, that upon the proper construction of the Loan Agreement, in its context within the transaction documents as a whole, as well as the underlying joint venture, the Lender was entitled to exercise its rights under the Loan Agreement in accordance with its terms, and in exercising those rights it was entitled to act as the Lender, and was not obliged to temper its actions by acting on the basis that it also had a 50% interest in the Borrower. 156This means that the only issue is whether the Lender acted honestly, and that issue must be determined on the basis that Mr Moss and Mr McKinnon were entitled to act as officers of the Lender, and in the interests of the Lender, under and in the context of the Loan Agreement. At one point in their oral opening the plaintiffs suggested that the Lender "must act and form its opinion as lender not as investor" (T 12.24), but this statement seems to be contrary to the primary thrust of the plaintiffs' submissions, which were that in order for the Lender to act in good faith it had to have regard to the interests of the Borrower, which effectively meant itself and Transpac as the holders of units in the Trust. 157Both Mr Moss and Mr McKinnon were cross-examined. It is sufficient that I say that I found both witnesses to be entirely credible, and indeed meticulous, witnesses. They gave their evidence forthrightly and are both clearly highly professional and proficient investment analysts, if I may be permitted to use a description of their professional qualifications that they did not use themselves. In argument I put to counsel for the plaintiffs whether he suggested that there was any part of the evidence of Mr Moss and Mr McKinnon that I should not accept. He said no. 158I find that both Mr Moss and Mr McKinnon, and therefore the Lender, acted honestly in forming the opinions that they professed to have formed within the meaning of clause 9.2(i) of the Loan Agreement. If good faith on the part of the Lender is required, I find that it acted in good faith. 159In cross-examination matters were put to each witness that have been relied upon in the plaintiffs' submissions to support an argument that neither acted in good faith. However, it was not directly put to them that this was the case; rather, the matters put have been relied upon to support a submission that an inference should be drawn that they did not act in good faith. I also asked counsel whether the proposition that Mr Moss and Mr McKinnon did not act in good faith, that was put to me in submissions, had been put to them as nakedly as it was put to me. Counsel submitted that it had, but I do not agree. The basis of the plaintiffs' claim as to the absence of good faith was put to the witnesses in isolation from any consideration of all of the circumstances concerning the Borrower's business and financial condition that were considered by the Lender in its material adverse change analysis. In the circumstances of this case I would not make a finding that the Lender failed to act in good faith on that basis. 160One significant matter that was put to the witnesses was that the Ashe Morgan Information Memorandum, in the places that I have extracted above, represented to potential investors that their investment would be repaid with coupon within 24 months. That is true. It was accepted by both Mr Moss and Mr McKinnon. The plaintiffs submitted that by June 2013 the Lender was under pressure to get capital back to its investors. 161Mr Moss and Mr McKinnon accepted the truth of evidence that suggested that, at a meeting with representatives of Transpac on 1 July 2013, Mr Moss said that there was "lots of capital tied up in Lancewood, and investors require payment. It would de-risk their position and we would be in the transaction more equally as partners" if 50% of the loan was repaid. Mr Moss also accepted that in principle he was anxious to achieve repayment of principal and interest within 24 months "so as to keep faith with the people who had invested on the strength of the Information Memorandum". 162I do not accept that these matters show that Mr Moss and Mr McKinnon did not form the opinions honestly and in good faith. It is apparent that they forecast, necessarily on the basis of similar information to that which led to the preparation of the Lancewood Village Business Plan, and the spreadsheets that supported the Budget, that the Trust would generate sufficient income to enable the Borrower's obligations under the Loan Agreement to be paid out within 24 months. Transpac itself prepared a cash flow forecast for September 2012 that estimated that a total of $2,540,000 would have been repaid off the Principal in the six months to 31 December 2012. That expectation was not realised, and only $1,250,000 was repaid by that date. Had Transpac's forecast been correct, and had the Borrower continued to achieve that level of success, the loan would have been repaid within about 28 months. 163The representations made in the Information Memorandum that investors would be repaid within 24 months are matters that could have influenced the Lender in an improper way to assert that it had formed relevant opinions under clause 9.2(i), but in the context of the whole of the evidence I find that they did not do so. This finding depends partly upon the objective evidence concerning the circumstances of the Borrower's business and financial condition, and the process adopted by the Lender to satisfy itself that it could properly form the opinions, and partly upon my acceptance of the evidence given by Mr Moss and Mr McKinnon. 164It is instructive to consider the relationship between Scenario 4 in Ashe Morgan's Information Memorandum and the results achieved by the Borrower in fact. Scenario 4 was the "Downside (or early exit) Case". Features of that scenario have been set out above. The scenario assumed that demand declined significantly following the maturity of the existing occupancy agreements. A relevant investment assumption was: "The room commitment declines to 75% in the 2nd year of operation and 50% at the end of the 3rd year". In July 2012 the Lancewood Village had 348 rooms available for occupation. Seventy five per cent of that number is 261. The downside scenario assumed an average of 261 rooms on hire per day between 1 July 2013 and 30 June 2014. A 50% usage of 174 rooms on average was assumed for the period 1 July 2014 to 30 June 2015. Apart from the first few months of the operation of the joint venture, the percentage of rooms occupied fell far below 75% for the 2012/2013 financial year; that is, well before 1 July 2013. The significance of the figures is not entirely clear, but for most of the first six months of calendar year 2013 occupancy was at about 33% or below. The Lender calculated in its material adverse change analysis that occupancy averaged 19.8% in the six-month period to May 2013. The occupancy rate in July, August and September 2013 was 78, 24 and 13 persons per day on average, respectively. The difference between these numbers and 261 speaks for itself.

Objective basis for forming opinion 165The issue between the parties is whether the opinion must be based on facts that objectively prove and support the particular limb being relied upon. The plaintiffs' case is that the opinion must "be based on facts which objectively prove and support the particular limb being relied upon ": POC par 3(c). This proposition appears to go further than an argument that the Lender's opinion must have a reasonable foundation in relation to the objective facts. At one point in their oral opening the plaintiffs did say that the opinion "must be an opinion reasonably founded on...the objective facts" (T 12.13). However, that formulation is inconsistent with the points of claim, and as I understand the plaintiffs' submissions generally, they put a case that the objective facts are absolutely inconsistent with the opinion that either the first or second limbs of clause 9.2(i) were satisfied. 166The plaintiffs submitted that the effect of clause 7.1 was that, as at July 2013, the Lender could not form the view that there would be an inability to repay because some 28 months after the date of the first draw down the Lender had to discuss with the Borrower how the advance would be repaid (T 12. 45), and the Lender could not form any view as to the ability of the Borrower to repay the Principal because that obligation did not arise until a moment substantially into the future, which "would depend upon a whole lot of unknowables in relation to what would happen...through the balance of the loan term" (T 13.10). The plaintiffs submitted that the Borrower had no obligations at all in respect of repayment until the end of the loan (T 107.7, 115.40). The plaintiffs submitted that a failure by the Borrower to achieve Budget forecasts could never be a material adverse change (T 106.30, 111.8, 112.15). 167In Pan Foods in the Victorian Court of Appeal and in the High Court this issue did not arise, because both courts were satisfied that the factual situation readily caused, and implicitly justified, the bank forming the requisite opinion. As noted, the issue did not arise in Grupo Hotelero. In Vision Telecommunications Pidgeon AUJ was concerned with a term of a loan agreement whereby it was an event of default "if any event or circumstance occurs or arises which in the opinion of the Bank causes a material adverse change in the financial condition of you or any guarantor such as is likely to prejudice (in the opinion of the bank) your ability or the ability of any or either of you or of any guarantor to meet your or their obligations under your Loan or any security therefor." 168There are a number of potentially significant differences between the wording of this term and clause 9.2(i) in the present case. In each the existence of the event of default depends upon the lender forming an opinion. In Vision Telecommunications the opinion had to be as to the actual existence of the material adverse change. In the present case the opinion may be as to whether the situation gives the Lender grounds to believe that a material and adverse change has occurred. The former basis for sustaining the opinion may more arguably support a requirement that the subject matter of the opinion objectively exists, than the latter in which the subject matter of the opinion is the belief that grounds to believe exist that may support the existence of the material adverse change. In Vision Telecommunications the relevant change was in the financial condition of the borrower or any guarantor. In the present case the opinion may concern not only the "financial condition" of the Borrower, but also the "business" of the Borrower. Finally, in Vision Telecommunications it was necessary that the material adverse change in the financial condition be likely to prejudice the borrower's ability to meet its obligations. In the present case the issue of the ability of the Borrower to perform its obligations arises under the second limb in general terms, without being tied to any particular type of change, such as in its business or financial condition, which is the subject of the first limb. As a matter of language the wording of the first and second limbs of clause 9.2(i) may be capable of operating more widely than was the case for the term of the loan agreement under consideration in Vision Telecommunications. 169Pidgeon AUJ held, in relation to the material change in the financial condition of the borrower that was found to exist, that it was then necessary to decide whether the change was adverse. His Honour held at [80] that there was a factual basis for arguing that the change in that case "was not an adverse one and was indeed a change for the better". His honour held at [81]: "However, the terms of the default clause do not provide for an objective judgment as to whether there is the adverse change but state that the condition of default is met if "in the opinion of the bank" the circumstances cause a material adverse change and "in the opinion of the bank" the adverse change is a change in the financial condition and is likely to prejudice the ability to meet the loan..." 170At [83] his Honour found that the opinion was held and was "an opinion honestly formed". The plaintiff in the case had pleaded that an event of default would only arise if the defendant formed the requisite opinion on reasonable grounds. His Honour found as a fact that the opinion in the case before him was based on reasonable grounds, so it was not necessary for him to decide whether such a requirement is to be implied in the relevant term. 171For reasons that I will consider below, it is my finding in this case that there was a reasonable basis for all of the opinions formed by the Lender to be formed. Indeed, were it necessary for me to so find, I would find on the balance of probabilities that in fact the opinions formed were correct. I am therefore in the same position as Pidgeon AUJ, and do not need to decide whether there is any implication in clause 9.2(i) that the opinion be based on facts which objectively prove and support the particular limb being relied upon. 172However, lest I be wrong in my factual findings concerning the reasonableness of the opinions formed by the Lender in this case, I should indicate what my finding is concerning the proper construction of the term in relation to the need for there to be an objective factual basis for the opinion that is formed. 173I start by noting the terms of clause 1.5 of the Loan Agreement, which I have set out above. Terms of this nature should not be treated as mere boilerplate. The formation of an opinion within the meaning of clause 9.2(i) is a discretion to determine something under clause 1.5. The clause provides that the determination will be in the Lender's sole and absolute discretion and will be conclusive and binding, except in the case of obvious error. It must be recognised that there is some scope for argument as to whether this provision meshes neatly with the formation of the opinion dealt with in clause 9.2(i). Clause 1.5 would not preserve an opinion that was not honestly held. It may preserve the formation of an opinion that no reasonable person would form, provided there was no obvious error. As I have noted, the Lender in this case did not specifically rely upon clause 1.5. It accepted that an opinion would not be valid if it could not be formed by any reasonable person, and did not rely upon any argument that there was no obvious error in the formation of the opinion. In these circumstances it would be wrong of me to place any significant weight on the presence of clause 1.5 in the Loan Agreement in determining the proper construction of clause 9.2(i). I have not reached any conclusion taking into account clause 1.5 that I would not have reached entirely in the absence of the existence of that provision. However, the term does in my view provide some support for a conclusion that, contrary to the plaintiffs' submissions, the opinion required by clause 9.2(i) is not required to be supported by facts that objectively prove the validity of the opinion. 174A number of features of the wording of clause 9.2(i) cause me to conclude that, if there is any requirement that there be a reasonable basis for the formation of the opinion, it is not so extreme as to require that the opinion be objectively valid based upon the facts. 175First, the relevant opinion is not that there has been a material and adverse change in any matter. It is an opinion that there are grounds to believe that a material and adverse change has occurred. An opinion that there are grounds to believe in the existence of a circumstance is not the same as an opinion that the circumstance exists. The former in relatively explicit terms suggests that what is necessary is that there be an opinion that a basis exists for believing in the circumstance, which falls short of an enquiry that leads to the conclusion that the basis actually justifies or compels the existence of the circumstance. 176This construction of the provision is commercially sensible in a context where the Lender may be obliged by circumstances to act expeditiously on the basis of information which is not complete. In the present case the Lender may have had full access to the financial and other records of the Borrower, because, as a party to the joint venture, it was entitled to that information. The Lender may also have had sufficient time to carry out satisfactory investigations. However, occasions could arise where the Lender is required to consider the operation of clause 9.2(i) when it has insufficient information or time to investigate and consider the matter fully. It is proper to construe the term having regard to the consideration that a requirement that the formation of the opinion be comprehensively justifiable and valid on the basis of the objective facts may stultify the effectiveness of the provision completely. 177Secondly, the subject matter of the relevant opinions is not conducive to any conclusion that the opinions will be invalid if they are not objectively justifiable on the facts. The first limb calls for an opinion concerning not only the business or financial condition of the Borrower, but also as to whether that condition has changed in a material and adverse way. In the general case it will be an extremely difficult matter to describe fully what the business or financial condition of a particular borrower is. The very concepts are nebulous. There is substantial room for legitimate differences of opinion and argument. Both business and financial condition are fluid and dynamic. Their examination depends upon the availability and reliability of financial information in the context of the particular market in which the Borrower operates. 178The second limb calls for the formation of an opinion concerning the ability of the Borrower to perform its obligations. That involves a prediction as to the financial capacity of the Borrower in future circumstances, which realistically may not in fact be predictable, and may require the exercise of judgment in circumstances that are inherently contentious. 179The Lender does not rely upon the third limb in this case. That limb is satisfied if " a situation occurs which in the opinion of the Lender gives it grounds to believe that... any other Event of Default is likely to occur". The formation of that opinion requires the Lender to anticipate events and to form an opinion as to whether those events, if they occur, will give rise to a breach of the Loan Agreement. That process is inherently speculative. It is difficult to see how the third limb could ever apply if the opinion that it was satisfied had to be objectively true on the existing facts. 180It must be remembered that the plaintiffs' argument in POC par 3(c) is that the facts must objectively prove that the opinion is valid, and is not an argument that the opinion must be reasonably based. 181There is, with respect, an essential unreality about this submission in so far as it is based upon the premise that a particular opinion can ever be proved objectively to be true on the basis of the facts. An opinion is inherently subjective. There may be many cases where the facts are such that a substantial proportion of persons called upon to form a particular opinion will form the same opinion on the basis of the same facts, but even where this happens, other than in exceptional cases, this result is not likely to come about in a commercial context by the application of a single, clear logical process to universally accepted facts. 182There are strong grounds for concluding that, if the plaintiffs' argument were accepted, the reality would be that the validity of the Lender's reliance upon an event of default such as that in clause 9.2(i) would ultimately involve the court substituting its own opinion for that of the Lender, no matter how honestly and conscientiously the Lender formed its own opinion. 183The preferable construction in this regard to give to clause 9.2(i) is that for which the Lender contends; that is, that if the Lender forms the opinion honestly and not capriciously, it will be effective unless no reasonable person in the position of the Lender could form that opinion. Once it is accepted that the opinion must be honestly held, it is but a small step to accept that an opinion is not effective if no reasonable person in the position of the Lender could form that opinion. That step is justified by the consideration, which is accepted by the law in various contexts, that it is not acceptable for a person to claim that an opinion is honestly held if no other persons acting reasonably would claim to honestly hold that opinion.

Ability of Borrower to perform obligations 184The next contentious issue raised by the points of claim is the plaintiffs' argument that, on the proper construction of clause 9.2(i), the first limb requires that the relevant change must materially and adversely affect the Borrower's ability to perform its obligations. 185Plainly, the second limb only permits a notice of default if the Lender forms an opinion that the ability of the Borrower to perform its obligations under the Loan Agreement has been or will be materially and adversely affected by reason of the situation that has occurred. The plaintiffs' argument requires that the condition upon which the second limb will operate be read into the first limb, even though the parties did not draft the Loan Agreement in a way which expressly included that condition in the manner of operation of the first limb. They submitted that "or" between the first and second limbs should be read conjunctively, not disjunctively. 186The Lender's response was to submit that clause 9.2(i) should simply be construed literally in accordance with its terms. The parties did not agree that changes in the business or financial condition of the Borrower could only be material and adverse if the changes affected the ability of the Borrower to perform its obligations, and, so says the Lender, that is the end of the matter. The Lender submits that the word "or" between the first limb and the second limb has its ordinary meaning, and accordingly it would be wrong for the court to transpose part of the wording of the second limb into the first limb, where that part was not included by the parties. 187In Grupo Hotelero Blair J was concerned not with a material adverse change term in the context of an event of default, but with a term in a loan agreement whereby the borrower automatically represented at the date of each draw down that there had been no material adverse change, and authorised the lender to decline to make a draw down if the representation was false. The particular term was: "There has been no material adverse change in its financial condition (consolidated if applicable) since the date of this Loan Agreement [21 December 2007]." 188As noted above, this term did not require the formation of any opinion. The relevant change was limited to the financial condition of the borrower in that case, whereas clause 9.2(i) in its first limb raises the possibility of material and adverse changes in the "business" as well as the "financial condition" of the Borrower. 189His Lordship found at [357]: "... Unless the adverse change in its financial condition significantly affects the borrower's ability to perform its obligations, and in particular its ability to repay the loan, it is not a material change. I would emphasise the word "significant". Unless the clause is read in this way, a lender may be in a position to suspend lending and/or call a default at a time when the borrower's financial condition does not fully justify it, thereby propelling it towards insolvency. Suitably modified, the same test applies where the obligation is one of guarantee." 190Putting aside the division of clause 9.2(i) into three separate limbs, this reasoning lends some support to the plaintiffs' argument that a material and adverse change to the Borrower's business or financial condition in the first limb can only be material if it adversely affects the Borrower's ability to perform its obligations under the Loan Agreement. 191It should be noted, however, that Blair J placed significant emphasis on the fact that the term under consideration was confined to "financial condition". The borrower argued that the use of that term "does not encompass other matters such as the prospects of a company or external economic or market changes". His Lordship agreed at [348], [349]. This led to Blair J finding at [351] that "an assessment of the financial condition of the company should normally begin with its financial information at the relevant times, and a lender...should show an adverse change over the period in question by reference to that information" (which will usually be capable of being established from interim financial information and/or management accounts). Blair J reasoned at [350]: "In my view, it shows that the parties understood that "financial condition" would be principally assessed by reference to accounts and, in particular, consolidated accounts where applicable". Further at [353]: "Accordingly, a material adverse change in financial conditions should be assessed by reference to those changes in a company's balance sheet position which are relevant to the company's ability to meet such obligations". 192A proper understanding of the significance of the reasoning in Grupo Hotelero to the present case requires, however, that it be noted that Blair J recognised at [349] that the limitation of relevant changes to changes in "financial condition" had a significant bearing on the conclusions that his Lordship reached. He noted, by looking at other terms in a related agreement, that it referred to "a material adverse effect on the business or financial condition "of an obligor, and said: "The inclusion of events which have a material adverse effect on the company's business covers a broader scope than the [relevant adverse material change term] which is limited to the company's financial condition. (Emphasis in original)." Blair J noted at [351] that if general economic and market patterns may be taken into account as proposed by the lender in that case "the enquiry becomes wide ranging and imprecise". 193One conclusion justified by this analysis of the decision in Grupo Hotelero is that the exercise of construing the relevant material and adverse change term s likely to be complicated and case specific, and although guidance may be drawn from one case for the purposes of construing a comparable provision in another case, the utility of that guidance is limited. 194Significantly, clause 9.2(i) contains two limbs, rather than one. The first limb contemplates changes in both the business and the financial condition of the Borrower, so it introduces the relevance of the wider considerations to which Blair J referred. The second limb specifically and separately contemplates changes of any nature that affect the ability of the Borrower to perform its obligations under the Loan Agreement. That restriction is omitted from the first limb. 195One aspect of the judgment in Grupo Hotelero justifies particular attention. In circumstances where his Lordship found little guidance in the authorities, he referred to academic writing in [356] as follows: "There is some academic writing on this point which supports this view [being that changes in financial condition are only material if they are relevant to the company's ability to meet its obligations]. The Encyclopaedia of Banking Law says at F [1862] that, "It is considered that normally an adverse change in financial condition would be material if the change would have caused the bank not to lend at all or to lend on significantly more onerous terms, e.g. as to margin, maturity or security". Zakrewski (ibid at p 350) puts it slightly differently, considering a change to be material that substantially affects the borrower's ability to repay, or, more generally, significantly increases the risks assumed by the lender. In other words, to be material, the adverse change must be material in a substantial way to the borrower's ability to perform the transaction in question." 196As noted above Blair J said at [357] specifically that he agreed with this approach, and that caused his Lordship to conclude that, to be material, the adverse change in financial condition must significantly affect the borrower's ability to perform its obligations, and in particular its ability to repay the loan. 197The academic writing to which Blair J referred in [356] appears to consider that an adverse change in financial condition may be material not only if it significantly affects the borrower's ability to repay the loan, but also if it increases the risks assumed by the lender, or is such that, if known at the time the loan was entered into, would have caused the lender not to make the loan, or to do so on different terms as to such matters as margin, maturity or security. These considerations may in a practical sense all be interrelated, but they are not entirely the same. Assume the existence of a loan from a lender to borrower on particular terms as to interest (or margin), security, and term. A change in the borrower's business or financial condition may adversely affect the borrower's ability to perform its obligations under that loan. A different, and arguably wider, effect might be to undermine the commercial rationale for the lender to lend to the borrower on the existing terms as to interest, security and term, and no doubt other matters. 198Whatever may be the significance of these matters to a consideration of the reasoning in Grupo Hotelero, they have in my view the following relevance to the present case. 199As noted, the second limb provides separately for adverse changes that materially affect the ability of the Borrower to perform its obligations under the Loan Agreement. In principle, as the parties included a separate first limb, they intended the first limb to operate separately, as that is the effect of the logical structure of clause 9.2(i). Not only does the first limb say nothing about the ability of the Borrower to repay the loan, that particular consideration is not the only one recognised in this context by the academic writers, who I accept for the purposes of the logical analysis of clause 9.2(i). It militates against the implied importation of the condition of operation of the second limb into the first limb that there are other considerations that may be material. Those considerations include that adverse changes may have the effect that the Lender would not have made the loan on the terms of the Loan Agreement at all if the changes had been anticipated at the outset, or would only have done so on substantially more onerous terms. 200As the reference to "a material and adverse change in the business or financial condition of the Borrower" is not limited to any identified condition in the first limb, it should be construed as encompassing all material and adverse changes, which should at least extend to changes which undermine the Lender's original decision to lend, or would cause the Lender to proceed upon significantly different terms. 201Put more shortly, changes are not material only where they affect the Borrower's ability to perform the existing Loan Agreement in accordance with its terms, but are also material if they would cause the Lender to wish not to continue to be bound by the existing terms, or to continue on significantly different terms. 202I should finally note that the cardinal requirement is that the court applies the wording of the first limb in accordance with its terms, and the observations expressed in the preceding paragraphs should be recognised as a gloss on that wording. It should not be assumed that the gloss, to the extent that it is valid, will necessarily anticipate all circumstances in which the Lender may validly demonstrate that a change in the Borrower's business or financial condition was material and adverse.

Material and adverse change 203As I understand it, there is no issue between the parties that in principle it is necessary for the Lender, in forming its opinion, to compare changes in circumstances as between two comparator dates: POC [5]. The plaintiffs submit that the first comparator date is either 3 July 2012, being the date the Loan Agreement was entered into, or at the latest, 31 August 2012 when the loan had been fully advanced. I accept that submission, particularly as it does not matter which of those dates is chosen. 204The plaintiffs submit that the second comparator date should be the date when the "situation" occurred, which is suggested as being 24 June 2013 when the first notice of default was issued: POC [6]. I prefer the conclusion that the second date should be 5 August 2013 when the operative notice of default was served. The choice of the second comparator date as between these alternatives is immaterial on the facts. 205The plaintiffs put an argument that on the evidence the Lender could not form the opinion that there were any relevant changes, and thus could not form the opinion that the changes were material and adverse. 206The plaintiffs list in par 7 of their points of claim the matters that they assert prevented the Lender from forming an opinion on the facts that either of the first or second limbs were satisfied. 207First, the plaintiffs assert that on the facts there had been no material and adverse change to the Borrower's business or financial condition, because the Borrower still continued to operate a business in a market that was characterised by volatility of revenue due to the temporary and physical nature of the short-term mining village accommodation market. They say that the Borrower continued to rely upon obtaining occupancy contracts that were always likely to be short term in nature, and not long-term so-called take or pay contracts. 208This argument misstates the expectations that the evidence shows the parties had at the time they entered into their joint venture. It is also too simplistic, and is put at too high a level of abstraction. The parties understood that the actual occupation of rooms by individual occupants would necessarily be short term. However, they had an expectation that the Borrower would continue to be able to enter into take or pay contracts of significant duration with substantial mining and related companies, under which the companies would bind themselves to pay an occupation fee for rooms at the Lancewood Village whether or not those rooms were in fact occupied. Both the Lancewood Village Business Plan and the Budget, and the supporting spreadsheets, are not consistent with the parties having an expectation as at 3 July 2012 that the revenue of the Borrower would be volatile, at least over the mid run term of the Loan Agreement, save for a dip in revenue in December and January due to holidays and the wet season. The cash flows that supported the Budget forecast revenue for each month during the period from 3 July 2012 to 30 June 2014 that fell within the range of $1,078,114 and $1,284,753. 209Secondly, the plaintiffs argue that a failure to meet budget is only a failure to reach an expectation, hope or business intention. Of itself it does not constitute a change in the business or financial condition of the Borrower, and does not constitute an affectation on the Borrower's ability to perform. 210The issue of whether the failure of a business to meet budget expectations is a relevant change for the purposes of clause 9.2(i) is a matter of degree, and depends upon the magnitude of the shortfall and the underlying reasons for its occurrence. 211In the present case the Budget forecast of EBITDA to 30 June 2013 was $6,836,324, and to 30 June 2014 was $7,044,881. Actual operating profit to 30 June 2013, before payment of interest, was $3,079,863, which was less than 50% of the amount forecast. The monthly revenue, which was estimated in the spreadsheets to exceed $1 million every month, exceeded that figure in August and September 2012, and then consistently fell off so that it was less than $500 per month following November 2012. 212The draft profit and loss forecasts for the year to 30 June 2014 estimated an operating loss of ($681,941) and ($342,929) respectively. As I have noted above, as these forecasts were made after the date of the notice of default, the use to which the evidence can be put is limited. Both forecasts estimated that there would be insufficient operating income to pay any of the $2,289,997 interest expense during the year. 213The Lender relies upon the evidence, which I accept, that by the end of 2012 the nature of the market in which the Borrower operated had changed in a highly detrimental manner to the Borrower's financial expectations. By reason of negative market forces the substantial companies that hitherto had entered into valuable take or pay contracts with the Borrower ceased to do so. They became substantially more cost conscious. They ceased booking rooms on a take or pay basis for their contractors, and left it to the contractors to make arrangements as they saw fit with the Borrower. This change fundamentally affected the way the Borrower had to go about its business, and experience showed that the Borrower could not generate the same levels of revenue as it had expected to do. On the evidence there was no reason to suspect that this change in the way the market operated would be reversed during the term of the Loan Agreement. 214Transpac itself decided that it was incapable of satisfying the KPIs in the Administration Management Agreement and voluntarily resigned. The relevant KPI required it to achieve 70% of the forecast EBITDA in the current Budget. 215Initially the Lancewood Village offered accommodation in 384 rooms. In what appears to be about March 2013 the Borrower was operating on the basis of 248 available rooms, with a plan to keep only 140 rooms open in the short term. Initially, in July 2012 all 348 rooms were booked. By July 2013 only 79 rooms were occupied, and in August 2013 the number was 24. The revenue in those months was $899,322, $278,073 and $448,426 respectively. 216Thirdly, the plaintiffs argue that the failure of the Borrower to generate sufficient revenue to pay interest cannot ever constitute a material and adverse change of business or financial condition, or effect the Borrower's ability to perform its obligations, because clause 6.3 of the Loan Agreement provided that unpaid interest would automatically be capitalised. 217I do not accept the logic of this argument. The effect of the capitalisation of interest would be to increase the amount that was repayable at the end of the 30-month period. Intermittent failures by the Borrower to pay the interest may be inconsequential. However, the Monthly Financial Reports show that for every month after November 2012 the operating profit was not sufficient to pay all of the interest. 218This argument must be considered in conjunction with the plaintiffs' fourth argument, which was based upon the effect of clause 7.1 of the Loan Agreement. The plaintiffs say that the failure of the Borrower to generate revenue to pay the whole of the Principal within 30 months cannot ever constitute a material and adverse change, because the provision establishes a process whereby the Lender and Borrower would consult after the 28th month as to how the loan would be repaid. 219This argument ignores the reality which emerges from the financial evidence that by about November 2012 it was apparent as a matter of forecast, and the forecast was consistently reinforced by experience, that not only could the Borrower not generate sufficient operating profit to pay interest, it could not generate an operating profit that enabled it to make any additional repayments of Principal during the 30 month period, and had no expectation of being able to do so thereafter. The only real value in the Lancewood Village was its ability to earn operating profit consistently. If it could not generate enough operating profit to repay the Principal, that result should have diminished its value for the purposes of selling the Lancewood Village at the end of the term, or using the assets of the Lancewood Village as security for new borrowing to refinance the debt owed to the Lender. These matters are inexorably linked to the ability of the Borrower to generate operating profit. 220With 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. 221I find on the basis of these considerations, as well as the other evidence I have summarised above concerning the financial performance of the Borrower, that there was ample evidence to enable the Lender to form an opinion that there were grounds to believe that a material and adverse change in the business or financial condition of the Borrower had occurred by the period June to August 2013. 222That is true also for the Lender's ability to form the opinion over the same period that the ability of the Borrower to perform its obligations under the Loan Agreement had been materially and adversely affected. 223I should finally deal with the argument raised by the plaintiffs in par 10 of their points of claim. That is to the effect that, if in addition to a requirement that the Lender must act honestly, it is not also required that the opinion be supported by facts which objectively demonstrate that the opinion is correct, "the Lender could, by simply asserting that it had formed the "opinion"...effectively convert a term loan with a fixed repayment date into an on demand loan repayable at the discretion and whim of the Lender". 224In Grupo Hotelero at [357] Blair J, in the passage that I have extracted above, expressed the view that the material and adverse change term that he was considering should be construed as requiring that the adverse change be "significant"; otherwise "a lender may be in a position to suspend lending and/or call a default at a time when the borrower's financial condition does not fully justify it..." I accept that in the present case an Event of Default does not arise unless the adverse change is significant. I take his Lordship to mean that the change must have a substantial adverse effect. A change that was insignificant would, as a matter of the ordinary meaning of the word, have no consequence. 225Blair J did not suggest that it was necessary to construe a material and adverse change provision as being inapplicable unless the material and adverse change could objectively be proved on the evidence, in order to avoid any capricious conduct by the lender. His Lordship only suggested that the evidence must support a finding that the adverse change is significant. 226The requirement that the lender act honestly and not capriciously, and not in a manner in which no reasonable lender would act, is likely to provide a substantial level of protection to borrowers. Reliance upon material and adverse change provisions is likely to be a matter of last resort to lenders, given the inherent uncertainty that may exist in many cases as to whether a material and adverse change has occurred, and the fact that the consequences of serving a notice to accelerate repayment of the loan may be no better to the lender than the best of a number of unsatisfactory outcomes. 227At the end of the day, in the present case, the Borrower willingly entered into the Loan Agreement containing clause 9.2(i). The right of the Lender to act on that provision was clearly agreed to depend upon the Lender forming opinions as to whether there were grounds to believe that material and adverse changes have occurred. The parties could have agreed that the Lender could only serve a notice to accelerate repayment if a material and adverse change had occurred. They could have agreed that the Lender could act if it formed a reasonable opinion on the basis of identified evidence that a material and adverse change had occurred. They agreed neither of these matters. 228For the reasons set out above I dismiss the plaintiffs' claim and order the plaintiffs to pay the costs of the defendant on the ordinary basis. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 January 2014