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Matheson Banking Update - What do courts say about MAC clauses?

AUTHOR(S): Patrick Molloy, William Prentice, Chris Quinn
DATE: 23.07.2013

Although material adverse change clauses feature in most loan agreements, it is rare to have judicial opinion on them. Recently however, two decisions of the English courts have provided interesting analyses on different aspects of these clauses. 

Grupo Hotelero Urvasco (GHU) v Carey Value Added SL (C)


GHU borrowed money from C to fund a property development in London. The parent company and guarantor of GHU entered negotiations to reschedule indebtedness under prior agreements however C refused to make further drawdowns, claiming a default and a breach of the following MAC representation “there has been no material adverse change in the financial condition of GHU (consolidated if applicable) since the date of this Loan Agreement”.

Key issues

The English High Court found that on the facts there was no breach of representation and Blair J made a number of salient points in relation to the interpretation of MACs. 

  • The financial condition of a company is to be assessed by reference to the financial information of the company at the relevant time and not the company’s prospects or external economic or market changes.
  • A change is materially adverse if it significantly affects the borrower’s ability to perform its obligations under the agreement and in particular, its ability to repay the loan in question.
  • A change must not be merely temporary.
  • A lender cannot invoke a MAC on the basis of circumstances of which it was aware at the time it entered the agreement.
  • The burden of proof is on the lender to show that the trigger to the MAC has occurred.

Cukurova Finance International Limited and another v Alfa Telecom Turkey Ltd (British Virgin Islands)


CFI and CH were members of the Cukurova group and CH owned 52.91% of a company called TCH while the remaining shares were held by a company called Sonera. Sonera brought arbitration proceedings against CH claiming that CH was obliged to transfer its TCH shares to Sonera pursuant to an alleged pre-emption agreement. With a view to defeating Sonera's claim, CH transferred its shares in TCH to a BVI registered company called Cukurova Telecom Holdings Limited ("CTH"). Separately, a company called Alfa subsequently acquired 49% of CTH and advanced a loan to CFI, secured on shares in CTH. 

When the arbitrator granted specific performance (ie the transfer of shares in TCH to Sonera), Alfa claimed a MAC event of default under the loan agreement which contained the following MAC clause “any event or circumstance which in the opinion of Alfa has had or is reasonably likely to have a material adverse effect on the financial condition, assets or business of CFI”. CH and CFI appealed against the decision of the Court of Appeal of the Eastern Caribbean Supreme Court, contending (i) that it was wrong to decide that Alfa had established any event of default, but, if they were right, then (ii) that Alfa's acceleration of the loan and/or its appropriation of the charged shares was vitiated by bad faith or improper purpose, and, if that argument fails, (iii) that CH and CFI should be accorded relief from forfeiture.

Key issues

Looking at the MAC clause, the Board of the Privy Council made these observations:

  • Firstly, it noted that “it was (and is) common ground that, in order to satisfy the [MAC clause], an event need not objectively have such an adverse effect: all that is required is that Alfa believes that it has such an effect. It is also common ground that the belief has to be both honest and rational”.
  • Secondly, it accepted Alfa’s argument that “it is true that the award was only for specific performance, but it clearly implied a potential, indeed a virtual certainty, of a very substantial order for damages (between $155m and quite possibly up to $950m) against CH which represented a classic case of a contingent liability, indeed a substantial contingent liability and it was therefore unquestionably reasonably likely to have a material adverse effect on [CH's] financial condition".
  • Thirdly, when analysing whether Alfa had established that it had formed the requisite opinion to satisfy the MAC, “there must be some admissible evidence at the trial to show that the Board of Alfa had formed the opinion described in the [MAC clause]. The clause virtually entitles one contractual party, Alfa, to be judge in its own cause on the issue of whether the clause is satisfied, and, if it is so satisfied, has a potentially drastic effect on the economic position of the other contractual parties, CH and CFI. Accordingly, it is only right that the court has to be convinced by admissible evidence that Alfa did in fact form the requisite opinion, as well as being convinced that that opinion was honest and rational”. The Board was satisfied that Alfa had formed the required opinion on the basis of (i) a copy of board minutes disclosed to the Board which approved the sending of a letter of acceleration of the loan to CFI and the appropriation of the shares in addition to (ii) the letter of acceleration itself.

The Privy Council upheld Alfa’s reliance on the MAC event of default as it was subjective and all that was required was an “honest and rational opinion on the part of the lender” that the MAC had occurred. The Board also held that the remedy of appropriation of the security was not vitiated by bad faith or improper purpose.


The application of MAC clauses will always depend on the facts and parties need to take into account (i) the importance of how MAC clauses are drafted, and (ii) the need to collate evidence as to how a MAC has taken place, with the nature and strength of the evidence dependent on the clause itself. These recent English cases, which are of persuasive but not binding authority for the Irish courts, should help guide parties in the negotiation of such clauses and the potential enforcement of the same.


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