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Material Adverse Change Provisions in Finance
Agreements – Lessons for Lenders from Recent Cases

Material Adverse Change (MAC) clauses are used in most financing agreements. Their purpose is to enable a lender to call a default (and therefore to demand early repayment of a loan) if there is an unforeseen adverse change in a borrower’s
position or circumstances.

Although MAC clauses are usually heavily negotiated by lenders and borrowers,
they are not often relied upon by lenders as it can be very difficult to establish
definitively that a MAC event has occurred and until recently, there have been
few English cases on their use. In this article, we highlight the key points
decided in the 2013 case of Grupo Hotelero Urvasco S.A. v Carey Value Added
S.L. and Another (Grupo) which lenders should consider in deciding whether
to invoke a MAC clause.

A lender should proceed carefully before invoking a MAC clause as, if it does
so incorrectly, it could be sued by the borrower for breach of contract and be
liable in damages for any losses incurred by the borrower.
The High Court in Grupo considered a repeating representation in a loan
agreement that “there has been no material adverse change in [the] financial
condition [of the obligors]..... since the date of the Loan Agreement”. The
dispute in the case arose from a general worsening in the obligors’ financial
position, rather than from any particular event. The key principles decided by
the Court in the case are:

• The burden of proof is on the lender to show that a MAC event has occurred;

• A lender cannot seek to rely on a MAC clause to call a default based on
circumstances it was aware of when it entered into the finance agreement
– e.g. if it knew that the borrower was in financial difficulties at this stage;

• A borrower’s “financial condition” will be determined largely by reference

to its financial information for the relevant period and “financial condition”
will not usually cover a borrower’s prospects or wider economic/market
changes. However an assessment of a borrower’s “financial condition” can
extend beyond its financial information if there is other compelling evidence
(such as its failure to pay other significant debts);

• A change in a borrower’s “financial condition” will only be materially adverse
if it affects the borrower’s ability to comply with its obligations under the
finance agreement (particularly its ability to repay); and

• The change in the borrower’s “financial condition” must not be only

If you have any questions or would like any assistance with any MAC clause
issues, please do not hesitate to contact a member of the Banking & Finance

Story by
Hayley Johnson, Solicitor
Banking and Finance
T: 0114 274 4293
E: hayley.johnson@irwinmitchell.com