High Court warning to lenders seeking to enforce farm mortgages Lisa Dorman and Alysha Tuziak | Febuary 2012 | Commercial Disputes & Insolvency
Yesterday’s High Court decision in Waller v
Who does this impact?
provides a warning to lenders to take particular care when seeking to enforce farm mortgages.
What action should be taken?
Hargraves Secured Investments Limited 1
Agribusiness lenders, and their advisors, looking to enforce farm mortgages.
Don’t jump the gun
Prior to commencing proceedings to enforce a farm mortgage, lenders must ensure that they mediate the “farm debt” to which it relates to. Lenders cannot rely on the “all monies” provision of the mortgage to capture debts not included in the mediation process.
Background In August 2003, Hargraves Secured Investments Limited (HSI) advanced $450,000 to Ms Waller under a loan agreement (the First Loan Agreement). The advance was secured by an “all monies” first registered mortgage over Ms Waller’s farm. Ms Waller defaulted on the terms of the First Loan Agreement. HSI gave notice under the Farm Debt Mediation Act 1994 (NSW) (the Act). A mediation under the Act took place on 2 June 2005 which resulted in a Deed of Settlement being entered into between the parties on 26 July 2005. Pursuant to the Deed, the parties entered into a further loan agreement (the Second Loan Agreement) for $640,000, of which $17,409.53 was advanced. The remainder paid out the First Loan Agreement and past and future interest due under that agreement. Ms Waller defaulted under the Second Loan Agreement. The parties entered into a further loan Agreement (the Third Loan Agreement). Ms Waller defaulted under the Third Loan Agreement. On 20 October 2006, HSI obtained a section 11 certificate from the NSW Rural Assistance Authority (the Authority) in respect of the mediation that had taken place in June 2005. On 1 November 2007, HSI commenced enforcement proceedings for possession of the farm and a monetary judgment against Ms Waller.
Relevant provisions of the Act
Decision of the High Court
Section 6 of the Act provides that any enforcement action taken by a creditor to whom the Act applies otherwise than in compliance with the Act, is void.
In her appeal, Ms Waller relied on the following arguments:
Section 11 of the Act provides, in relevant part, that the Authority can issue a certificate that the Act does not apply to a farm mortgage, if the farmer is in default under the farm mortgage and if the Authority is satisfied that satisfactory mediation has taken place in respect of the farm debt involved. ‘Enforcement action’ is defined in s4(1) to mean, in relation to a farm mortgage, taking possession of property under the mortgage or any other action to enforce the mortgage, including the giving of any statutory enforcement notice, or the continuation of any action to that end already commenced. ‘Farm debt’ means a debt incurred by a farmer for the purposes of the conduct of a farming operation that is secured wholly or partly by a farm mortgage. ‘Farm mortgage’ includes any interest in, or power over, any farm property securing obligations of the farmer whether as a debtor or guarantor, including any interest in, or power arising from, a hire purchase agreement relating to farm machinery, but does not include: >> any stock mortgage or any crop or wool lien; or >> the interest of the lessor of any farm machinery that is leased.
Judgment at first instance On 12 November 2009, Harrison J of the Supreme Court determined that the section 11 certificate issued at the request of HSI was valid and accordingly, gave judgement for possession and debt in favour of the lender. Ms Waller appealed against the decision of Harrison J. On 11 November 2010, the Court of Appeal (Tobias JA, Sackville AJA and Macfarlan JA dissenting) dismissed Ms Waller’s appeal. Ms Waller appealed to the High Court.
>> the proceedings instituted by HSI concerned a “farm mortgage” which was not the farm mortgage in respect of which the section 11 certificate issued on 20 October 2006; >> the Third Loan Agreement gave rise to a farm debt which was distinct from the debt arising out of the First Loan Agreement (which was the subject of the mediation); >> the debt arising under the Third Loan Agreement was a new and distinct “interest in, or power over” Ms Waller’s farm and therefore a new and distinct “farm mortgage” in favour of HSI;
Don’t jump the gun Lisa Dorman and Alysha Tuziak | February 2012
>> HSI had not complied with the Act because the certificate that had been issued related only to the farm debt created by the First Loan Agreement (and the proceedings constituted enforcement action un relation to the debt created by the Third Loan Agreement). The High Court agreed with the contentions made by Ms Waller. In summary, the High Court fuond: >> A certificate, as provided for in section 8(3) of the Act, is a certificate that the Authority is satisfied that a satisfactory mediation has taken place in respect of the farm debt involved2. >> The reference to a “farm mortgage” is a reference to a farm mortgage under which money is owed by a farmer to a creditor3. >> The definition of “farm mortgage” extends beyond the general law and statutory definitions. It extends to an “interest” or “power” over farm property securing an obligation to repay a “farm debt”. If the interest or power is granted as security, and the debt is extinguished, then it no longer secures any obligations of the farmer as a debtor4. >> The discharge of the First Loan Agreement and the Second Loan Agreement (by entry into the Third Loan Agreement) extinguished Ms Waller’s obligations arising under the mortgage by reason of those agreements5.
Don’t jump the gun Lisa Dorman and Alysha Tuziak | February 2012
The Act, through the broad definition of a “farm mortgage”, treats those distinct interests as in three successive “farm mortgages”6. >> Notwithstanding the mortgage over the property was an “all monies” mortgage, the Third Loan Agreement created a new interest or power over the property . The Third Loan Agreement was not included in the section 11 certificate. As a result, HSI had not obtained a valid certificate prior to the commencement of the enforcement action. The High Court also found that “enforcement action” included not only the proceedings for possession but also any reliance on any rights in the farm mortgage, including commencement of proceedings for debt. As a result, the High Court allowed the appeal with costs.
Implications for lenders The decision is a reminder to lenders to take particular care when enforcing rights under farm mortgages. In summary, even if a section 11 certificate has been obtained in respect of a farm mortgage, a lender must carefully check that the farm debt it relates to has not been discharged in any way prior to the commencement of enforcement action under the mortgage. Lenders cannot rely on the “all monies” provisions of the mortgage to capture debts not included at mediation. If in doubt, the lender should serve fresh notices for mediation concerning the new facility or obtain advice as to whether the section 11 certificate obtained is sufficient.
End notes 1. 2. 3. 4. 5. 6. 7.
 HCA 4 29 February 2012 Paragraph 51, page 18 Paragraph 51, page 18 Paragraph 10, page 4 Paragraph 16, page 7 Paragraph 56, page 20 Paragraph 16, page 7
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