Focus: High Court gives guidance on farm debt mediation legislation
21 March 2012
In brief: A significant High Court judgment has provided clear guidance on the limitations imposed under New South Wales farm debt mediation legislation on lenders enforcing security over farms. Partner Andrew Boxall (view CV) and Lawyer Marian Pond report.
How does it affect you?
- The High Court of Australia has allowed an appeal from the NSW Court of Appeal concerning the Farm Debt Mediation Act 1994 (NSW) (the Act).This decision will have a significant impact for lenders who wish to enforce a farm mortgage or recover a farm debt, as:
- a lender cannot take enforcement action under an 'all moneys' farm mortgage unless a section 11 certificate has been issued for the farm mortgage for the particular farm debt to be recovered; and
- the recovery of a money judgment framed on the basis of the covenants in the mortgage is barred by s8(1) in the absence of a s11 certificate as much as the seeking of possession of the farm.
In August 2003, the appellant farmer, Ms Waller, borrowed $450,000 from the respondent, Hargraves Secured Investments Limited (the lender) under a loan agreement (the first loan agreement) secured by an 'all moneys' registered first mortgage over her farm (the registered mortgage). The registered mortgage, read with the first loan agreement, created a 'farm mortgage' within the meaning of the Act.
In October 2004, the lender gave Ms Waller notice under s8(1) of the Act that she was in default and that the lender intended to take action to enforce the farm mortgage. In response to the 'enforcement action', Ms Waller requested, under s9(1), that the parties take part in a mediation 'concerning the farm debt involved'.
As a result of the mediation, the parties entered into a further loan agreement in July 2005 (the second loan agreement), under which the lender agreed to increase the amount of the loan to $640,000. This new principal sum of $640,000 was repayable in September 2006, along with any interest then outstanding.
In August 2006, after further default by Ms Waller, the parties entered into another loan agreement (the third loan agreement). Under this agreement, the time for repayment of the principal sum of $640,000 was fixed as September 2009.
From October 2006, Ms Waller did not make any interest payments when they were due. As a result, the New South Wales Rural Assistance Authority (the Authority) issued to the lender, in October 2006, a s11 certificate. It was common ground that the certificate was issued on the basis that a satisfactory mediation had taken place.
Following Ms Waller's default under the third loan agreement, the lender brought a successful claim in the Common Law Division of the NSW Supreme Court for possession of the farm and judgment for the principal and interest. By majority of 2-1, the NSW Court of Appeal dismissed Ms Waller's appeal. Ms Waller appealed by special leave to the High Court.
The two main issues on appeal to the High Court were:1
- Whether the certificate issued under s11 in relation to the first loan agreement lifted the bar on the enforceability of the mortgage as security for the advances made under the third loan agreement? In short, the answer is no.
- Whether the bar on the enforceability of the mortgage precluded recovery of a money judgment framed on the basis of the covenants in the mortgage? In short, the answer is yes.
The answer to both of these issues turns upon the particular language of the Act and the statutory purpose. Below are some of the Act's key provisions that the High Court had to consider in reaching its decision on these issues. The key provisions of the Act centre on 'farm debts', not 'farm mortgages'.
Section 8(1) conditions a creditor's ability to take 'enforcement action' for a 'farm mortgage' upon 21 days' prior written notice to the debtor farmer, in response to which the debtor farmer may request mediation under s9. Section 8(1) does not apply if a s11 certificate is in force 'in respect of the farm mortgage concerned'.
Section 11(1) outlines the circumstances in which the Authority can issue a certificate confirming that the Act does not apply. Under s11, the Authority can only issue a certificate if satisfied that the farmer is in default under the farm mortgage, and that satisfactory mediation has taken place 'in respect of the farm debt involved'.
Section 4(1) defines:
- 'creditor' as meaning 'a person to whom a farm debt is for the time being owed by a farmer'. Further, s5(1) provides that the Act 'applies in respect of creditors only in so far as they are creditors under a farm debt'.
- 'farm debt' as meaning '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' as including 'any interest in, or power over, any farm property securing obligations of the farmer as a debtor or guarantor'. The High Court noted that 'obligations of [a] farmer...as a debtor' are 'farm debts'.2 Thus, a 'creditor' to whom the Act applies will always be owed a 'farm debt' secured by a 'farm mortgage'.
- 'enforcement action', in relation to a farm mortgage, as meaning 'taking possession of property under the mortgage or any other action to enforce the mortgage'.
Issue 1: Whether the certificate issued under s11 lifted the bar on the enforceability of the mortgage as security for the advances made under the third loan agreement?
Ms Waller's primary argument rested on the proposition that the proceedings instituted against her by the lender concerned a 'farm mortgage' within the meaning of the Act that was not the farm mortgage for which the s11 certificate had been issued.3 Ms Waller's argument was essentially that the third loan agreement gave rise to a 'farm debt' distinct from that arising under the first loan agreement that had been the subject of mediation, and that, as a result, the farm debt arising under the third loan agreement gave rise to a new and distinct 'interest in, or power over' the farm, and thereby a new and distinct 'farm mortgage' in favour of the lender. The Court of Appeal, by a majority, dismissed Ms Waller's argument, and she appealed to the High Court.
In contrast, the High Court unanimously held that the third loan agreement, read with the registered mortgage, had created a new 'farm mortgage'. The subject of the mediation, and the issuing of the s11 certificate in October 2006, was in relation to the 'farm debt' owed under the first loan agreement rather than the third loan agreement. Therefore, at the time the lender commenced proceedings on 1 November 2007, there was no s11 certificate in force for the farm mortgage. The High Court held that the lender was barred from taking any enforcement action against Ms Waller other than in accordance with the Act. Under s4(1), 'enforcement action' includes both the claim for possession of the farm and the claim for a money judgement.
Issue 2: Whether the bar on the enforceability of the mortgage precluded recovery of a money judgment framed on the basis of the covenants in the mortgage?
The lender pleaded that, even if ss 6 and 8(1) barred its claim to possession, the dissenting reasons for the judgment of Justice Macfarlan in the Court of Appeal had been correct in holding that its claim to a money judgment was not barred.4 The lender, however, argued that its claim for the debt (that being, the principal sum of $640,000 and the interest owing) does not constitute an 'enforcement action' because it does not involve the enforcement of security over the farm property.
The High Court rejected the lender's submission on the money judgment. The court viewed the definition of 'enforcement action' (as defined in s4(1)) as being wide enough to extend beyond enforcement of the security by taking possession to include reliance on any of the rights in the farm mortgage. Therefore, since the claim to the order for possession was solely based on the breach of the money obligations arising under the registered first mortgage and the third loan agreement, it was inextricably interlinked with the claim for a money judgment.5 The High Court viewed the lender's conduct of commencing proceedings as action to enforce the mortgage, and hence an 'enforcement action'. Therefore, the lender's attempt to obtain a money judgment was an action barred by s8(1) as much as the seeking of possession of the farm.
The result of the High Court's decision is to clarify the obligations imposed on lenders seeking to recover farm debts, whether by way of money judgment or security enforcement. The decision underlines the importance to lenders of obtaining a s11 certificate in relation to each farm loan that it seeks to recover.
- Waller v Hargraves Secured Investments Limited  HCA 4, para 4 (Chief Justice French and Justices Crennan and Kiefel).
- Waller v Hargraves Secured Investments Limited  HCA 4, para 48 (Justice Heydon).
- Waller v Hargraves Secured Investments Limited  HCA 4, para 7 (Chief Justice French and Justices Crennan and Kiefel).
- Waller v Hargraves Secured Investments Limited  HCA 4, para 64 (Justice Heydon).
- Waller v Hargraves Secured Investments Limited  HCA 4, para 66 (Justice Heydon).
- Andrew BoxallConsultant,
Ph: +61 2 9230 4534
- Alf PappalardoPartner,
Ph: +61 7 3334 3269
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