The Farmer Wants a Mediation: Clarifying when the Farm Debt Mediation Act Applies By Lisa Dorman & Paris George | November 2009 Area of Expertise | Commercial Disputes & Insolvency
Summary The recent Supreme Court of NSW decision of Hargraves Secured Investments v Waller1 provides further clarification that the Farm Debt Mediation Act 1994 (NSW) (FDMA) and mediation procedure prescribed by it is concerned with farm mortgages rather than farm debts.
Who Does This Impact? Secured lenders to farmers and their advisors.
What Action Should Be Taken? Lenders must appreciate when and how the FDMA applies. Lenders with distressed and impaired farm assets need to consider the alternatives in realising those assets rather than simply commencing proceedings for possession. Farmer borrowers must accept that the Act does not bind the lender to mediate every aspect of its dealings with a farmer.
The Facts The defendant (‘W’) owned a farming property known as ‘Merryangledre’. In August 2003, W and Hargraves Secured Investments (HSI) entered into a loan agreement (‘the first loan agreement’). Under the first loan agreement, HSI advanced to W the sum of $450,000. That amount was secured by a registered mortgage over Merryangledre. Importantly, the mortgage contained an ‘all moneys’ clause. Following default by W under the first loan agreement, W and HSI participated in a mediation under the FDMA in June 2005. A second loan agreement was entered into in July 2005 which increased the sum advanced to $640,000. There was subsequent default by W and in August 2006, a third loan agreement was entered into. It required repayment of the loan by 5 September 2009. All three loan agreements were secured by the one mortgage. On 20 October 2006, the NSW Rural Assistance Authority (‘the Authority’), issued a certificate pursuant to s11(1) of the FDMA, stating that the FDMA did not apply to W’s mortgage (being a farm mortgage). The certificate contained a notation in accordance with s11(5) that it remain in force until 2 June 2008. There was again further default and in November 2007, HSI commenced proceedings for possession of Merryangledre and recovery of the unpaid moneys.
TURKSLEGAL
TUR K A L E R T
1
The Farmer Wants a Mediation: Clarifying when the Farm Debt Mediation Act Applies by Lisa Dorman & Paris George
The Farmer’s Defence W sought to resist HSI’s claim on two grounds. The first was that HSI’s proceedings, as an enforcement action in respect of a farm mortgage, were void under the FDMA. This argument was based on the alleged failure by HSI to comply with the FDMA. The second was that all three loan agreements were unjust within the meaning of the Contracts Review Act 1980 (NSW) (CRA). However, at the hearing, this was only pressed in respect of the third loan agreement. The heart of W’s first ground of defence was that the correct interpretation of the FDMA required that mediation had to occur in respect of each farm debt. W argued that each of the loan agreements gave rise to a new farm debt. Based on this, W alleged that HSI’s proceedings were void as mediation had only occurred in respect of the first loan agreement farm debt. W sought to emphasise that it is a farm debt that is mediated under the FDMA and relied on s9 in doing so. W further alleged that HSI had engaged in ‘pure asset lending’ by entering into the third loan agreement in circumstances where HSI knew that W was unable to meet interest payments and was content to rely on its security.2 W said, as a result, that the third loan agreement was an unjust contract.
The Law The relevant provisions of the FDMA are: 3. Object The object of this Act is to provide for the efficient and equitable resolution of farm debt disputes. Mediation is required before a creditor can take possession of property or other enforcement action under a farm mortgage. 6. Enforcement action in contravention of Act void Enforcement action taken by a creditor to whom this Act applies otherwise than in compliance with this Act is void. 8. No enforcement action until notice of availability of mediation given (1) A creditor to whom money under a farm mortgage is owed by a farmer must not take enforcement action against the farmer in respect of the farm mortgage until at least 21 days have elapsed after the creditor has given a notice to the farmer under this section. (2) Notice to the farmer is to be in writing in a form approved by the Authority (informing the farmer of the creditor’s intention to take enforcement action in respect of the farm mortgage and of the availability of mediation under this Act in respect of farm debts). (3) This section does not apply if a certificate is in force under section 11 in respect of the farm mortgage concerned.
TURKSLEGAL
TU R K A L E R T
2
The Farmer Wants a Mediation: Clarifying when the Farm Debt Mediation Act Applies by Lisa Dorman & Paris George
9. Farmer may request mediation (1) A farmer to whom notice has been given under section 8 may, within 21 days after the notice was given, notify the creditor in writing that the farmer requests mediation concerning the farm debt involved. (1A) A farmer who has not been given notice under section 8 but who owes money to a creditor in relation to a farm debt may notify the creditor in writing that the farmer requests mediation concerning the farm debt involved. A farmer may request mediation under this subsection whether or not the farmer is in default. default (2) The Authority may approve a form for the purposes of a notification under this section and a notification given to a creditor in that form is sufficient notification for the purposes of this section. Failure to use the approved form does not in itself invalidate a notification given by a farmer. farmer (3) If a farmer requests mediation but subsequently refuses to mediate, this Act ceases to apply to the farm mortgage concerned. 10. Enforcement action postponed to allow for mediation (1) Once a farmer has given a creditor a notification in accordance with section 9 requesting mediation, the creditor must not take enforcement action in respect of the farm mortgage concerned unless a certificate is in force under section 11 in respect of the farm mortgage. (2) This section does not invalidate any statutory enforcement notice or other process given, served or executed in order to fulfil a condition precedent to the taking of any enforcement action, but operates to prohibit the taking of the action concerned, or the enforcement by a court or tribunal of any such process, except as provided by section 11(6). Section 11 is a lengthy section that enables the NSW Rural Assistance Authority, in certain circumstances, to issue a certificate stating that the FDMA does not apply to a particular farm mortgage. There is a growing body of case law regarding the construction of the FDMA and the issue of what constitutes enforcement in respect of a farm mortgage. In order to appreciate the argument that W raised and the Court’s response to it, it is useful to review one of the leading cases. In the 1997 NSW Court of Appeal decision of Australian Cherry Exports Ltd v Commonwealth Bank of Australia3, the question to be determined was whether the issue of a demand under s459E of the then Corporations Law (Cth.) based on a farm debt and the commencement of winding up proceedings, constituted enforcement action of a farm mortgage. The farm debt was secured by a farm mortgage. The Court of Appeal upheld the decision of the trial judge at first instance, holding that the service of the demand and the commencement of the winding up proceedings arose as an ordinary incident of the creditor/debtor relationship. This was in no way dependant on the existence of the farm mortgage and could not constitute action to enforce a farm mortgage.4
TURKSLEGAL
TU R K A L E R T
3
The Farmer Wants a Mediation: Clarifying when the Farm Debt Mediation Act Applies by Lisa Dorman & Paris George
Priestley JA commented: ..the Act appears quite plainly to be imposing its temporary moratorium on actions to enforce farm mortgages, not farm debts. The distinction is significant. A farm debt is two things, a debt, and a secured debt. It does not cease to be a debt because it is also a secured debt. 5
The Court pointed out that had the purpose of the FDMA been to impose a moratorium on a creditor enforcing a debt, the Act could have simply said so. The limitation of the moratorium imposed by the FDMA was also commented on in another Court of Appeal decision in 1997, Gain v Commonwealth Bank of Australia.6 In Gain, Gleeson CJ commented on the moratorium aspect of the FDMA and said: Built into the legislation are provisions aimed at limiting the time during which one party can delay the enforcement of the other’s rights. This is an obvious problem against which the legislation was intended to guard. It is not the purpose of the legislation to provide an unlimited moratorium on farm debts, or to allow debtors to keep creditors at bay for as long as they wish.7
These decisions have not been overturned.
Reasons for the Decision W’s argument was essentially, a variation on a theme. Case law clearly established the principles that are detailed above. W’s ‘twist’ was to allege that mediation was required on each and any further farm debts secured by the one farm mortgage. Harrison J conclusively found against W on both grounds of her defence and gave judgment for possession and the debt in favour of HSI. His Honour stressed that the Act is concerned primarily with farm mortgages, rather than farm debts and noted that there is no reference in the Act to loan agreements. Harrison J further commented that: The enforcement action that is constrained by the Act is the taking possession of property or other enforcement action under a farm mortgage.
And: Such action is qualitatively different to an action to recover unpaid money.8
There is no restriction on the ability of a lender, under the FDMA, to sue on the loan agreement for recovery of unpaid moneys. Importantly, Harrison J found that a farm mortgage is unaffected in its effect by variations in the amount it secures from time to time. Subsequent loan agreements, secured by the one farm mortgage do not, by themselves, re-activate the mediation obligations under s8 of the Act.
TURKSLEGAL
TU R K A L E R T
4
The Farmer Wants a Mediation: Clarifying when the Farm Debt Mediation Act Applies by Lisa Dorman & Paris George
In respect of the CRA grounds, his Honour found that although the arrangement entered into by W with HSI was probably unwise and inadvisable, that did not make the third loan agreement in anyway unjust. Nor was there any ďŹ nding that W demonstrated an inability to protect her own interests or that W was taken advantage of by HSI. Critically, Harrison J commented that W had set upon a path of not parting with the farm unless it was on terms meeting her approval. The inference open to the Court was that W remained unrealistically hopeful of never having to sell the farm despite clear and pressing indications that this would have to be done. W’s situation leading to the commencement of the proceedings was caused by a failure to recognise and appreciate that W could not afford to keep the farm. It was not due to any unjust aspect of the transactions between W and HSI.
Implications for Secured Lenders Secured lenders to farmers need to be aware that as a matter of litigation strategy, proceedings can be commenced against a farmer in respect of a farm debt only. This can be done without engaging the machinery prescribed by the FDMA in seeking possession of the farm (which would constitute enforcing the farm mortgage). This mirrors the ability of any secured lender9 to sue for recovery of the unpaid money without seeking to recover possession of the security. Lenders need also to be aware that the FDMA is relatively conďŹ ned in its application and should be prepared to assertively meet any complaints by borrowers by pointing out when and why mediation is required. Farmers are keen to allege that the lender failed to comply with the FDMA or insist that mediation is required at every step. Lenders and their advisors need to appreciate that mediation is not the be all and end all in such situations. There are a number of ways that a secured lender can seek to realise a distressed or value impaired farm or agricultural asset. The enforcement of a farm mortgage, by seeking possession of the property, is but one of them. This case serves as a clear reminder that the Act will, in many cases, support the lenders position and not that of the farmer.
TURKSLEGAL
TU R K A L E R T
5
The Farmer Wants a Mediation: Clarifying when the Farm Debt Mediation Act Applies by Lisa Dorman & Paris George
Endnotes 1
Hargraves Secured Investments Limited v Waller [2009] NSWSC 1210
2
Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 and Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 are the leading NSW decisions on ‘pure asset lending’ and unjust contracts. In the context of this case, discussion of these decisions is beyond the scope of this article. 3
(1996) 39 NSWLR 337
4
(1996) 39 NSWLR 337 at 343 per Clarke JA
5
(1996) 39 NSWLR 337 at 340 per Priestley JA
6
(1997) 42 NSWLR 252
7
(1997) 42 NSWLR 252 at 257 per Gleeson CJ
8
[2009] NSWSC 1210 at [26]
9
Subject of course, to the terms of the security and loan documentation
TURKSLEGAL
TU R K A L E R T
6
The Farmer Wants a Mediation: Clarifying when the Farm Debt Mediation Act Applies by Lisa Dorman & Paris George
For more information, please contact: Lisa Dorman Senior Associate T: 02 8257 5734 lisa.dorman@turkslegal.com.au
Paris George Lawyer T: 02 8257 5717 paris.george@turkslegal.com.au
Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099 Insurance & Financial Services | Commercial Disputes | Workers Compensation | Business & Property
www.turkslegal.com.au This Tur kAler t is cur rent at i t s d ate o f p u b l i c at i o n . Wh i l e eve r y c a re h a s b e e n t a k e n i n t h e p re p a rat i o n o f t h i s Tu r k Aler t it do es not constitute legal advice a n d s h o u l d n o t b e re l i e d u p o n fo r t h i s p u r p o s e. Sp e c i f i c l e g a l a dv i ce s h o u l d b e s o u g ht o n p ar ticular matters. Tur ksLegal do es not ac ce p t re s p o n s i b i l i t y fo r a ny e r ro r s i n o r o m i s s i o n s f ro m t h i s Tu r k Al e r t . Th i s Tu r k Al e r t i s co py r i ght and no par t may b e repro duced in a ny fo r m w i t h o u t t h e p e r m i s s i o n o f Tu r k s Le g a l . Fo r a ny e n q u i r i e s, p l e a s e co nt a c t t h e a u t h o r o f this Tur kAler t. Š Tu r k s Le g a l 2 0 09