Turkalert no false start for lender under farm debt mediation

Lisa Dorman | September 2013 | Banking

The New South Wales Court of Appeal has rejected the proposition that a lender is precluded from obtaining a section 11 certificate under the Farm Debt Mediation Act 1994 (Act), simply because it entered into an agreement at a mediation which deferred time for repayment. The decision reinforces a common position taken by lenders at farm debt mediations.

Mr & Mrs McMahon sought leave to appeal the dismissal of an application by Davies J, seeking to restrain Permanent Custodians from disposing of rural properties owned by them. Permanent Custodians had previously obtained orders for possession of those properties.

By way of background • Mr & Mrs McMahon had defaulted under the loans with Permanent Custodians.

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No false start for lender under Farm Debt Mediation

• The loans were secured by way of mortgages over farms considered “farm mortgages” as defined in the Farm Debt Mediation Act (Act).

• A farm debt mediation took place in June 2011, which resulted in a Heads of Agreement being entered into.

• The Heads of Agreement provided that Permanent Custodians could obtain the issue of a section 11 certificate under the Act. • Mr & Mrs McMahon defaulted on the agreement reached at mediation.

• Permanent Custodians applied for a section 11 certificate which was issued by the Rural Assistance Authority.

• Orders for possession of the properties were obtained by consent in March 2012. By agreement, the orders were not entered until May 2012 (with time being provided to the McMahons to sell sufficient properties to clear the arrears).

• Writs for possession were obtained by Permanent Custodians. Injunctive relief was sought by Mr & Mrs McMahon (including orders to set aside the consent orders previously signed).

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Mr & Mrs McMahon argued the section 11 certificate was void because at the time it had been issued, they were not in default of the Heads of Agreement, and therefore, were not in default of the ”farm mortgage”. It was contended that the Heads of Agreement deferred time for repayment of the loan which had not yet passed.

Davies J rejected the contention that the obligation to repay the debt had been postponed by the Heads of Agreement. He found that all it had done was to give the customers further time to sell or refinance the properties. The Heads of Agreement had assumed the McMahons were, and remained, in default.

Application for leave to appeal Mr & Mrs Mahon appealed the decision. The sole ground raised in the appeal was whether Permanent Custodians was prohibited from obtaining the certificate where there had been no default under the Heads of Agreement. It was argued that a default under a “farm mortgage” included a default under a farm mortgage and debt which was the subject of mediation, or which had been varied in accordance by way of an agreement reached at mediation.

• There was nothing in Heads of Agreement which precluded Permanent Custodians from applying for the section 11 certificate. It was not inconsistent (with the objectives of the Act) to apply for a certificate in advance of a time when enforcement action could be taken under an agreement reached at a mediation4.

Her Honour noted the comments Barrett J (as his Honour then was) in Myross (NSW) Pty Ltd –v- Kahlefeldt Securities Pty Ltd5 in which case his Honour said the purpose of the Act was to require a mortgagee: to hold his hand on enforcement of the farm mortgage until there has been an opportunity for resolution of differences with respect to the mortgage by mediation and either an arrangement acceptable to the mortgagor and mortgagee has been reached, or the possibility of resolution is seen to be exhausted.

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No false start for lender under Farm Debt Mediation Lisa Dorman | September 2013

The decision should give comfort to lenders who commonly include similar provisions in agreements reached at farm debt mediations.

1 [2012] HCA 4

It was conceded by the McMahons that the Heads of Agreement did not bring about a new farm mortgage (which was the case in the High Court decision of Waller –v- Hargraves Secured Investments Ltd1). Instead it was suggested that section 11(1)(a) of the Act required a creditor to hold off applying for a certificate until a default under the Heads of Agreement.

Decision In summary, Ward JA, with whom Meagher JA and Barrett JA agreed, determined: • A “default under a farm mortgage” did not extend to defaults under an agreement reached at farm debt mediation2. The Act clearly provides that a mediation may be “satisfactory” without reaching a final resolution or agreement3.

2 See paragraph 45 3 See paragraph 46 4 See paragraph 49 5 [2003] NSWSC 138 at paragraph [23]

For more information, please contact: Lisa Dorman Partner T: 02 8257 5734 M: 0417 236 786 lisa.dorman@turkslegal.com.au

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