Australia: Farm Debt Mediation: Restructure Implications - Waller v Hargraves Secured Investments Ltd
financial services recovery update

The Court of Appeal recently handed down a decision which is relevant to the entitlement of a lender to proceed with enforcement action in respect to a 'farm mortgage'.

Briefly, in NSW a lender cannot enforce a farm mortgage unless the lender has given the farmer an opportunity to participate in mediation pursuant to the Farm Debt Mediation Act.

The facts

In 2004 the lender advanced a loan of $450,000 to the farmer, secured by a mortgage over a farm property.

The farmer defaulted on the loan repayments and, in June 2005, the parties participated in farm debt mediation.  Following the mediation, a section 11 certificate under the Farm Debt Mediation Act was issued by the Rural Assistance Authority.

The section 11 certificate entitled the lender to proceed with the enforcement of the farm mortgage.

The agreement reached at mediation involved the lender advancing a second loan of $640,000 to the farmer.

The farmer was unable to repay the second loan by the end of the facility term.  The lender advanced a third loan of $640,000 to the farmer, extending the term of the facility.

The loan agreements for the second loan and the third loan did not refer to the events of default under the first loan.

Each of the three loans had been secured by the original mortgage, an "all monies" mortgage which secured all debts owing by the farmer to the lender from time to time.

Upon default under the third loan, the lender commenced proceedings against the farmer seeking possession of the farm property.

The dispute

The farmer resisted the lender's claim for possession on the basis that:

1. the section 11 certificate was issued in respect to the first loan and not the debt the subject of the proceedings;
2. on the advance of the second loan the parties treated the first loan as being repaid in full; and
3. the default the lender relied on to support its claim for possession did not exist at the time of the mediation and the issue of the section 11 certificate.

The law

Section 8 of the Farm Debt Mediation Act precludes a lender from taking enforcement action against a farmer until the farmer has been given an opportunity to participate in farm debt mediation.  The section does not apply if a section 11 certificate is in force in relation to the farm mortgage.

Section 11 of the Farm Debt Mediation Act outlines the circumstances in which a section 11 certificate will be issued including, relevantly, where:

1. satisfactory mediation has taken place in relation to the farm mortgage; and
2. the farmer remains in default of the farm mortgage.

Generally, a section 11 certificate remains in force for three years from the date of issue.

The decision

By a majority of 2-1, the Court of Appeal determined that the lender was entitled to possession of the 'farm property' on the basis that:

1. the section 11 certificate refers to the 'farm mortgage', and not the 'farm debt'.  Accordingly a lender is entitled to commence proceedings in relation to the farm mortgage even if the farm debt the subject of the proceedings was not the subject of the mediation;
2. if the legislature had intended that there should be a moratorium on a lender taking steps to enforce a 'farm debt' until that 'farm debt' (as distinct from the 'farm mortgage') had been the subject of mediation it could have drafted section 11 differently;
3. the interpretation of section 11 put forward by the farmer could lead to repeated mediations between farmers and lenders which would be inconsistent with the object of the Act, which is to "...provide for the efficient and equitable resolution of farm disputes"; and
4. it was open to the Court to interpret the second loan as having repaid the first loan in full, however the facts of the case supported the conclusion that the second loan and the third loan were variations of the first loan.

Whilst the Court did not review the issue fully, the majority appeared to conclude that the Rural Assistance Authority could not issue a section 11 certificate unless the debt due at the time the creditor applied for the certificate had been mediated.

Impact for lenders

Where a lender agrees, as a result of farm debt mediation or otherwise, to restructure a facility in default (for example by capitalising interest or extending the term of the facility) the lender should take care to:

1. describe the new facility as a variation; and
2. ensure that it reserves it rights in relation to the farmer's default under the terms of any prior loan agreement or security.

If the lender fails to take these precautions the farmer may be able to contest the issue of a section 11 certificate on the basis that the new debt due at the time of the lender's application has not been mediated.

As a further safeguard, lenders may consider deferring restructuring any facilities until after a section 11 certificate has been issued.

It is open to the legislature to amend the Farm Debt Mediation Act if it considers that each 'farm debt' as well as each 'farm mortgage' should be the subject of mediation prior to any enforcement action by a lender.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.