Australia: Lenders - reserve your rights: Waller v Hargraves Secured Investments Ltd

Last Updated: 7 March 2012
Article by Amber Warren

The High Court has handed down its decision on an appeal by a farmer from the decision of the NSW Supreme Court, Court of Appeal concerning the operation of the Farm Debt Mediation Act.

The High Court's decision deals with the entitlement of a lender to proceed with enforcement action in respect to a 'farm mortgage' once farm debt mediation has taken place.

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 NSW Rural Assistance Authority.

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 extending the facility term.

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 was secured by 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 farmer contested the lender's entitlement to commence the proceedings because the third loan had not been the subject of mediation.

The Act

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.

Court of Appeal Decision

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 referred to the 'farm mortgage', and not the 'farm debt';
  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; and
  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".

The farmer appealed to the High Court.

Issues on Appeal

The issues for determination by the High Court were as follows:

  1. did the section 11 certificate entitle the lender to enforce its mortgage as security for the debt due on the third loan, despite the fact that third loan was not in existence at the time of the mediation;
  2. did the extinguishment of the debts under the first and second loan agreements, and the creation of the debt arising under the third loan agreement, give rise to a new "farm mortgage"; and
  3. if the lender was not entitled to enforce the 'farm mortgage', was it also precluded from recovering a monetary judgment.

High Court Decision

Having reviewed the relevant sections of the Act, the High Court concluded that:

  1. the key provisions of the Act centre on the 'farm debt', not the 'farm mortgage';
  2. there is a close connection between a 'farm mortgage' and any 'farm debt' which it secures - it is not possible to identify what a relevant 'farm mortgage' is without identifying the particular 'farm debt' which is secured by it;
  3. Mediation is required to take place in relation to a 'farm debt' before the 'farm mortgage' can be enforced; and
  4. the reference in section 8(3) of the Act to a "certificate" is a reference, relevantly, to a certificate that the Authority is satisfied that satisfactory mediation has taken place in respect of "the farm debt involved".

As a consequence of these conclusions, the High Court determined that the lender was not entitled to commence the proceedings to enforce the farm mortgage because:

  1. Each of the loan agreements were comprehensive and exhaustive in their terms and established a new 'farm debt', with differing:
    -principal amounts to be repaid;
    -rates of interest payable; and
    -facility expiry dates.
  2. Each of the loan agreements, when read with the 'farm mortgage', created distinct interests in, and powers over, the farm property owned by the farmer;
  3. had the extension of the further loans involved only adjustments to the farm debt - such as extending the term to pay, reducing the principal or capitalising interest - the initial farm debt would have remained in place;
  4. the lender's claim for money judgment constituted "enforcement action" under the Act as the claim relied on enforcing the covenants in the mortgage.

Whilst the Court did not expressly deal with the issue, it is arguable that a lender remains entitled sue for a judgment for debt if it does not need to rely on the covenants in the mortgage to do so.

Impact for Lenders

Where a lender agrees, as a result of farm debt mediation, to restructure a facility in default (for example by capitalising interest or extending the term of the facility) it is crucial that the lender:

  1. includes every existing 'farm debt' in the section 8 notice to ensure that each 'farm debt' has been the subject of mediation. A lender may need to rely on non-monetary or cross-defaults where there is no monetary default;
  2. any further advance or extension of an existing facility must be described as a variation; and
  3. the lender must ensure that it reserves it rights in relation to the farmer's default under the terms of any prior loan agreement or the 'farm mortgage'.

If a lender fails to take these precautions, and advances further funds to the farmer, the farmer will be able to contest enforcement action taken after the issue of a section 11 certificate if the new 'farm debt' created as a consequence of a settlement or restructure has not been mediated.

As an alternative to a variation or restructure, a lender may consider documenting any further advance of funds as an additional facility, secured by a second registered mortgage.

The lender could then rely on the original farm debt and first mortgage to recover possession of the farm property. On settlement of the sale of the farm property, the lender will be entitled to recover all amounts owing to it under both of the mortgages.


Amber Warren

P +61 2 9931 4897


This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.

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