Clayton Utz Insights

25 October 2012

Victoria's new farm debt mediation scheme - how does it work?

By Paul James and William Frost.

Key Points:

There are various issues of which a secured creditor must be aware in seeking to either comply with its obligations or take steps to enforce a mortgage under the Act.

Victoria's new Farm Debt Mediation Act 2011 (Vic) commenced operation on 1 December 2011 and is largely modelled on the equivalent New South Wales legislation, the Farm Debt Mediation Act 1994 (NSW).

The purpose of the Act is to provide for the "efficient and equitable resolution of farm debt disputes" by requiring a creditor to provide a farmer with the opportunity to mediate before they take possession of property or other enforcement action under a farm mortgage. The mediation process is managed by the Small Business Commissioner (SBC).

The basic structure of Victoria's Farm Debt Mediation scheme

A creditor holding any interest in, or power over, any farm property which secures the obligations of the farmer (being an individual or corporation) either as a debtor or guarantor (ie. a "farm mortgage") is required to serve written notice on the farmer giving 21 days' notice of the creditor's intention to take enforcement action pursuant to the mortgage. The Department of Primary Industries' website sets out an overview of the process when the creditor initiates mediation with a farmer under the Farm Debt Mediation scheme.

Enforcement action is defined in the Act as "taking possession of property under the mortgage or any other action to enforce the mortgage". Within the 21 day notice period, the farmer is entitled to notify the creditor in writing that the farmer requests a mediation in relation to the farm debt. A farmer is also entitled to request a mediation at any time, regardless of whether the farmer is in default.

A creditor may, by written notice given to the farmer, agree or refuse to mediate. A creditor is presumed to have refused to mediate if they:

  • fail to take part in mediation in good faith or unreasonably delay entering into or proceeding with mediation;
  • indicate in writing to the Department of Primary Industries or to the farmer that they do not wish to enter into or proceed with mediation.

If the creditor refuses to mediate and the farmer is in default, the farmer can apply to the SBC for a "prohibition certificate" preventing the creditor from taking enforcement action against the farmer for up to six months. Conversely, a creditor is entitled to apply for an "exemption certificate" if the farmer is in default under the farm mortgage; no prohibition certificate is in force against the creditor; and a mediation:

  • has taken place but no settlement was reached;
  • has not taken place due to the farmer's refusal; or
  • has not taken place within three months after service of the initial notice and the creditor has attempted to mediate in good faith.

The exemption certificate allows the creditor to begin enforcement proceedings (and remains in force for varying periods of time depending upon the steps previously taken under the Act). Importantly, parties cannot contract out of their obligations under the Act and all farm mortgages are subject to the Act from 1 December 2011, whether or not they existed before that date.

Farm Debt Mediation legislation before the courts

Currently, the majority of the approximately 40 disputes that have gone to mediation under the Act have been creditor-initiated. At the time of writing, there have been no legal proceedings in Victoria in relation to the Act.

However, on 24 July 2012, the Supreme Court of Victoria delivered judgment in KFT Investments Pty Ltd v Bullard [2012] VSC 307, which considered the application of the NSW Act to enforcement proceedings in respect of two loan agreements and a guarantee (ie. not a mortgage). The Court dismissed the debtors' application for a stay of the proceeding because the creditor:

  • was not making a claim under any "farm mortgage";
  • did not seek possession of the farm property; and
  • was seeking to enforce the loan agreements and guarantee, not a mortgage. The existence of a mortgage and its cross collateral nature was "not relevant".

In addition, the debtors were not "farmers", because the owners of the farm (the creditor and the debtors) had resolved to use a corporate vehicle to operate the farming business, meaning only the company, not the debtors, could have the benefit of the NSW Act.

The recent High Court decision in Waller v Hargraves Secured Investments [2012] HCA 4 provides a valuable lesson for creditors in structuring any agreement reached as a result of farm debt mediation. The creditor, Hargraves, was issued with an exemption certificate (described above) following a mediated settlement of a dispute over a farm debt arising out of the breach of a loan agreement. The parties negotiated a second loan agreement as part of the settlement, and subsequently a third loan agreement when the second was breached. Moneys advanced under each loan agreement were secured by the same "all moneys" mortgage.

The primary question for the Court was whether the exemption certificate issued to Hargraves lifted the bar on enforcing the mortgage for the advances made under the third loan agreement. The Court decided against Hargraves, holding that the successive discharge of the debts under the first and second loan agreements extinguished the creditor's obligations arising under the mortgage. As a result, no enforcement action could be taken under the mortgage by reference to obligations arising under the subsequent agreements because the third loan agreement created a new interest or power over the farm.

Conclusion

In summary, there are various issues of which a secured creditor must be aware in seeking to either comply with its obligations or take steps to enforce a mortgage under the Act. In this regard, please feel free to contact us to discuss this note or the application of the Act to any farm mortgage that your business may have.

For more information, contact...
Email: Paul James, Partner
Tel: +61 3 9286 6927
Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
Paul James
Paul James