Supreme Court New South Wales

• Medium Neutral Citation: Rural Bank Limited v Merriba Pty Limited & Ors [2012] NSWSC 498
• Hearing dates: 4 May 2012
• Decision date: 04 May 2012
• Jurisdiction: Equity Division - Commercial List
• Before: White J

Decision

Refer to para [37] of judgment

• Catchwords: PRACTICE AND PROCEDURE - application for summary judgment - recovery of outstanding debt - no arguable defence raised by second defendant; PRACTICE AND PROCEDURE - application to strike out various parts of Amended Commercial List Response - pleading of first defendant inadequate; STATUTORY INTERPRETATION - Farm Debt Mediation Act 1994, s11 - application of Act to mortgages - "satisfactory mediation" - not limited to mediation in regards to farm debts alone - validity of certificate not affected by mediation in respect of both farm debts and other debts
• Legislation Cited: Agricultural Tenancies Act 1990; Farm Debt Mediation Act 1994
• Cases Cited: State Government Insurance Office (Qld) v Rees (1979) 144 CLR 549; Trustees Executors and Agency Co Ltd v Reilly [1941] VLR 110; Barnes v Addy (1874) LR 9 Ch App 244; Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89; Waller v Hargraves Secured Investments Ltd [2012] HCA 4; 285 ALR 41
• Category: Interlocutory applications
• Parties: Rural Bank Limited (Plaintiff); Merriba Pty Limited (1st Defendant); Hamish Tristram Alexander Holcombe (2nd Defendant); Nicholas Walter Alexander Holcombe (3rd Defendant)
• Representation: Counsel: J Sexton SC with S B Loughnan (Plaintiff); D K L Raphael (1st & 2nd Defendants); Solicitors: Hennessy & Co (Plaintiff); Cole & Butler (Defendants)
• File Number(s): 2011/377456

Judgment

1 HIS HONOUR: In these proceedings the plaintiff seeks to enforce a mortgage given by the first defendant over its land. The mortgage secures the first defendant's obligations as guarantor of the liabilities of the second and third defendants to the plaintiff. The plaintiff also seeks to recover an outstanding debt said to be owed to it by the second and third defendants. It seeks judgment against the first defendant as guarantor.

2 The present application is for summary judgment against the second defendant, being one of two brothers. The plaintiff also seeks to strike out parts of the Commercial List Response filed for the first and second defendants. The third defendant has not been served, and no order is sought today concerning him.

3 According to the Commercial List Response, the second and third defendants are brothers and together carry on in partnership the business of farmers and graziers on the real estate the subject of the mortgage given by the first defendant to the plaintiff. The second and third defendants own substantially all the shares in the first defendant.

4 On 9 January 2004 the first defendant executed a guarantee and indemnity in respect of the indebtedness of the second and third defendants to the plaintiff. On or about 8 July 2004 the first defendant executed the mortgage.

5 The mortgage secures the mortgagor's obligation to pay the "Secured Money" to the plaintiff. The "Secured Money" includes all moneys which then or in the future were owing by the mortgagor (the first defendant) to the plaintiff, whether those moneys were owing actually or contingently. By the guarantee of 9 June 2004, the first defendant guaranteed the due and punctual payments of all the "Guaranteed Money". The "Guaranteed Money" included all money which, for any reason or at any time, was owing actually or contingently by the second and third defendants to the plaintiff. Clause 7 of the guarantee included an extensive provision, the effect of which was that the liability of the guarantor would not be affected by anything which in law or equity might otherwise affect its liability to the plaintiff, including by the granting to the borrower of any indulgence or consideration, or by reason of any transaction or arrangement taking place between the plaintiff and the borrower.

6 On or about 13 October 2010 the plaintiff issued letters of offer in respect of three facilities to the second and third defendants. The first was for the purpose of assisting them to extend an existing facility with the plaintiff. The facility limit in respect of this facility was $400,000 and such other amount as the plaintiff might approve. The second was for the same purpose, but with a facility limit of $900,000 or such other amount as the plaintiff might approve. The third was for the purpose of the second and third defendants' meeting seasonal or livestock expenses, or such other purposes as the plaintiff might approve.

7 In respect of the third facility it was stated that the facility limit would be increased in stages up to $600,000. The first and second facilities were repayable on 15 April 2011 and the third facility was repayable on demand.

8 In their Amended Commercial List Response the first and second defendants do not dispute the making of the advances. Nor do they put in issue that the time for repayment had passed. There is a certificate (which is prima facie evidence of the amount due) that the second and third defendants were liable to the plaintiff as at 26 March 2012 in the sum of $2,036,799.11, being the sums of $400,000 and $900,000 due under the first and second facilities and $736,799.11 in respect of the third.

9 The liability of the second and third defendants is joint and several.

10 It is convenient to deal first with the claim for summary judgment against the second defendant. That requires consideration not only of the defences pleaded but of matters raised as possible defences during the course of argument.

11 The defences pleaded by the second defendant may be summarised as follows. First, he says that he and his brother are in occupation of the land as tenants of the first defendant under an oral, year-to-year tenancy. It is pleaded that the periodic tenancy is subject to rights afforded to them by s 14 of the Agricultural Tenancies Act 1990. That section deals with the circumstances in which a periodic tenancy can be terminated. However, it is not relevant to the plaintiff's claim for recovery of the debt. It is pleaded that the plaintiff was aware of the circumstances of the second and third defendants' occupation and of the times or circumstances in which that tenancy could be terminated. Again, that is irrelevant, at least to the present claim.

12 It is then pleaded that the second defendant was not authorised to accept the plaintiff's offers dated 13 October 2010 on behalf of the first defendant. This is a matter which I can take it is raised also by the first defendant. Each of the offers of 13 October 2010 was accepted by the second and third defendants on their own behalf and was purportedly accepted by the first defendant. The signature of acceptance for the first defendant includes that of the second defendant. But he is not a director of the first defendant. Comparison of the signatures suggest that it was also signed purportedly for the first defendant by the third defendant, who is also not a director.

13 I will return later in these reasons to the question as to whether this provides an arguable defence for the first defendant. It does not provide an arguable defence for the second defendant in respect to his liability as a principal borrower. He pleads that his and the third defendant's liability as borrower is dependent upon the security granted by the first defendant being good and enforceable. He pleads that his and his brother's liability to repay the borrowing was co-extensive with the first defendant's obligation to repay.

14 Counsel for the second defendant submitted that this arose by way of implication from the terms of the contract for loan. There is nothing in the letters of offer, and I was referred to no such provision, which arguably provides such a defence. It may well be a defence for a surety to argue that the surety's obligations are discharged if other securities taken by the creditor are unenforceable. This will depend upon the terms of the contract between the surety and the creditor. But there is no principle that the principal debtor's obligation would be discharged if security taken by the creditor is unenforceable. Security was provided for the benefit of the creditor, not of the debtor. If the security provided by the first defendant, either pursuant to the guarantee or the mortgage was good and was called on, the second and third defendants, as principal debtors, would be liable to indemnify the first defendant as surety. The second defendant's position is not adversely affected if the contention that the security was unenforceable was made good.

15 The other matter raised as a defence for the second defendant in the course of argument was based on the Farm Debt Mediation Act 1994. It may be taken that the second defendant is a "farmer" within the meaning of that Act. There would be a triable question of fact as to whether the first defendant might also fall within the definition of "farmer". If the first defendant is a farmer within the meaning of the Act, then the mortgage would be a farm mortgage within the definition of "farm mortgage". The mortgage refers an interest in or the power over farm property that secures the obligations of the first defendant as guarantor. There is no question that the land involved in this case is farm property.

16 Section 8 of the Farm Debt Mediation Act relevantly provides:

"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.

...

(3) This section does not apply if a certificate is in force under section 11 in respect of the farm mortgage concerned."

17 A certificate dated 24 November 2011 was issued by the Rural Assistance Authority purportedly pursuant to s 11(1) of the Act. The certificate identified the first defendant as a farmer and it described the facilities in respect of which the certificate was given as being the three facilities having the numbers of the facilities that were the subject of the letters of 13 October 2010. It specified outstanding balances, as at the date of the issue of the notice under s 8, as being $400,000, $900,000 and $594,575.79.

18 During the course of argument an issue arose whether there is a triable issue that by seeking to recover the moneys owed by the second defendant, the plaintiff is taking enforcement action against a farmer "in respect of the farm mortgage". If so, it is said that such action is prohibited by virtue of s 8(1). It is said that s 8(3) does not apply because there is no valid certificate in force under s 11 in respect of the farm mortgage concerned.

19 No moneys are owed by the second defendant to the plaintiff under the farm mortgage. The moneys owed under the mortgage are owed by the first defendant, not the second defendant. Nonetheless, there is a connection between the debt owed by the second defendant and the mortgage. Payment of the debt by the second defendant in whole or in part would obviously affect what enforcement action could be taken under the mortgage against the first defendant. The words "in respect of" have the widest possible meaning of any expression intended to convey some connection or relation between two subject matters to which the words refer (State Government Insurance Office (Qld) v Rees (1979) 144 CLR 549 at 561 citing Trustees Executors and Agency Co Ltd v Reilly [1941] VLR 110 at 111).

20 However, the expression "enforcement action" is itself defined in s 4. In relation to a farm mortgage it means "taking possession of property under the mortgage or any other action to enforce the mortgage". The action of the plaintiff against the second defendant is not an action to enforce the mortgage. It is not "enforcement action" as defined in s 4. I conclude that there is not an arguable defence available to the second defendant under s 8 of the Act. Even if there were, for the reasons below in respect of the defence of the first defendant, there would not be a seriously arguable defence, except in relation to a small part of the debt.

21 For these reasons the plaintiff is entitled to summary judgment against the second defendant.

22 The plaintiff does not seek any substantive order against the first defendant. That is to say, it does not seek any judgment for a monetary sum, nor does it seek, today, an order for possession. Rather, it seeks to strike out various parts of the Amended Commercial List Response of the first defendant. The response in section C commences by the first defendant's repetition of paras (i) to (vii) of section B which identifies issues that the first defendant says may arise. In effect, the matters in section B are themselves pleaded as an answer to the claim. The first such issue was pleaded as follows:

"B. The issues which the first defendant says may arise are:-

(i) No consideration passed to it for giving the guarantee upon which the plaintiff relies. One question will be whether or not that failure of consideration vitiates the guarantee and/or mortgage. The second will be whether or not, if consideration was received, whether that same is adequate to the promise. The third is whether or not, by the actions of the parties an estoppel arose to prevent the first defendant from setting aside the guarantee. The plaintiff was aware that it sought a guarantee from the first defendant and either deliberately 'closed its eyes' to the fact that, in giving the guarantee, the directors of the first defendant breached their fiduciary obligations to the members of the first defendant and/or its creditors because they did not give valuable consideration for the grant of the guarantee and as such the plaintiff is liable as an accessory to the breach of those fiduciary obligations. In particular the first defendant says that the plaintiff is fixed with 'transmitted fiduciary obligations' and is hence an accessory to that fiduciary. This last raises the issue of whether or not the plaintiff, as an accessory to the breaches of fiduciary obligations, is itself liable as a fiduciary. The first defendant will so assert."

23 There is no elaboration of these allegations in section C of the response. The pleading is manifestly inadequate. The first sentence alleges that there was no consideration for the guarantee. As explained in argument, this is intended to allege that there is no consideration sufficient to support a contract of guarantee. The reason for that being what is further alleged in this paragraph, as I understand it, that the first defendant did not receive consideration for its promises. Although there must be consideration for a contract, the consideration from the promisee does not need to move to the promisor. The first defendant does not dispute, and could not dispute, that the plaintiff made advances to or for the benefit of the second and third defendants. Those advances are manifestly sufficient consideration to support a contract of guarantee.

24 The balance of the paragraph, as I understand it, is a plea that the directors of the first defendant breached their obligations to the company by allowing the company to give the guarantee for the benefit of two of the shareholders and to give the mortgage for the benefit of two of the shareholders without receiving adequate reward. The plea is that the plaintiff has knowledge that this was a breach by the directors of their fiduciary duties and that they assisted in the breach and are themselves liable as accessaries. The plea does not assert that the plaintiff knowingly induced or procured breaches of duty by the directors. Nor is it pleaded that the directors have engaged in a dishonest or fraudulent design in which the plaintiff participated with knowledge, so as to make the plaintiff liable as an accessary under the second limb of Barnes v Addy (1874) LR 9 Ch App 244 at 254. These would be necessary allegations to support a plea of accessorial liability. (See Farah Constructions Pty Limited v Say-Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89 at [161]-[163].)

25 The plaintiff did not say that the first defendant should not have leave to replead these allegations, although the allegations have already been repleaded once. I will give that leave, but I emphasise that it is the obligation of the first defendant and its legal representatives to ensure that only real issues are raised for determination. It would be a serious matter to plead either that directors had engaged in a fraudulent or dishonest design, or that the plaintiff procured a breach of duty by the directors.

26 If such matters are to be pleaded, it would be necessary for the first defendant to plead with particularity the facts which are said to give rise to the breach of fiduciary duty and the facts by reason of which it might be said that the directors were engaged in a dishonest and fraudulent design or the facts, by reason of which it might be pleaded, that the plaintiff procured the alleged breaches. The first defendant should not expect that it will be allowed a further opportunity to replead those matters beyond the leave that I will give today.

27 The next matters pleaded by the first defendant assert the invalidity of the certificate under s 11 of the Farm Debt Mediation Act. As it was explained in oral argument, the first defendant asserts two matters. First, it is said that one of the three debts identified in the certificate was not a "farm debt" within the meaning of the Act. In particular, it is said that the debt of $900,000 was not a debt incurred by a farmer for the purposes of the conduct of a farming operation, but was incurred in order to discharge a previous borrowing secured over the land. I assume that it is arguable that a debt for that purpose might not be a farm debt within the meaning of the Act. It is then said that the certificate is invalid because it encompasses not only two farm debts, but a debt that is not a farm debt. No authority was cited that supports that proposition. In particular, there is nothing in Waller v Hargraves Secured Investments Ltd [2012] HCA 4; 285 ALR 41 that supports it.

28 In that case Heydon J said (at [51]) that:

"[51] ... The reference to a 'farm mortgage' is a reference to a farm mortgage under which money is owed by a farmer to a creditor - that is, a particular farm debt in respect of which the creditor intends to take enforcement action against the farmer. And the reference in s 8(3) 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' - that is, again, the particular farm debt in respect of which the creditor intends to take enforcement action against the farmer. A s 11 certificate is 'in respect of the farm mortgage concerned', but only because the 'farm mortgage concerned' secures a particular 'farm debt' and the authority is satisfied that 'satisfactory mediation has taken place in respect of the farm debt involved': s 11(1)(c)(i).

[52] ... The issue of the certificate does not depend on the authority being satisfied that satisfactory mediation has taken place in respect of any aspect of the farm mortgage at large. Thus the dispute about a farm debt - 'the farm debt involved' - which was satisfactorily mediated under s 11(1)(c)(i) must be the same dispute as that which triggered the creditor's desire to take the enforcement action referred to in s 8(1)."

29 Thus in Waller v Hargraves Secured Investments Ltd it was held that a creditor was precluded from taking enforcement action where following mediation, a settlement agreement was reached by which the existing farm debt, which was the subject of the mediation and certificate under the Act, was discharged and a new debt created. The creditor failed because there had been no mediation and certificate in respect of the new debt.

30 Nothing in that reasoning indicates that a mediation under s 11 can only be engaged in by reference to the farm debt involved. Section 11(1)(c)(i) requires the authority to be satisfied that "satisfactory mediation has taken place in respect of the farm debt involved", not that satisfactory mediation has taken place in respect of, and only in respect of, the farm debt involved. Provided there has been a mediation in respect of the farm debt involved, there is nothing in the language of the Act and no reason of principle or policy why the mediation could not extend to other debts. It is not arguable that the certificate is invalid because it is said to refer to what is claimed to be a non-farm debt as well as to farm debts.

31 The second ground upon which the validity of the certificate was challenged is that it is claimed that debts which are now sued for include debts which are farm debts, but which were not included in the certificate. I accept that if that is so, it is at least arguable that the plaintiff is not entitled to take enforcement action in respect of such debts. Indeed, prima facie, it seems to me that that would be the consequence of the decision in Waller v Hargraves Secured Investments Ltd.

32 However, it is not at all clear from the pleading, nor is it clear from counsel's submission, what are the farm debts which it is said the plaintiff is suing for which are not included in the certificate. The debt of $900,000 and the debt of $400,000 in respect of the two particular numbered accounts are referred to in the certificate. It seems that it could only be part of the debt of $736,799.11 that could properly be the subject of this submission. The certificate states that the balance outstanding in respect of that facility as at the date of the issue of the s 8 notice was $594,575.79. In respect of so much of the debt, it does not seem to me to be arguable that the certificate is invalid. But it does appear that the debt totalling $736,799.11 includes not only the sum of $594,575.79 and interest or charges in respect thereof, but some further amounts that may have arisen as a result of further advances.

33 I think it is open to the first defendant to argue that enforcement action cannot be taken against it in respect of such further debts on the basis of the existing certificate. As presently pleaded, the first defendant has not identified with particularity what it says are the debts which the plaintiff is seeking to enforce which were not the subject of mediation or the certificate under s 11. The first defendant is required to plead those matters with specificity, but it should have the opportunity to do so.

34 Next, the first defendant pleads that it is not bound by the terms of the agreements arising from the offers of 13 October 2010 because the purported acceptances of those offers are signed by persons who are not authorised by it to act on its behalf. It is not disputed that this question of fact raises a triable question. Nonetheless, this issue would go nowhere if the first defendant would, in any event, be bound by its guarantee and mortgage, whether or not it consented to the terms of the offers of 13 October 2010. The first defendant pleads that there was no agreement between it and the plaintiff that the mortgage would constitute security for future advances. It does not plead any facts that might give rise to the asserted collateral contract and there would be obvious difficulties in so asserting. As I said earlier in these reasons, by the mortgage the first defendant "mortgages to the Bank the mortgaged property to secure to the Bank the due and punctual payment of the secured money and the due and punctual performance of each of the mortgagor's other obligations in this mortgage and in any other relevant document". As I have said, "Secured Money" includes any money which in the future is owing by the mortgagor to the plaintiff.

35 The guarantee is not expressed to be a guarantee of a particular advance. It is expressed as a guarantee of all money which is owing by the borrower to the bank, or for which there was a prospect it might become owing, whether actually or contingently, by the borrower to the bank.

36 However, I did not understand the submissions for the plaintiff to go so far as to say that I should strike out these pleadings on the basis that there would not be a triable question as to the scope of the guarantee, and hence the mortgage, as to the first defendant's liability, if the first defendant was not a party to the agreements of 13 October 2010. Accordingly, whilst it seems to me highly doubtful that these allegations, if made good, would ultimately go anywhere, I do not think I ought to strike out those relevant paragraphs. I think the paragraphs in question in B(v), (vi) and (vii) do adequately raise the issue. I would not strike out those paragraphs.

37 For these reasons and subject to hearing counsel as to the precise form of the orders that should be made, I propose the following:

1. Give judgment for the plaintiff against the 2nd defendant in the sum of $2,036,799.11.

2. Order that paras B(i), (ii), (iii) and (iv), C(i), (iii), (iv) and D(iii) of the Amended Commercial List Response be struck out with liberty to the first defendant to replead the matters the subject of the existing paragraph B(i) but in accordance with these reasons and to replead (ii), (iii) and (iv) and C(iii) and (iv) in respect of its contentions that part of the debt sought to be enforced against the first defendant are farm debts which were not the subject of the certificate given under s 11 of the Farm Debt Mediation Act.

3. Order that execution of the judgment be stayed for 21 days or further order.

4. Order that the second defendant pay the plaintiff's costs of the proceedings against him.

5. Order that the first defendant pay the balance of the costs of the plaintiff's Notice of Motion filed on 30 March 2012, including the costs reserved by Sackar J on 20 April 2012.

6. Order that any Further Amended Commercial List Response be filed and served by 25 May 2012.

7. Stand over to 1 June 2012 before the Commercial List Judge.

Decision last updated: 15 May 2012