Constantinidis v Equititrust [2010] NSWSC 299

The lender appointed a receiver to the corporate borrowers for defaults under the mortgages. The borrowers and Mr Achilles Constantinidis, the sole director of each, responded by seeking a declaration under s 418A(2) of the Corporations Act 2001 that the appointments were not valid.

It is not disputed that defaults which gave the lender the power to make an out-of-court appointment of a receiver had occurred. The appointments were challenged on the grounds that they were in breach of s 8(1) of the Farm Debt Mediation Act 1994:

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.

In interpreting the section Justice Barrett found it is necessary to look not only to the present but also to the past.

A person who is today a farmer and whose farm property stands today as security for a debt will be protected if the purpose of the original incurring of the debt was a farming purpose (and whether or not the person was then a farmer), but not if the original incurring was for some non-farming purpose; while, if the original incurring was for a relevant farming purpose but either the person by whom the debt is owed is not today a farmer or the security property is not today a farming property, the protection will not be attracted.

In considering whether the purpose of the original incurring of the debt was a farming purpose His Honour noted that the evidence indicated the loan purpose was for property acquisition. He then held:

Since the indebtedness was obviously incurred in order to buy the land, I should regard the purposes for which the land was acquired as corresponding with the purposes for which the indebtedness was incurred.

In determining what the purpose of the acquisition of the land was His Honour applied the following test:

When a person buys property, as a commercial money-making transaction and not for his personal use or enjoyment, the purpose he has in view is the use to which he intends to put the property to achieve this end. He may intend either to sell it at a profit, or to keep it as a revenue-producing asset. It is the main or dominant purpose of the acquisition that is significant. If a property, say a house or farm, were bought for the purpose of resale at a profit it would be immaterial that the purchaser also had in mind to take the rents and profits in the meantime or pending selling.

The borrowers claimed, in the case of a Dairy Farm, the debt was incurred in order to conduct a turf farming operation. The judge disregarded this commenting:

There is no objective evidence of the existence of any such purpose at the time of the acquisition. Mere assertion, as at today, by the natural person who is and was the sole brain of the company as to what the company’s purpose was at the time of acquisition (and there are various such statements in Mr Constantinidis’s affidavits) can be of no real assistance unless borne out by evidence of things said and done at the earlier time. In any event, Mr Constantinidis said that he had a plan to re-align boundaries of lots and to build polo stables, agistment yards and a polo field, which does not fit within the statutory definition of “farming operation”.

Instead the court found compelling the security documents which recited:

The borrower proposes to realign boundaries and may resubdivide but intends to resell the land at a profit. The parties wish to record the terms of their agreement for the borrower to purchase and resell the land in accordance with the terms of the Agreement

Having disposed of the Farm Debts argument on this ground His Honour nevertheless addressed in obiter dictum an alternative argument raised by the lender. The submission was that the Farm Debts Mediation Act did not apply because s 5(2)(c) says:

This Act does not apply in respect of a farmer, being a corporation, that is an externally administered corporation within the meaning of the Corporations Act 2001 of the Commonwealth.

His Honour found that any such reliance upon this clause could only occur if the corporation had been placed under external administration by someone else on a ground other than the Farm Debt:

Section 6 intercepts and renders void what would otherwise have been a valid and effective appointment. There is never any valid and effective appointment. As a result, the company concerned never becomes subject to the particular form of external administration.

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