Rural Bank v Merriba [2012] NSWSC 498

Two brothers are shareholders in the company owning the farm. The brothers were the borrowers, the company was the guarantee. The company gave a mortgage over the farm to secure its obligations under the guarantee. Their liability was joint and several. A mortgage was granted over the farm by the company and a company guarantee was also given. The lender sought summary judgment for recovery of the debt against the brothers and to strike out parts of the defence of the company.

Brother’s defence

The brothers claimed by way of defence that:

  1. they were not authorised to sign the loan offers on behalf of the company, not being directors only shareholders. Hence the security was invalid and this discharged their  obligation to repay; and
  2. no mediation notice was given under the Farm Debt Mediation Act 1994.

The law
The court agreed the authority of the brothers to sign the loan offers on behalf of the company raised a triable question as to the validity of the security over the farm but not the liability of the brothers as principal borrowers. The court found nothing in the loans which made their liability to repay dependent upon the security being enforceable.

No mediation notice
Section 8 Farm Debt Mediation Act 1994 prevents enforcement action in respect of a farm mortgage until a notice as to mediation is given to the farmer and a section 11 certificate ultimately issued. Enforcement action is defined to mean taking possession under the mortgage or other action to enforce the mortgage.

Although the brothers were farmers, they had not given the mortgage–it was the company. Accordingly no notice to the brothers was required.

Company’s defence

  1. The company argued that there was no consideration for its guarantee because it did not receive the moneys lent;
  2. The directors breached their obligations by allowing the company to give the guarantee and the lender knew this; and
  3. The certificate under the Farm Debt Mediation Act 1994 was invalid on two grounds:

• One of the debts was not a farm debt but a refinancing; and

• Some of the debts claimed were not included in the certificate.

Lack of consideration
Although there must be consideration for a contract, the consideration from the promise (lender) does not need to move to the promisor (company).

The court found that the lender made advances to or for the benefit of the brothers. Those advances were manifestly sufficient consideration to support a guarantee.

Accessorial liability
Accessorial liability requires that the bank knowingly induced or procured breaches.

The court noted this defence was not pleaded correctly and gave leave to replead noting that such an allegation would be a serious one.

The validity of the certificate
Section 11 Farm Debt Mediation Act 1994 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. The court found that 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.

As regards the farm debts not included in the certificate, the court noted that any additional advances included in the certificate could be objected to and gave leave for the company to identify those debts in its pleadings.

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