Farm debt mediation – what you need to know
Updated: Mar 18, 2020
From 1 July 2020 the Farm Debt Mediation Act will be in force. It imposes substantial restrictions on the ability of creditors to enforce security interests over farm property and introduces a regime for parties to farm debts to undertake a mediation process.
This article covers what the Act means, what is involved in the scheme and some key points about the impact this may have for both farmers and creditors.
Who will the Act apply to?
The Act applies to farmers, and to most secured creditors of farm debt. Importantly, it does not apply to debts which are unsecured such as sums owed to the IRD or to unsecured trade creditors.
There are two key definitions in the Act in terms of its application:
A ‘farmer’ essentially means a person incurring debt solely or principally for the purpose of a primary production business. The definition of a farmer can extend to include a spouse, guarantor or trustee in relation to the farm. Primary production businesses include industries such as agriculture, horticulture, share milking and aquaculture, but the Act specifically excludes lifestyle farms, mining, hunting and wild harvest fishing from the scheme. It may also exclude contractors or secondary processing operations, but this will depend on the individual circumstances and the dominant use of the relevant property.
‘Farm debt’ is defined as debt incurred by a farmer, principally for the purpose of conducting a primary production business, and which is secured (in part or wholly) by a security interest over farm property. As examples, security will include a valid PPSR registered security or a mortgage.
What does the Scheme/Act mean?
In general terms the new Act means that:
a bank or creditor must offer mediation to a farmer before they can commence any type of enforcement proceedings relating to security interests over farm property; and
A farmer can request a mediation with a creditor at any time.
The process involves a request for mediation (from either party), with a 20 working day period to respond and with obligations of good faith imposed. If the parties agree to mediate, the mediation process must then be completed within a total time period of 60 working days (which includes the initial 20 working day period).
The approval of mediators will be managed by the Ministry for Primary Industries. The current authorisation standards which MPI have set to become approved are high and include being AMINZ (or other authorised body mediator) registered, having primary sector experience and experience, or training in rural sector family disputes and primary sector economics.
The farmer is only required to pay a maximum of $2,000 towards the costs and expenses of the mediator.
If a farmer refuses to mediate, or the creditor has participated in a mediation process in good faith then the creditor can apply to MPI for an enforcement certificate, valid for 3 years, to allow it to take enforcement action.
If the creditor declines to mediate, or does not participate in the mediation process in good faith the farmer may seek a prohibition certificate, valid for 6 months, to prevent any enforcement action.
How will it affect farmers?
For farmers there is be an early opportunity to negotiate with the bank and request a mediation before an event of default. The 60 working day mediation period also reduces the risk of short notice enforcement and gives some certainty and breathing room to make plans in good faith without time running on any default notice or enforcement action in the background.
How will it affect the creditors?
Lenders will need to consider their processes and early warning signs prior to a default so that these can be factored into the 60 working day period for mediation to occur, before other enforcement action is taken (if a mediation is not successful).
Creditors will be prevented from taking enforcement action which they may otherwise be entitled to take under their terms of trade or lending documents until they have followed the process set out in the Act. Those types of enforcement action include:
Appointing a receiver;
Serving a PLA notice;
Entering into possession of farm property/secured goods;
Appointing a liquidator (including applying for an order to appoint);
Appointing an administrator;
Applying for a farmer to be adjudicated bankrupt;
Exercising a right, power or remedy existing only because of a security interest.
Whilst contracting out of the Act is prohibited, there is an exception to the moratorium on enforcement which enables a creditor to apply to the High Court to appoint a receiver in defined events of urgency. In general terms an event of urgency is where farm property subject to the security interest will otherwise be destroyed, damaged, removed or sold, or to safeguard the welfare of animals.
It seems likely that even in these cases the Court may impose conditions on the appointment of a receiver and the creditor may still be able or required to use the mediation process.
This legislation is a significant change to the ordinary terms and enforcement options for farmers and creditors of farmers. If you would like specific advice about this Act or have any queries in relation to this article, please do not hesitate to contact a member of our litigation team.