November 2019
The Farm Debt Mediation Bill (No 2) (‘the Bill’) has been introduced with the intention of establishing an equitable and efficient mediation scheme to resolve farm debt issues between farmers and secured creditors. The Bill would require secured creditors, which includes nonbank creditors, with security interests in farms to engage in a farm debt mediation scheme prior to taking enforcement action against farmers in the event farmers default on payments.
The Bill has been introduced in response to the significant levels of farm debt that have been increasing over recent years and in recognition of the fact there can be external factors out of the control of farmers, such as weather, market fluctuations, disease and pests, such as Mycoplasma bovis, for instance, that may result in farmers being unable to pay their debts on time and getting into financial difficulties. For many farmers this can be hugely significant as it can often also affect their family home and personal effects.
The objective of the Bill is to support farmers during periods of financial strain to ensure that they are provided with an opportunity to meet with their secured creditors to discuss options for business development prior to enforcement action being taken; and in the event there are no options left for the farmer, to provide an opportunity for a dignified exit.
The mediation scheme will be implemented through the Ministry for Primary Industries (‘MPI’) and will be triggered by an invitation being issued by one of the parties. A secured creditor will be required to offer mediation before any further enforcement action can be taken in relation to farm debts. The mediation scheme will also apply to guarantees given by a person or entity in respect of a farm debt. Farmers can initiate mediation at any time if they have a farm debt secured over an eligible farm business, except if there is an enforcement certificate in force in relation to the farm debt.
Once the request to mediate is accepted the secured creditor must agree to one of three mediators nominated by the farmer from an approved list of mediators. The parties will then have 60 working days to complete the mediation, unless the parties have reached an agreement for an extension. There will be a restriction on enforcement action during this period.
Neither party is obligated to attend mediation. However, if a farmer is in default and declines to attend mediation then the secured creditor can apply for an enforcement certificate which will allow the secured creditor to proceed with enforcement action. The enforcement certificate has an expiry date three years from date of mediation concluding. The farmer will not be able to request mediation through the scheme during this period.
Once the mediation process is completed the mediator will provide a summary report and copy of the mediation agreement (if any) to MPI. The mediation agreement should provide agreed actions for the management of the debt and will be binding. A farmer can cancel the mediation agreement within 10 days of entering into it.
In the event the farmer and the secured creditor cannot reach an agreement then the parties can apply to the Ministry for a determination on whether the enforcement action can proceed. Either party can then apply to the chief executive of the Ministry within 10 days for an administrative review of the determination.
If the secured creditor refuses to mediate, or has not acted in good faith during mediation, then the farmer can apply for a prohibition certificate to prevent any enforcement action for a period of six months. After six months, the creditor would still need to offer mediation before any enforcement action could be taken.
The mediation scheme will apply to farm debt attached to farm businesses that are solely or principally engaged in agriculture (including sharemilking), horticulture and aquaculture, or any primary production activity in connection with these. Debt associated with forestry activities, lifestyle farms, wild harvest fishing and hunting and trapping of animals are excluded at this stage. The mediation scheme will apply to loans secured against farmland, farm machinery, livestock, and harvested crops and wool. The mediation scheme will extend to existing debt, however if enforcement action has already commenced the mediation scheme will not apply.
MPI is estimating that mediation costs will be around $6,000, which will be shared between the parties unless an agreement is reached to the contrary.
The Bill is an indication that it is going to be more important than ever for farmers to take proactive steps and seek advice to avoid finding themselves in financial difficulties in the first instance. Until recently there has been relatively easy access to funding, including access to extensions of funding where there are financial constraints, or to carry a farmer through a lean period or season. However, there are indications that a new banking environment is emerging which may restrict farmers’ ability to have access to the same levels of borrowing. Banks are being influenced by increasing regulatory requirements from the Reserve Bank of New Zealand and increased accountability to shareholders and will be looking to invest capital where they can get the best returns. It will be important that farmers have clear and focused business plans and strategies moving forward and good working relationships with their lenders.
At the time of writing of this article, the Bill is in its second reading and it is anticipated to become law before the end of 2019 (the Farm Debt Mediation Act (No 2) 2019). The first parts comeinto force on 1 February 2020 and the remaining parts from 1 October 2020, with the expectation that farmers will be able to access the services from 1 October 2020 onwards.