The Farm Debt Mediation Bill (No 2) passed into law on 13 December 2019 as the Farm Debt Mediation Act (Act). The final form of the Bill incorporates a number of amendments proposed by the Primary Production Committee (Committee) to the version previously reported on (Bill) in our earlier update:
Broadly, the Act establishes a statutory farm debt mediation scheme (Scheme), requiring lenders to offer mediation to a farmer in default, before enforcement action can be taken.
Some of the key changes reflected in the final form and scope of the Act are summarised below.
Scope of the Act:
The definitions of “farmer” and “primary production business” have been revised, clarifying the scope of the Scheme. Firstly, the definition of “farmer” has been expanded to cover those persons that are “engaged in a primary production business” as opposed to someone “solely and principally engaged…” (as previously drafted) in response to concerns that this might otherwise impact on complex ownership structures. The definition also includes persons that are debtors under a loan agreement entered into in connection with farm debt, but not necessarily contributing labour to the farm business (e.g. a spouse or trustee that is a joint-borrower), given they still have a vested interest in farm debt mediation.
A “primary production business” is intended to capture any business that primarily produces unprocessed materials (including agriculture, horticulture and aquaculture businesses). It now expressly includes sharemilkers, but excludes contractors and mining, and is not intended to capture lifestyle/hobby farmers. A new concept of “related activities” has also been incorporated, to clarify that farm debt and farm property captures debt incurred, or property used in connection with, those activities related to the primary production business of the farmer (e.g. a farmer producing milk, who also produces cheese as a related operation of the primary farm business). The Scheme does not however extend to secondary production businesses.
Mediation before default:
A farmer can initiate mediation at any time, whether or not a default had occurred. With the intention of encouraging early mediation, this has been expanded on so that a creditor can only refuse to mediate if it has a good reason for doing so. If a creditor refuses to mediate and (a) doesn’t provide a good reason; or (b) doesn’t provide any reason at all, that will be treated as evidence that a creditor has not acted in “good faith” for the purposes of the chief executive considering whether to issue a prohibition certificate (which in turn prevents a creditor from taking enforcement action in respect of the farm debt for six months). What constitutes a “good reason” is not elaborated on in the Act, the determination of which will ultimately lie with the chief executive.
The former drafting of the Bill prescribed that a farmer could not be required to pay more than half of the mediator’s costs and related expenses. This has been revised in the Act to cap that amount at $2,000, irrespective of the mediator’s actual costs and expenses. The balance of this will be payable by the creditor. With the Committee expecting that on average, a two-way mediation will cost less than $6,000, this will likely result in the creditor incurring more costs than the farmer. The Act also requires a creditor to meet its own costs incurred in connection with the mediation (which will override any costs provisions in the underlying loan and security documents that might otherwise require a debtor to pay all of the creditor’s costs incurred in connection with enforcement).
The Act is silent as to how the costs of any third party participants may be allocated (e.g. that of an independent expert).
Further provisions have been introduced in relation to multi-party mediations (i.e. those where there are multiple creditors having security over the farm property, or multiple debtors, such as guarantors of farm debt) so that the total amount of costs and expenses of the mediator payable by the debtors can collectively not exceed the $2,000 cap. No provision is made for increased costs resulting from more than two parties to the relevant mediation. A mediator is required to discuss the advantages and disadvantages of multi-party mediation with both the creditor and the farmer, if it deems it appropriate in the circumstances.
Event of urgency:
In has been recognised that in certain circumstances, a creditor may need to take urgent action to appoint a receiver to protect the value of secured assets, which it would otherwise be prohibited from doing in compliance with the Scheme. As a result, the Act now allows a creditor to apply to the High Court to enable it to appoint a receiver to (a) safeguard the interests of the creditor; or (b) to safeguard the welfare of animals (if the creditor’s security extends to animals). The grounds for application (in addition to having the right under the security documents to appoint a receiver) are where an “event of urgency” occurs, which is where:
• farm property is at risk of being destroyed, removed, or sold in contravention of the terms of the security;
• farm property is at risk of being damaged, resulting in a substantial decline in the property’s value; or
• an animal is at risk of suffering unreasonable or unnecessary pain or distress
The High Court has wide abilities to impose conditions surrounding any such receiver appointment, including whether (and when) mediation is to occur, the duration of the receiver’s appointment, and modifying the terms of the underlying security interest.
The provisions of the Act relating to mediators (including the approval of mediation organisations) and the administrative review of decisions comes into force on 1 February 2020. The balance of the Act comes in to force on 1 July 2020.
If you have any questions or would like to discuss the impact of the Act on your business, please get in touch with one of the writers, or another member of the Banking and Finance team.
Business Law team
Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper
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