New Zealand has a large primary production industry and, with that, a large amount of debt. The Minister for Agriculture has introduced a new Bill to try and give greater protection to farmers by forcing creditors with security interests in farm property to jump a few hurdles before they can enforce securities over defaulting farm borrowers. We will watch the progression of this Bill with interest, and keep you updated, as it will affect a great number of our Agri-business clients.
The Farm Debt Mediation Bill, introduced by the Minister for Agriculture Damien O’Connor in June 2019, has now had its second reading in Parliament and is currently before the Select Committee.
If introduced in its current form, this new legislative scheme will have a significant impact on farmers and their secured creditors in relation to the enforcement of securities held in farm property in relation to farm debt. The Bill has been introduced in recognition of the increasing levels of farm debt, the power imbalance between farmers and lenders, the often complex nature of the lending, and the difficulty to quickly resolve lending issues for farmers. Additionally, the Bill recognises that farming is vulnerable to many external factors which are outside of farmers’ controls. These include climate, disease, and market volatility.
The scheme will apply to all farm debt, whether it was borrowed before or after the introduction of the scheme. Essentially, the scheme will require creditors to jump a number of hurdles if they have a defaulting farmer (and, in particular, attend a mediation with the farmer) and will give the farmer additional levels of protection before a security can be enforced.
There will be no ability to contract out of this scheme and, if introduced, a huge number of people and businesses will be affected.
Secured creditors’ rights pursuant to the Property Law Act 2007 (“PLA”) and the Personal Property Securities Act 1999 (“PPSA”) will be limited by this scheme.
What does this Bill apply to?
The Bill will affect anyone who has incurred debt, or has supplied credit, which is secured against farm property. Farm property includes the land, plant, machinery, livestock and crops – things that are used, or created, by the farming business. Secured creditors are not limited to banks and inlcude anyone who is owed a farm debt by a farmer.
This scheme, if introduced, will affect everyone from sharemilkers and kiwifruit orchard businesses, through to large financial institutions and small trade creditors who, for example, supply machinery to sharemilkers and register a PPSA interest over that machinery.
What is farm debt?
Farm debt is debt for farming businesses that are solely or principally engaged in one or more of the following activities: agriculture (including sharemilking), horticulture, and aquaculture. The scheme also applies to a farm business engaged in an activity involving primary production carried out in connection with any of those activities. It also includes guarantees given in respect of farm debt. It will not ordinarily cover debt loaned to lifestyle farmers.
What are the proposed new hurdles for creditors?
If it comes into force, the new scheme will prevent a creditor from enforcing a security over farm debt unless it has obtained an enforcement certificate. Creditors will still be able to pursue debts in all the other ways (such as through the issue of demands and Court proceedings), but they will not be able to enforce their security interests, including PLA and PPSA security interests, without following the procedure prescribed by the Bill.
An enforcement certificate may only be obtained, following default in repayment of a loan by the farmer, in two circumstances:
- The creditor issued a notice to the farmer to mediate and the farmer declined to attend mediation; or
- The parties attended a mediation and the creditor acted in good faith but the parties did not reach a mediated settlement.
Failure by a farmer to respond to properly-issued notice to mediate will result in a determination that the farmer declined to mediate. That will result in a creditor being entitled to, upon application to the Chief Executive of the Ministry for Agriculture, an enforcement certificate and the ability to call up its securities in the usual way.
There will be a statutory requirement that both parties mediate in good faith. Failure by a creditor to agree to forgive or reduce debt, by itself, does not amount to breach of good faith. Mediations are to be conducted by approved mediators who will furnish a report following the mediation to the Chief Executive. That report may be relied upon by either party to either support or challenge a claim in relation to participation in good faith.
An enforcement certificate remains valid for 3 years from the date of issue.
Additional protections for farmers
In addition to the extra steps that creditors will be required to take, farmers will have the right to request a mediation with a creditor at any time. This may be particularly useful when a farmer can see that it is about to face difficulties in meeting its financial obligations, but before it has defaulted. The farmer will also have the ability under the new scheme to apply for a prohibition certificate to prevent the enforcement of securities. A farmer may get a prohibition certificate where:
- The creditor declined to mediate; or
- The creditor attended a mediation but did not participate in the mediation in good faith.
A prohibition certificate is valid for 6 months from the date of issue.
In the case of the issue of either an enforcement or a prohibition certificate, parties will have the right to apply for an administrative review of the decision to issue a certificate. While a review is underway, it will act as a stay on the certificate.
Can I have a say on the Bill?
Submissions on the Bill close on 7 August 2019, so there is still time to file a submission either in support or against the proposed legislation. Harkness Henry can assist you with preparation of submissions.
We will keep you updated here as to the progress of the Bill, and can provide you with detailed advice if it does come into force and it affects you.
Published: 18 July 2019