The Farm Debt Mediation Act 2019 is now fully in force, requiring secured creditors to offer mediation before enforcing debts in relation to “farm property” or against farmers and other eligible primary production business.
As a secured creditor, you need to consider carefully which of your loans will be subject to the regime, how to manage the delay in enforcement, and whether you can apply to the Court for urgent appointment of receivers.
We explain the process set out under the Act and how to avoid potential pitfalls.
The mediation regime applies to all secured lenders (including non-bank lenders and secured farm equipment financiers) who are owed “farm debt” and are able to enforce security interests against “farm property”.
The regime’s scope is defined through four key terms.
Farm debt – debt incurred by a farmer, before or after the Act came into force, whether as principal debtor or guarantor, that is:
- incurred solely or principally for the purpose of conducting a “primary production business or any related activities” (at the time it is incurred), and
- secured wholly or partly by a security interest in the “farm property”.
Farmer – person engaged in a primary production business. It includes a principal debtor under a debt incurred solely or principally for the purpose of conducting a primary production business. That extends to a spouse, partner or trustee who is party to the debt but employed elsewhere.
Farm property – any property used for, or in connection with, the primary production business or related activities of the farmer.
Primary production business – a business undertaking that primarily produces unprocessed materials, including agriculture, horticulture, aquaculture and share milking. It excludes any business providing materials or labour to such businesses, and any business primarily involving mining.
The regime does not apply to unsecured creditors.
Mediation steps and processes
The farmer or the creditor sends a written request to the other party. A farmer may request mediation at any time. A creditor may only request mediation after a default by the farmer.
The receiving party must reply in writing within 20 working days. A creditor declining to mediate must state a reason for doing so. Failing to reply is treated as declining.
If the parties agree to mediate, the farmer must nominate a panel of three authorised mediators (see below). The creditor must select one of them. The parties must take those steps within a reasonable time (or risk being seen as not participating in good faith).
Once a mediator is selected, the parties and the mediator must enter into an agreement that sets out the procedure for mediation and how costs will be shared. A farmer cannot be required to pay more than $2,000 towards the costs. Failure to enter into an agreement or to comply with its provisions may be treated as evidence that a party has not participated in good faith.
Once the mediation request is made, the mediation process must be completed within 60 working days, although the parties can agree to extend that. Farmers and creditors are required to participate in good faith in each step of the mediation process. Importantly, the Act protects creditors who refuse to reduce a debt or vary its terms from allegations of bad faith.
The Act does not prescribe how a mediation should be conducted. Mediators are free to follow whatever procedures they consider appropriate. But the mediator must discuss the advantages and disadvantages of a multi-party mediation with the creditor and the farmer in advance.
At the end of the mediation, the mediator must report the results in writing to the chief executive of the Ministry for Primary Industries (MPI) with copies to the parties. Notwithstanding the required disclosure to MPI, matters raised in the mediation are confidential and are not admissible in judicial proceedings.
Scenario 1: mediation results in agreement
The mediator will prepare a written agreement that the parties must sign. The agreement will be binding on the parties – except that the farmer may cancel it within 10 working days of signing.
The farmer does not need to have particular grounds for the cancellation. During the 10 working day period, the creditor cannot enforce the mediation agreement.
Scenario 2: mediation failure
A creditor may apply for an enforcement certificate from MPI in respect of the relevant debt:
- where the farmer declined to mediate, or
- where the mediation failed but the creditor participated in the process in good faith.
The application must be made within:
- 10 working days of the farmer declining to mediate
- 10 working days after being given the mediation report if mediation failed, or
- 20 working days of the cancellation of the mediation agreement.
MPI must issue an enforcement certificate if:
- the farmer is in default of the farm debt, and
- no prohibition certificate is in force in respect of the farm debt, and
- it is satisfied that the grounds set out in the application are established.
Once issued, enforcement certificates remain in force for three years.
A creditor cannot enforce its security without an enforcement certificate.
If the creditor declines to mediate or did not participate in the mediation in good faith, the farmer may apply to MPI for a prohibition certificate to prevent the creditor from enforcing its security interests.
The time limits to apply for a prohibition certificate are the same as those for an enforcement certificate (see above).
MPI will issue a prohibition certificate where there is no enforcement certificate in respect of the debt and the grounds set out in the application are established.
Prohibition certificates remain in force for six months.
A debt incurred by a guarantor under a “farm debt guarantee” will be treated as forming part of the farm debt.
Unless an enforcement certificate is in place, a creditor will be restricted from taking actions against a guarantor, including:
- any enforcement action in relation to a security interest given by a guarantor in connection with the farm debt
- appointment of a receiver, service of Property Law Act (PLA) notices or taking possession of either non-farm property or farm property owned by a guarantor, and
- appointing an administrator or a receiver in respect of a guarantor, or seeking to have the guarantor adjudicated bankrupt.
Effect on purchasers of secured property
The rights of persons who purchased the secured or mortgaged property from the creditor in good faith and to whom protections of s 184 of the Property Law Act 2007, s 124 of the Personal Property Securities Act 1999 and s 51 of the Land Transfer Act 2017 apply will be unaffected, even if the sale occurred without an enforcement certificate in place, or while a prohibition certificate is in place.
In limited circumstances, a secured creditor may apply to the High Court for an order to appoint a receiver urgently. That secured creditor must have the power to appoint a receiver but for the restrictions in the Act.
The Court must be satisfied that there is an event of urgency, being that:
- the whole or part of any farm property subject to the creditor’s security has been or will be destroyed, endangered, removed or sold contrary to the terms of the debt or the security, or damaged resulting in a substantial decline in its value, or
- an animal subject to the security has been suffering or will suffer unreasonable or unnecessary pain or distress.
The Court must also be satisfied that the appointment of a receiver is necessary or desirable to safeguard the interests of the creditor or the welfare of the animals.
The Court’s powers are broad. It can make an order on whatever terms and conditions it thinks fit. That includes modifying or suspending the receiver’s powers, specifying the duration of the appointment and providing how the receivership may be terminated.
Farmers and creditors cannot opt out of the scheme. Any provision in an agreement to that effect is unenforceable. Submissions were made to the Select Committee proposing that parties be able to agree to bypass the mediation scheme. Such an option would have been particularly apt in situations of clear insolvency or where urgency is a factor, but was not adopted.
The Bill as first drafted did not provide for multi-party mediations – to apply in circumstances where a farmer has more than one secured creditor or is part of a wider group in relation to the security arrangements, or where there are multiple guarantors of the relevant debt, and a number of cross-guarantees.
In response to submissions, provision has been made – but the Act still doesn’t allow for a complete collective resolution to be put in place with all of the creditors. Creditors who are either unsecured or hold debts that are not “farm debts” cannot participate in the mediation process.
No de minimis threshold
The Act does not contain a de minimis provision. The Restructuring & Insolvency Turnaround Association of New Zealand (RITANZ) proposed a threshold of $50,000 but the Select Committee took the view that “mediation could be useful in all instances of debt”.
Approved mediators and mediation organisations
To date, the MPI has approved only two mediation organisations to offer services under the Act:
- the Arbitrators’ and Mediators’ Institute of New Zealand Inc. (AMINZ), and
- the Resolution Institute.
A list of authorised farm debt mediators is available on MPI’s website.