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Select Committee endorses farm debt mediation

November 07, 2019

Contacts

Partners James Caird, Josh Cairns
Senior Associates Mace Gorringe

The Primary Production Committee (Committee) has released its report on the Farm Debt Mediation Bill (No 2) (Bill) and recommends it is passed with amendments. 

The Bill will establish a farm debt mediation scheme, which will require creditors with security interests in farm property to offer mediation before taking enforcement action. It will also allow farmers to request mediation.

In this FYI we look at the key amendments suggested by the committee, noting that not all of the issues identified in public submissions have been addressed.
 

The Committee’s amendments

The Committee has suggested amendments to the Bill including:

1.  Using the term “primary production business” instead of “primary production operation”,  clarifying that:

  • the Bill applies to businesses that primarily produce unprocessed materials (including, without limitation, agriculture, horticulture and aquaculture); and
  • mining and contractor-type business services are excluded.

2.  Amending the definition of “farmer”  so that it:

  • applies to persons engaged in primary production businesses (removing the requirement to be “solely or principally engaged”); and
  • includes principal debtors of farm debt who may not be otherwise “engaged” in the business (such as spouses, partners or trustees who may be employed elsewhere).

The Committee was concerned the previous drafting may have been too limiting for complex ownership structures. It acknowledged that this may allow some farms on the boundary between lifestyle farming and business to access the scheme, but considered it preferable to excluding some operations that could genuinely benefit from mediation.

3.  Requiring a creditor to engage in mediation unless there is a good reason to decline a mediation request.

The Committee considered whether mediation should be triggered by events earlier in the process, rather than waiting for an event of default. However, rather than specifying an earlier trigger, the Committee elected to place an obligation on creditors to accept, at all times, a request for mediation unless they have a good reason to decline.

4.  Allowing a creditor to apply to the High Court for an order to appoint a receiver  if that creditor:

a) would have the power to appoint a receiver if not for the enforcement prohibition under the Bill; and 

b) has reasonable grounds to believe that there is an “event of urgency”, being one or more of the following:

  • the whole or part of any secured farm property has been or will be destroyed, endangered, removed, or sold contrary to the borrowing terms, or damaged resulting in a substantial decline in value contrary to those terms; and
  • an animal has been suffering or will suffer unreasonable or unnecessary pain or distress.

This change was proposed by the Committee in response to a number of submissions that called for exceptions in particular situations. The changes proposed by the Committee include that the High Court may impose whatever terms and conditions it thinks fit and those terms and conditions may modify or suspend (in whole or in part) a creditor’s security interest.

5.  Capping farmer and other non-creditor contributions towards a mediator’s costs to $2,000 and requiring a creditor to pay the balance  (to help address concerns that cost could be a barrier for those experiencing financial hardship). This will place a greater burden on creditors to pay for the balance of costs.

6.  Expressly allowing for multi-party mediation, with a mediator required to discuss the advantages and disadvantages of multi-party mediation,  if the mediator considers it appropriate.
 

Comment

While the Committee’s report and proposed changes address a number of issues with the Bill, we note that amendments have not been made to the Bill to address some other issues that were identified in public submissions.

These include providing for mediation agreements to be more in the nature of Heads of Agreement (similar to the approach taken under the Queensland farm debt mediation legislation). Under the Bill, the mediator is to prepare a mediation agreement that can override the terms of existing loan and security documents. However, farm debt and security documents are complex, and should only be amended through well drafted and considered amendment documentation. 

Accordingly, it is our view that the Bill should more closely follow the Queensland approach, whereby:

  • a mediator prepares, or supervises the preparation of, the Heads of Agreement;
  • the farmer and creditor must enter into, and are bound by, the Heads of Agreement; and
  • there is an onus on the creditor to ensure that existing contracts (loan and security documents) are amended in line with the terms of the Heads of Agreement.  

We also note that amendments have not been made to provide for:

  • A threshold amount, excluding the interests of minor creditors (such as suppliers and lessors) from mandatory mediation.
  • An exception for institutional farmers, so that creditors of large, experienced, corporate farming entities are not required to undertake mandatory mediation (given the lack of power imbalance between them and those types of farmers).  
  • An exception for where a farmer requests that a creditor take enforcement action. This was called for in a number of submissions to enable a farmer to avoid insolvent trading, in situations where a farmer can see that the business is no longer viable.

Our views on these issues are discussed in our submissions


Get in touch

Please get in touch with any of our contacts if you’d like to discuss the Bill or the Committee’s report.

Contributors david.hill@simpsongrierson.com