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FARM DEBT MEDIATION BILL EXPECTED TO BECOME LAW SOON
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The Primary Production Select Committee has reported back to the house on the Farm Debt Mediation Bill (No 2). The select committee has unanimously recommended that the Bill be passed by the House with some amendments to the original bill. The Bill will require secured lenders, as a prerequisite to taking any enforcement action, to offer mediation to a farmer and participate in the process in good faith. Farmers who are in financial trouble will also be able to initiate mediation regardless of whether a default has occurred.

If a lender refuses to mediate or participate in the mediation process in good faith, the farmer may apply to the Ministry of Primary Industries (MPI) for a prohibition certificate prohibiting the lender from taking any enforcement action for six months. Where a lender participates in the mediation process in good faith, but matters with a farmer are not resolved, the lender will be able to apply for an enforcement certificate from MPI allowing the lender to take enforcement action for three years following the issue of the certificate.

The committee’s key recommendations are as follows.

Wider meaning of ‘enforcement action’

The definition already covers a range of actions a lender might take to enforce its debt, such as a mortgagee sale or the repossession of farm property, or the appointment of a receiver. The committee has expanded the meaning of ‘enforcement action’ to also include making an application to have a farmer declared bankrupt.

Wider definition of a ‘farmer’

The definition of a ‘farmer’ has been amended to mean ‘a person engaged in a primary production operation’ and to include ‘a principal debtor under a debt that was incurred solely or principally for the purpose of conducting a primary production business’. This amendment is proposed to ensure that farm property held in a trust or by a corporate structure is not excluded from the regime. Likewise, spouses, partners, or trustees who are a party to farm debt but do not contribute to farm labour directly or are primarily employed elsewhere are also included in the scheme. 

Rejection of a de minimis requirement

The committee considered and rejected a de minimis requirement to limit the Bill’s application to debt over a minimum threshold. The committee’s view is that mediation could be useful in all instances of debt. We remain concerned that the scheme treats all debts the same regardless of size and that the cost of mediation could be disproportionate to smaller debts.

Rejecting a mediation request could be evidence of bad faith

To strengthen a farmer’s ability to call for an early mediation, the Bill has been amended so that, if a lender declines a mediation request without a good reason, that conduct can be treated as evidence that a creditor did not act in good faith in the mediation process when MPI subsequently considers issuing enforcement or prohibition certificates at a later time.

Multi-party mediation

The Bill has been refined to make it explicit that a mediation under the scheme can encompass multiple parties. The provision for multi-party mediation reflects the reality that in many situations debts are owed to more than one creditor.

Urgent relief

A concern with the original Bill was that there was no provision for a creditor to appoint a receiver prior to the issue of an enforcement certificate if the creditor was concerned about animal welfare issues, environmental non-compliance, crop wastage, or the misappropriation of assets contrary to a security agreement. The Bill now provides for a secured creditor to apply to the High Court for appointment of a receiver to safeguard animal welfare, environmental compliance, or farm assets in situations where urgent relief is required. 

Capping of farmer costs for mediation

The Bill previously provided that the parties would equally share the costs of mediation (excluding their own costs).  MPI’s advice is that total mediator’s costs are likely to be less than $6,000 for most two-party mediations. The committee was concerned that costs could be a barrier for farmers experiencing extreme financial hardship and as a consequence have capped the farmer’s contribution to mediator’s costs to $2,000.

Our comments

We welcome the amendments to the Bill that provide for urgent relief and multi-party mediation. We remain concerned that the Bill has a ‘one size fits all’ approach to all farm debt regardless of quantum, especially as the Bill caps a farmer’s contribution to mediator’s costs. A further concern we have with the Bill is the proposed system to appoint mediators. Under the Bill, a creditor must agree to one of three mediators nominated by a farmer. A creditor has no ability to nominate its own mediator if it is not comfortable with any of the farmer’s candidates. The proposed system is therefore at risk of becoming one sided and some mediators who are frequently appointed may be perceived as farmer friendly. A better system would be for both parties to nominate candidates and for an independent mediation organisation to appoint the mediator in the event of a deadlock. A copy of Kensington Swan’s submissions made to the committee on the Bill can be found here.

Please contact us if you would like more information about the Bill.

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