Farm Debt Mediation Bill (No 2)

Lucy Doherty

In June 2019, the Government introduced its Farm Debt Mediation Bill (No 2) replacing an earlier private members’ bill which was withdrawn last year.

Based on NSW legislation tailored to reflect NZ’s regulatory environment, this Bill will establish a farm debt mediation scheme that will require creditors with security interests in farm property to offer mediation to farmers before taking enforcement action in relation to that debt and farm property. It will also allow farmers to initiate mediation with a secured creditor at any point. A creditor will not be able to take enforcement action in relation to farm property (e.g. issue a Property Law Act notice) unless they have an enforcement certificate which is issued if they have participated in mediation in good faith.

Under the Bill, there is no actual obligation on either party to participate in mediation. However, if a farmer declines to mediate, the creditor will be able to apply for an enforcement certificate, which will allow enforcement action to proceed in line with the terms and conditions of the security agreement. If the creditor declines to mediate, the farmer can apply for a prohibition certificate, which will prevent the creditor from taking any enforcement action related to that debt for 6 months. After 6 months, the creditor would need to offer mediation before enforcement could be taken.

Under the Bill, the mediation scheme will apply to farm businesses engaged in agriculture, including sharemilking, horticulture, aquaculture, and any primary production activity done in connection with these. The scheme will apply to debt secured against farmland, including buildings, farm machinery, livestock, and harvested crops and wool, and will apply across all secured creditors, including non-bank lenders.  It won’t cover debt linked to lifestyle farms or forestry.

The mediation process will be supported by independent mediators with strong understanding and experience of the rural sector, and farmers and creditors will have combined input into the selection of a mediator. Costs and associated expenses of the mediator will be shared equally between the parties.  

With total farm debt in New Zealand sitting at around $62.8 billion, Agriculture Minister Damien O’Connor has labelled the Bill pragmatic; giving either the farmer or the creditor the ability to seek early intervention (mediation) in an environment where farmers are especially vulnerable to down-turns as a result of conditions largely outside of their control.

It is anticipated that the mediation scheme will bring consistency and clarity of the process for both the farmer and creditor, and it is something that both the farming and banking sectors support.  The New Zealand Bankers’ Association (NZBA) sees that the Bill will essentially “codify what is already happening in practice”. The aim is to provide a process for creditors and farmers to meet in an equitable manner to constructively and objectively explore options for business turn-around, and to provide for a timely and dignified exit for those where few other options exist.

Whilst generally supporting the purpose of the Bill, both the farming and banking sectors have expressed concern that it doesn’t provide a mechanism for dealing with urgent situations, for example where there are biosecurity, environmental, or animal welfare concerns, or concern around misappropriation of assets, which may justify immediate enforcement action either on public interest grounds and/or to safeguard the value of secured assets. It has been suggested that in situations of urgency, creditors should be able to temporarily bypass the mediation process, or obtain an emergency enforcement certificate to enable the creditor to preserve the security and/or its value by taking certain actions to avoid those risks while mediation continues.

It has also been suggested that the Bill should include provision for enforcement action to happen without delay upon request by the farmer or if the situation is ‘terminal’ and both parties consent.

The Bill doesn’t address the situation where there are multiple creditors, however due to increasing complexity of farm ownership and financing structures there may be situations where the mediation process needs to be able to involve multiple parties. In their submissions, NZBA recognises that there will be secured creditors who wish to enforce on, for example, one piece of rapidly depreciating farm machinery of relatively low value. In this case, the creditor would theoretically be obliged to engage in the full mediation process, which may involve a disproportionate time and expense. NZBA suggests that parties consider whether other creditors should attend the mediation (in part or in whole) during the procedural agreement stage. These could include other secured creditors or unsecured creditors (like the Inland Revenue Department), who would fall under “interested parties”. Anecdotal evidence from Australia suggests that there has been some success in farm debt mediation where other creditors have been involved.

NZBA notes that under the Bill, guarantors who have guaranteed farm debt are also to be treated as “forming part of that farm debt” and accordingly, the restriction against enforcement applies to any enforcement action under “a security interest granted by the guarantor” in connection with that farm debt. However, it does not expressly provide that the guarantors are required to attend the same mediation as the borrower farmer.  NZBA submits that guarantors should be required to attend mediation with the borrower, given their debt forms part of the borrower’s farm debt.

The Bill has been referred to the Primary Production Select Committee, with their report due on 4 November 2019. According to MPI, the Bill may become law by the end of the year.