Mandatory Farm Debt Mediations – What you need to know

A new law has come in affecting how creditors can take enforcement steps against borrowers and guarantors of farm debts.

The Farm Debt Mediations Act 2019 (FDMA) came into force in 2020, which prevents secured creditors from taking enforcement action in relation to farm debts without taking certain steps.

What is a farm debt?

A “farm debt” is defined as being:

• a debt owed by a farmer (a person involved in a primary industry or a debtor where the debt was incurred to conduct a primary production business) as principal debtor or guarantor;
• incurred for the purpose of conducting a primary production business (eg. horticulture, agriculture, aquaculture, including businesses such as sharemilking but does not include forestry, mining or providing labour/materials to a primary production business) or related activities; and
• secured wholly or partly in farm property (being any property used in connection with a primary production business. Property can include vehicles, animals, resource consents)

What is an enforcement action?

“Enforcement action” includes appointing a receiver, serving notice under s119 of the Property Law Act 2007 to exercise powers of sale, taking possession or assuming control of the farm property or applying to liquidate or bankrupt the farmer.

A letter advising of a default and reminding the debtor to make payment is not an enforcement action.

When can ‘enforcement action’ be taken by a creditor?
A secured creditor can only take enforcement action in relation to the farm property when either:

• an enforcement certificate is in force in relation to the relevant farm debt. A creditor can apply to MPI for a certificate if the farmer declined to attend mediation or the creditor attended mediation with the farmer in good faith. An enforcement certificate lasts for 3 years; or
• the parties have entered into a mediation agreement in the past 3 years.

If any of enforcement steps are taken without an enforcement certificate or mediation agreement, the enforcement steps will be void.

If the farmer obtains a “prohibition certificate”, a creditor cannot take any enforcement action for 6 months. The farmer can apply to MPI for a prohibition certificate if the creditor declined to mediate or did mediate but not in good faith.

Action could be taken against non-farm property (of the farmer) secured under a farm debt, or potentially against farm property (of the farmer) if the farmer is insolvent or subject to insolvency proceedings. However, action cannot be taken against a guarantor in relation to any kind of property, farm or non-farm unless an enforcement certificate or mediation agreement is in place.

If there is an urgent need to protect a creditor’s interests, the creditor can apply to the High Court to appoint a receiver.

Mediation

Generally, farmer and a creditor can both request mediation, although a farmer can request one at any time and the creditor can only request one once the farm debt is in default. The mediation process is confidential. There are specific formalities and procedures under the FDMA, including that:

• the request must be in writing;
• the other party (‘respondent’) must respond to the mediation request within 20 working days. If they do not reply, they are deemed to have declined mediation;
• if the respondent responds by declining to attend, they must set out the reasons why;
• a creditor must agree to mediation unless there is good reason; and
• unless the parties agree, the mediation must occur within 60 working days of the request.

A farmer can only be asked to contribute up to $2,000 towards the cost of the mediator, and a creditor must meet it own costs of the mediation process. The legislation indicates that any of the creditor’s mediation related costs cannot be recovered from the farmer in any way, which would override standard contractual cost indemnities.

The parties must mediate in “good faith”. If a creditor declines to attend mediation without good reason or without setting out its reasons, that will be evidence of ‘bad’ faith. The legislation also indicates that a creditor refusing to reduce or forgive a debt, or alter the loan terms, could be evidence of bad faith, but not on its own.

What now?

The FDMA applies to all farm debts, irrespective of when the debt was incurred. The FDMA cannot be contracted out of. As this legislation is brand new, it has not yet been interpreted by the Courts, so it will be interesting to see it work in practice. Holland Beckett has expertise in rural law and can advise you on the impact of the FDMA on any farm debt, and assist you to navigate the mediation and enforcement process.