Farm Debt Mediation Act 2019

The Farm Debt Mediation Act 2019 is a process law. Its purpose is to give parties to farm debt the opportunity to use mediation to reach agreement on their present arrangements and future financial relationship before enforcement action is taken in relation to farm property.

For a business owner, the practical point is straightforward. If the Act applies, a creditor will often need to go through the mediation framework and obtain an enforcement certificate before taking enforcement action.

The Act does not erase the debt. It does not force a lender to refinance, extend terms or accept a compromise. It mainly affects timing, process and the steps that must happen before enforcement.

The Act applies to a farm debt. That definition does most of the work. A debt is a farm debt if it is incurred by a farmer and, at the time it is incurred, it is incurred solely or principally for conducting a primary production business or related activities. It must also be secured wholly or partly by a security interest in farm property.

A primary production business means a business undertaking that primarily produces unprocessed materials. The Act gives agriculture, horticulture and aquaculture as examples, and it also includes sharemilking.

Related activities means business activities that involve primary production and are carried out in connection with a primary production business. The Act gives an example of a milk producer that also makes and sells a limited range of cheeses.

Farm property means property used for or in connection with the farmer's primary production business or related activities. The use of the asset matters. The Act gives examples such as farmed fish, an apiary, bees and a smoker, and a utility vehicle used on the farm.

The Act also shows what is usually outside scope. A lifestyle property producing for personal use is not a primary production business. A business that mainly provides labour or materials to farmers, rather than carrying on primary production itself, is also outside the definition.

The definition of farmer is wider than just the person doing the farm work. It includes a principal debtor under a debt incurred solely or principally for the primary production business, whether or not that person is engaged in the business. The Act gives the example of spouses who both owe the debt, even if only one works on the farm.

The Act becomes critical when there is a default and a creditor is considering enforcement. Section 11 says a creditor must not take enforcement action in relation to a security interest in farm property unless an enforcement certificate is in force. A creditor also must not take enforcement action if a prohibition certificate is in force.

The definition of enforcement action is broad. It includes appointing a receiver, applying for a receiver, serving a notice under section 119 or 128 of the Property Law Act 2007, entering into possession or assuming control of farm property, appointing someone else to do that, or exercising rights, powers or remedies because of the security interest.

The Act also treats some wider insolvency-style steps as enforcement action for this purpose. These include appointing an administrator, applying for an administrator or liquidator, appointing a receiver over the whole or substantially the whole of the farmer's assets and undertaking, or applying to adjudicate the farmer bankrupt.

Not every collection step is enforcement. The Act's own example distinguishes a reminder letter from a later letter that includes a formal Property Law Act notice to accelerate the debt.

Either side can start the process, but the timing rules are different. A farmer may request mediation at any time in relation to a farm debt, unless an enforcement certificate is already in force. A creditor may request mediation at any time after default, unless a prohibition certificate is already in force.

The request must be in writing and must comply with any published requirements. The receiving party must reply in writing within 20 working days, state whether they agree to mediate, and comply with any published requirements.

If a creditor declines to mediate, the creditor must also state the reason for declining. A creditor must agree to mediate unless there is a good reason to decline.

A farmer who receives a creditor's mediation request can apply for more time. The application must be made within 5 working days after receiving the request, and the chief executive may grant up to 10 additional working days if an extension is reasonably required.

A party is treated as declining mediation if they fail to reply in time, say in writing that they do not want to proceed, or indicate in another way that they do not want to proceed.

If the parties agree to mediate, they must appoint an authorised mediator. The farmer nominates a panel of 3 authorised mediators and the creditor accepts 1. Delay in doing this within a reasonable time may count against a party on the question of good faith.

Once the mediator is appointed, the parties and the mediator must enter into a procedure agreement. That agreement must include how the costs and related expenses of the mediation will be shared.

The procedure agreement may also deal with who has authority to represent and bind the parties, who may attend, confidentiality and privilege, whether the mediator may engage an expert assessor, how the agreement may be varied or terminated, and any other matter the parties and mediator consider appropriate.

The mediation process must usually be completed within 60 working days after the mediation request, unless both parties agree to extend that period.

The Act also allows for multi-party mediation. The mediator may discuss inviting other creditors or parties to participate, and special rules then apply to the procedure agreement, cost cap and cancellation rights.

The parties must participate in each step of the mediation process in good faith. That does not mean they must settle. The Act says that declining to reduce or forgive a debt, or declining to vary the terms of a debt, does not by itself show that a creditor failed to participate in good faith.

The Act points to conduct that may be treated as evidence that a creditor did not participate in good faith. Examples include declining an earlier mediation request without good reason or failing to state a reason for declining.

The Act also points to conduct by either party that may count against them. Examples include failing to appoint a mediator within a reasonable time, failing to enter into a procedure agreement within a reasonable time, or failing to comply with the procedure agreement without a good reason.

Costs are dealt with directly. A farmer must not be required to pay more than $2,000 towards the mediator's costs and related expenses. A creditor must meet its own costs and expenses in relation to the mediation process.

If the procedure agreement breaches the farmer cost cap, or says nothing about costs, the Act treats the parties as having agreed that the farmer will pay $2,000 towards the mediator's costs and related expenses and the creditor will pay the balance.

Matters covered in mediation are generally confidential and not admissible, subject to the statutory exceptions. Businesses should treat mediation communications carefully and not assume they can be used later outside those exceptions.

The certificate system is the gateway to enforcement. A creditor may apply for an enforcement certificate if the farmer declined to mediate, or if the creditor participated in the mediation process in good faith. A farmer may apply for a prohibition certificate if the creditor declined to mediate, or if the creditor did not participate in the mediation process in good faith.

The Act sets short application windows. Applications based on a declined mediation must be made within 10 working days after the grounds arise. Applications based on good faith grounds must be made within 10 working days after the mediation report, or within 20 working days after notice of cancellation of a mediation agreement where relevant. The chief executive may extend those periods if an extension is reasonably required.

An enforcement certificate lasts for 3 years. A prohibition certificate lasts for 6 months. If a creditor takes enforcement action when section 11 prohibits it, that enforcement action is void.

The Act also provides for administrative review of certain decisions. If an application for administrative review is filed about a decision to grant an enforcement certificate, or to refuse a prohibition certificate, enforcement is stayed until notice of the review determination is given.

If the parties reach agreement in mediation, that agreement must be recorded in a mediation agreement. The mediator prepares a draft setting out the main points of agreement, and the parties may enter into the agreement by signing it.

A mediation agreement is binding on the parties who signed it. But there is an important cancellation right. A farmer may cancel the mediation agreement by written notice within 10 working days after it is signed.

Until that cancellation period expires without cancellation, the agreement is not enforceable by a creditor. If the agreement is cancelled, the Act treats it as if it had never been entered into.

The Act also changes the enforcement position where there has already been a mediation agreement. Section 11 does not apply if the parties have, at any time in the 3 years before the enforcement action, entered into a mediation agreement under the Act in relation to the farm debt.

That does not mean the creditor can ignore the agreement. The agreement remains binding and may be enforceable. It means the statutory restriction in section 11 does not apply during that 3 year period. If the agreement is more than 3 years old, the restriction can apply again.

The Act does not stop with the main borrower. It says the restriction on enforcement also applies to guarantors in important situations. Debt incurred by a guarantor under a farm debt guarantee is treated as part of the farm debt.

That means the section 11 restriction can apply to enforcement action in relation to security granted by a guarantor in connection with the farm debt. It can also apply to actions against non-farm property owned by a guarantor, as well as farm property, if the action is taken in connection with the guarantor's obligations under the guarantee.

The Act gives a practical example involving a farm company, a family trust, and trustees who gave an unlimited guarantee plus a mortgage over both farm land and a nearby residential property. In that example, the creditor had to mediate and obtain an enforcement certificate before enforcing the mortgage.

There is also an insolvency carve-out. Section 11 does not apply if the farmer under the relevant farm debt is subject to an insolvency proceeding or process. The Act lists examples including liquidation, voluntary administration, a deed of company arrangement, a compromise with creditors, statutory management, bankruptcy, and similar overseas or New Zealand processes.

If enforcement started while the farmer was subject to an insolvency proceeding or process, the end of that process does not undo the action. The action may continue and be completed in the circumstances set out in section 13.

The Act includes an urgent court pathway. If a creditor has reasonable grounds to believe there is an event of urgency, and would otherwise have power to appoint a receiver or seek a receiver, the creditor may apply to the High Court for an order allowing appointment despite section 11.

The court may make the order if satisfied there is an event of urgency and the appointment is necessary or desirable to safeguard the creditor's interests, or in some cases to safeguard animal welfare. The court can impose terms and conditions and must balance the need to address the urgent event with the need to preserve the parties' opportunity to use mediation as far as possible.

An event of urgency includes destruction, endangerment, removal or sale of secured farm property contrary to the debt or security terms, damage causing a substantial decline in value, or unreasonable or unnecessary pain or distress to animals subject to the security interest.

Before relying on this Act in a live dispute, businesses should check the debt purpose, the security package, the current certificate position, whether there has been a mediation agreement in the last 3 years, whether guarantor security is involved, and whether any published requirements apply to the documents being used.