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Farm Debt Mediation - where do the obligations start and end?

NewsFlash 13 December 2016

Recent years have seen Australia’s farm debt reach an all-time high, with public criticism directed at banks for “adding fuel to the fire” of farm debt. Farm debt mediation was introduced in recognition of the external factors that regularly impact upon farmers’ abilities to meet financial obligations (such as drought, flood, disease, etc) and provides farmers with additional protection before creditors can take enforcement action.  

A number of States have introduced farm debt mediation procedures, with others currently considering the introduction of farm debt legislation. This article will primarily focus on the Victorian and New South Wales schemes which are at present the most regulated.

What is FDM?

Alternative dispute resolution is not a novel concept. Notwithstanding this, it is not surprising that Farm Debt Mediation (“FDM”) has raised important questions about debt dispute resolution in the farming industry.

So what is FDM? What makes different to any other type of mediation or dispute resolution process? The process of FDM relates to the situation whereby farmers borrow money from financiers in exchange for security over their farm or farm property. When concerns arise with respect to a farmer’s ability to repay the loan debt, the legislation provides for a mediation process that must take place, as instigated by either the farmer or the financier.

The legislation seeks to provide an efficient and fair mechanism by which debt disputes between farmers and creditors can be negotiated. Farmers are afforded protection vis-à-vis creditors who are required to provide farmers with the option to mediate, prior to undertaking enforcement proceedings in relation to farm property or a farm mortgage. However, creditors are under no obligation to reduce the debt owed.

The legislative farm debt mediation schemes in NSW and Victoria are limited in their application insofar as certain factors must exist in order for the law to apply. In particular, various definitions such as “farmer”, “farm debt”, “farm mortgage”, and “farm property” must be met, and there is a body of case law that has grappled with the interpretation of these definitions. The legislation expressly does not apply to farmers in specified circumstances, including those in bankruptcy or company administration.

What process needs to be followed?

The Victorian legislation prescribes a process for creditors when dealing with farmers struggling to meet their debt obligations. Prior to taking any enforcement action against a farmer under a farm mortgage, a creditor must give written notice to the farmer, stating as follows:

  1. the creditor intends to take enforcement action under the farm mortgage; and
  2. under the relevant Act, mediation between the farmer and the creditor is available; and
  3. the farmer has 21 days from the date the notice was given to request mediation with the creditor in respect of the farm debt; and
  4. may be in the form approved by the Secretary.  

The position is similar is NSW. In short, if a farmer requests mediation, the creditor is obligated to mediate. Where a farmer is in default under the farm mortgage and the creditor refuses mediation or does not respond within 21 days of a request to do so, the farmer can apply to the relevant authority for a prohibition certificate to prevent the creditor from commencing enforcement proceedings for the next 6 months or until the parties mediate.

In both NSW and Victoria, the FDM requirements will not apply where a creditor is granted an exemption in respect of a farm mortgage. Creditors can apply to the relevant authorities in Victoria and NSW in certain circumstances to enable them to apply for an exemption from the farm debt mediation requirements. An exemption may granted where a farmer is in default under the farm mortgage and no prohibition is in force in respect of the farm mortgage and satisfactory mediation has taken place without resolution, or where mediation could not take place due to a refusal by the farmer or a failure by the farmer to respond within three months from the issuing of a notice. A certificate may be applied for or given even where no notice to mediate has been provided, however this would be a rare occurrence.

Both the Victorian and NSW Acts provide that creditors are not under any obligation to reduce debt at mediation.  Any enforcement action taken by a creditor that fails to comply with the legislation will be void.

Relevant cases before the Courts

There have been various cases before the Court in relation to FDM legislation including in relation to the purpose of the legislation  and the definition of “farm”, “farmer”, “solely or principally engaged in a farming operation”, creditor exemptions and the meaning of “satisfactory mediation”. These cases have had a significant impact on the scope and application of the legislation. For instance, following a court decision on the question of whether a “satisfactory mediation” had taken place, the confidentiality provision in the NSW Act was amended to provide that the mediation report prepared by the mediator following FDM is no longer subject to confidentiality. The Victorian provision is modelled off the NSW Act and is accordingly the same. Both Acts also include a definition of “satisfactory mediation”.

Whilst enforcement proceedings cannot be commenced unless a notice has been served and there has been mediation (or an exemption or prohibition certificate applies), the requirement to serve the requisite notice has been held not to apply when serving a Statutory Demand or to Winding Up proceedings.

Who do the obligations under the FDM legislation apply to?

The obligations under the FDM legislation relate to creditors, they are not applicable as against those that are sub-contracted for the purpose of carrying out enforcement. However to ensure that those who are contracted to carry out the wishes of creditors, are not met with irate farmers claiming that they have sought a mediation which has not occurred, we see no reason why the following cannot be sought as part of initial instructions sought from a creditor.

  1. A copy of the relevant notice issued under the legislation in relation to mediation; and/or
  2. Confirmation that a mediation has taken place and the matter was not able to be resolved; and/or
  3. A copy of any exemption certificate provided by the relevant Authority.

Access to documentation of this kind would ensure that contractors can act efficiently and have a sound understanding of the circumstances when carrying out the enforcement of a farm debt.

This article is intended only to be informative and does not constitute legal advice. For guidance with the individual circumstances of particular cases, professional legal advice should be sought.

Maria Kerhoulas, Partner

Emily Scott, Legal Trainee

NewsFlash 13 December 2016
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