This week, the Government introduced its Farm Debt Mediation Bill (No 2) to Parliament. This fulfils a commitment in the Labour-New Zealand First coalition agreement, and takes the place of the private members bill that was withdrawn last year on the promise of the Government introducing this new Bill in its place. A copy of the Bill is attached here.
The essence of this Bill is the same as the last one: it requires lenders to participate in a compulsory mediation process before enforcing security over certain farm property. However, both borrowers and lenders can take comfort from the fact that this Bill is significantly more comprehensive than the last one. We set out the key changes below.
What does the Bill prevent lenders from doing?
The previous Bill applied only when a creditor wished to appoint a receiver. The new Bill instead requires mediation in a wider range of circumstances – before any enforcement action is taken in respect of the relevant debt. Given the Bill seeks to allow lenders and borrowers to “meet in an equitable manner to constructively and objectively explore options for business turnaround", it makes sense for mediation to occur before receivership is imminent and will likely allow for more positive outcomes. This reflects proposed changes advocated by the New Zealand Bankers Association when the previous Bill was in select committee.
It also addresses one of the key criticisms made in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia last year, which was that compulsory mediations were not taking place until it was too late. Under the Bill, farmers will be able to initiate mediation in relation to farm debt at any point.
What lending does the Bill apply to?
The Bill now applies to a wider range of lending. The new Bill applies to all debt incurred “solely or principally for the purpose of conducting a primary production operation", if debt is secured. This is a much clearer test than in the previous Bill.
What assets does the Bill apply to?
The Bill now clearly applies to debts secured over chattels as well as land. This more appropriately recognises the nature of farm debt and reduces the risk of anomalies arising between the procedures that would apply to different forms of secured credit.
Who will administer the mediation scheme?
The proposed mediation system will now be administered by the Ministry of Primary Industries (MPI), and the government has indicated that the general costs of the system will be met within MPI's regular funding. Parties will share the costs of their mediation (unless agreed otherwise). This is a welcome change from the previous Bill that placed the administrative burden on the Banking Ombudsman with assistance from the New Zealand Bankers Association and the Arbitrators' and Mediators' Institute of New Zealand.
Although the Bill is a considerable improvement, aspects of the Bill are likely to attract comment as the Bill progresses. In particular, the last Bill elicited a range of different views as to which borrowers the Bill should apply to. The current draft applies to debt incurred by “farmers" which is defined as “a person who is solely or principally engaged in a primary production operation". Submissions made on the first Bill suggests that industry participants may consider this to be both over- and under-inclusive. For example, it covers all borrowers who meet the definition, no matter how large, well-resourced, or sophisticated they might be. However, it will not cover small family or community groups for who primary production is not their principal business, even if the debt itself relates exclusively to their farming operation. This is likely to be a focus again as the Bill moves forward.
Bell Gully is available to advise on the effect of the proposed regime, or to assist with submissions during the parliamentary process. Please get in touch with the authors or your usual Bell Gully advisor for more information.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.