A recent Department of Agriculture, Fisheries and Forestry research report highlights the critical importance and role of debt financing in the farm sector. There was a 6% increase in aggregate lending to the sector in 2022-23, with aggregate value of loans outstanding increasing from $114.2 billion at 30 June 2022, to $120.5 billion at 30 June 2023.
Private lending has also been on the increase with many new participants to the industry in recent years. Lenders servicing the farm sector must be conscious of the applicable Farm Debt Mediation (FDM) schemes in Australia, which are presently State based and specific. Broadly:
• Australian FDM schemes prescribe mandatory mediation procedures (save for Western Australia which has a voluntary scheme) that must be followed before a secured lender can commence and proceed with enforcement action against a farm or farmer.
• Failing to observe the requirements of an applicable FDM scheme may void enforcement action and or result in penalties.
Anecdotally, we have recently seen a sharp rise in the frequency of loan enforcements involving farming properties in which we are presently assisting various lenders navigate applicable FDM schemes across Australia in the process of efficient and effective secured debt recovery.
This short form article provides a brief overview of some of the key features of the FDM schemes in New South Wales, Victoria, Queensland, South Australia and Tasmania (collectively, the Relevant States) to put these schemes on the radar of existing and new lenders to the farm sector.
When does FDM apply?
In the Relevant States, FDM will generally apply where:
1) the loan debt was incurred for a relevant farming purpose; and
2) at the time of enforcement:
a) the debtor is a farmer (i.e. solely or principally engaged in a farming operation); and
b) the security property is in use for a relevant farming purpose.
There are prescribed statutory exceptions to the application of the FDM schemes. For example, the FDM scheme will not typically apply where the relevant debtor is the subject of a bankruptcy petition or, if a company, is under external administration (i.e. in liquidation or voluntary administration).
If an FDM scheme applies, a secured lender must comply with its requirements before commencing ‘enforcement action’. Failing to do so may:
1) render any enforcement action void; and/ or
2) lead to penalties against any companies and/or individuals who have breached, or have been involved in a breach of, an FDM scheme.
What is ‘enforcement action’ under the FDM?
In the Relevant States, ‘enforcement action’ under the FDM typically includes:
1) issuing default notices and/or demands based on enforcement of the mortgage or security;
2) issuing statutory default / power of sale notices;
3) taking possession via self-help;
4) commencing and prosecuting possession proceedings; and
5) appointing a receiver / receiver and manager.
‘Enforcement action’ under the FDM does not typically include:
1) bringing action for simple / personal debt claims not based on the mortgage;
2) bringing action for shortfall after mortgage has been discharged;
3) issuing a bankruptcy notice;
4) commencing and prosecuting bankruptcy proceedings;
5) issuing statutory demand for payment;
6) commencing and prosecuting winding up proceedings;
7) cancelling the loan facility; and
8) charging default (or higher rate) interest.
What does FDM typically involve?
Where an FDM scheme applies, a secured lender must typically:
1) Issue a prescribed notice inviting mediation;
2) If accepted by the debtor(s), arrange for mediation through the applicable regulatory body;
3) Attend a pre-mediation conference with the mediator and debtor(s);
4) Prepare for and attend formal mediation, and participate in good faith; and
5) If no agreement is reached at mediation:
a) apply for an exemption certificate; and
b) if and when exemption certificate is received, commence enforcement action.
Ordinarily, the prescribed mediation process can take up to 3 months.
What should lenders to the farm sector do?
1) At the outset of the loan process – undertake a robust interrogation of the debtors, their businesses, the current and intended use of any proposed security properties and intended use of the funds to identify whether (or not) any FDM scheme may apply; and
2) Before commencing enforcement action:
a) obtain occupancy checks and reports of any relevant security property/ies;
b) re-interrogate and consider whether any FDM scheme may apply, including engaging of specialist loan recovery and enforcement lawyers to advise; and
c) where a FDM scheme does or may apply, ensure to proceed cautiously and comply with any applicable requirements.
Moving forward
We are a specialist banking and finance law firm, notably recognised as Australasian Lawyer’s 2024 Top Boutique Firm – Banking and Finance. For any lenders servicing or proposing to service the farm sector in Australia, contact us to assist you with any specific enquiries or matters.
• Phil Hustler, Managing Principal, and Druon McGovern, Associate – Banking and Finance
• Oliver Small, Principal, and Jamie Dimeo, Associate – Litigation, Recovery and Disputes
DISCLAIMER: This article is only general in nature and is not to be relief upon as legal advice. You should seek legal advice in relation to your specific circumstances.