Lenders beware: when is a farm a farm?

May, 2016

By Dan Mackay, Partner, Ariel Borland, Partner, and Michael Chapman, Associate

A recent decision of the New South Wales Supreme Court confirms that failure to comply with the mediation notice requirements of the Farm Debt Mediation Act 1994 (NSW) prior to taking action to repossess property will be fatal.  More interestingly, in a decision relevant to all lenders and creditors of agribusiness entities (and their professional advisers) the Court considered what is and isn’t ‘farming activity’ for the purposes of that legislation, holding that the definition was wider than some (including the plaintiff) thought.

What is this case about?

The Supreme Court of New South Wales has found that money lent to a person operating a small scale migratory bee-keeping business secured against the property where he commonly keeps his bees was a “farm debt” under the Farm Debt Mediation Act 1994 (NSW).

Migratory beekeeping means that the bees are taken off the property where they are generally kept from time to time to find food.

The bee-keeper, Mr Bee, took out a loan from Secured Funding to purchase bee hives for his property and to discharge earlier loans for funds to buy beekeeping equipment.

He fell into default under the loan and the plaintiff, Secured Funding, sought to enforce its rights to possession of the property under the mortgage and repayment of the loan.

Secured Funding accepted that if the mortgage was a “farm mortgage” or “farm debt”, then it had not issued a notice for compulsory farm debt mediation to Mr Bee under the Farm Debt Mediation Act prior to taking action to repossess his property.

However, Secured Funding disputed that Mr Bee’s migratory beekeeping business was actually farming activity and the funds lent to him were therefore not a farm mortgage or farm debt.

Was the beekeeper’s name really Mr Bee?

Yes.

Was the profitability and size of Mr Bee’s farming operation relevant?

Under the Farm Debt Mediation Act, the onus fell on Mr Bee to show he was a farmer conducting a farming operation and the loan money was a farm debt secured by a farm mortgage.

Mr Bee put on evidence that this was in fact the case.

Secured Funding argued that:

The Court agreed that the business was peripatetic, very modest and not profitable but it also found that the Farm Debt Mediation Act does not require any particular level of economic activity or profitability of a farming activity to be shown to attract its protections.

The Court also drew an analogy with a cattle farmer who moves cattle off his farm for droving in search of feed. It cannot be correct that because the cattle have been moved elsewhere temporarily to feed that farming activity is not occurring on the cattle farm. It applied the same principle to Mr Bee’s beekeeping business.

Ultimately, the Court accepted Mr Bee’s evidence that he was a farmer and the loans were secured for purposes connected with beekeeping.

Secured Funding’s claim was dismissed.

Lessons for creditors

After this decision, creditors may be concerned that defaulting borrowers will raise spurious arguments that they are engaged in farming activity to attract the protections of the Farm Debt Mediation Act 1994 (NSW).

Creditors should note that the Court will not simply accept the borrower’s claims that they are engaged in farming activity and will examine the borrower’s evidence.

Before taking action, creditors should carefully assess whether in fact the borrower is engaged in farming activity, regardless of whether all of that activity occurs at all times on the relevant land and, if so, whether it should first issue a notice for compulsory mediation of a farm debt.

Contact Mills Oakley

Dan Mackay, Partner, and Michael Chapman, Associate, are members of Mills Oakley’s Financial Services team who specialise in agribusiness related investment activity and funding.  Ariel Borland is a partner in Mills Oakley’s Insolvency team specialising in all aspects of insolvency and secured debt enforcement.

For more information, please contact:

ariel-borland

Ariel Borland
Partner
T: +61 3 9605 0015
E: aborland@millsoakley.com.au

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