Agriculture has long been a key industry in Atlantic Canada. Government’s interest in promoting agriculture and protecting the family farm in the face of challenging economic conditions led to the implementation of the Farm Debt Review Act (the “FDRA”) by Parliament in 1986 and its replacement by Parliament with the more robust Farm Debt Mediation Act (“FDMA”) in 1998. The FDMA grants farm debtors unique rights not shared by other debtors in Canada and it imposes various procedural restraints on creditors seeking to enforce their rights. It creates unique challenges and risks for lenders that should be considered before lending and reflected in the commercial terms of the loan.
Prior to lending or attempting to realize on debt secured by assets in a farming operation, it is prudent to tread carefully and consider the following:
The FDMA imposes notice obligations on the lender which are in addition to those prescribed by the Bankruptcy and Insolvency Act (“BIA”). In effect, this means that where a creditor wishes to enforce its rights on the assets of an insolvent farmer, two independent and separate notice obligations will need to be satisfied; one under the FDMA, and the second under the BIA.
The FDMA requires that the lender provides the farmer fifteen (15) business days’ notice of its intention to enforce any remedy against the assets of the farmer and must advise of the farmer’s right to make application for assistance under the FDMA. During this mandatory notice period the lender may not take enforcement actions and the farmer may consider whether or not to make application under the FDMA for a stay of proceedings. Where notice to the farmer is not given in compliance with the FDMA, all subsequent enforcement actions involving the farm assets are ineffectual.
Canadian courts have interpreted the notice requirements under the FDMA strictly. The Alberta Court of Queens Bench in the case of Intec Holdings Ltd. v. Grisnich noted that the object of the FDMA is to protect farmers and therefore the statutory notice requirements could not be waived. Where, for example, a lender commenced foreclosure/power of sale proceedings without providing the required FDMA notice, a mediation agreement in which the farmer waived notice requirements under the Act was insufficient.
Stay of Proceedings
Perhaps the most significant protection for farmers under the FDMA is the ability for a farmer to apply for a stay of proceedings, which, if granted, restricts the lender taking further steps to realize on the farmer’s assets for a period of at least thirty (30) days. If such an application is granted, the farmer’s financial circumstances will be reviewed and a report may be presented to the Farm Debt Mediation Service which has the ability to meet with the farmer and lender and attempt to reach a mutually-agreeable resolution. Note, however, that the FMDA does not force a lender to compromise a debt or enter into a new financial arrangement with a farmer. The stay of proceedings may be extended further depending on the complexities of mediation and the likelihood of resolution.
Importantly, the stay of proceedings that may be imposed under the FDMA operates “notwithstanding any other law”. This has been interpreted to include a petition in bankruptcy. Accordingly, if a farmer has applied for and received a stay under the FDMA, proceedings under a petition in bankruptcy issued before proceedings under the FDMA are stayed.
Lenders should note that a number of provinces have enacted provincial legislation (The Family Farm Protection Act in Manitoba, for example) which impose requirements on lenders to seek approval from the court to seize and sell certain types of farm land and assets. This type of legislation has not been enacted in any of the Atlantic Canadian provinces at this time.
Unlike the former FDRA, the FDMA requires that a debtor must be engaged in farming for a commercial purpose before the Act will apply. With recent increases in hobby and small farm operations in Atlantic Canada, this distinction may become muddled and the prudent lender will need to carefully consider whether the ‘commercial purposes’ requirement has been met before proceeding to realize on farm debt obligations. Courts have provided the following illustrative points to consider whether or not the activity falls within the ambit of the FDMA:
- the debtor has dedicated most his/her land to a farming activity;
- the farming activity is entirely the result of the debtor’s efforts;
- the debtor has claimed farming losses;
- the debtor has engaged in farming activities both before and since obtaining the debt; and
- the debtor intends to make an eventual profit from the farming activity.
As discussed above, the FDMA is designed to protect farmers and it provides them special rights not shared by other debtors. The ability of farmers to secure a stay of proceedings even after the expiry of the mandatory 15 day notice period provides significant practical challenges for lenders trying to seize assets quickly to maximize recovery after default. Lenders should consider these risks carefully prior to lending and ensure the commercial terms of the loan adequately compensate the lender for this risk. Additionally, lenders should be weary of making a loan to a borrower with non-commercial farming operations and should assess whether the FDMA would apply if enforcement efforts were required to be taken.
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Tread Carefully – Enforcement of Farming Assets