The likely impact of the new personal insolvency legislation on Farmers.
Ciaran Dolan BL, MCIArb.
The Personal Insolvency Act 2012, which was signed by the President December 2012, will begin to come in operation by March and be fully operation by the summer of this year. The legislation provides for three non- judicial debt resolution mechanisms as well as amending the bankruptcy legislation. This new Act together with another piece of proposed legislation-The Credit Reporting Bill, which will provide for a central credit register and the more stringent criteria now in place to obtain credit will have a major impact on the availability and cost of credit and the way banks will act in the future when individuals farmers get into financial difficulty and require loan restructuring.
What then is the extent of the debt problems in the farming sector? Incredible as it may be there is very little data available nationally on the extent and depth of the debt problem in the farming sector both for their farming businesses and off-farm investments. In addition, it would seem that there is a major conflict or divergence on the actual side of the overall level of indebtedness on Irish farmers.
Total loans for farming outstanding in 2011
According to the Farm Management Survey, the total volume of debt on Irish farms in December 2011 was almost €1.9 billion. This was a decrease of 14 per cent on the previous year and a net reduction of €307 million. However the figure recorded and published by the Central Bank puts the level of loans extended to the farmers by all licensed institutions at the end of 2011 at €3.9 billion. This is almost twice the figure as estimated by Teagasc under the Farm Management Survey. This difference is not a matter of no consequence.
Given the importance of credit to farming both in terms of existing debt levels and the requirement for future investment, it is self evident that there must be a credible body of information on the level and extent of the debt so that public policy measures can be formulated and proper action can be taken to resolve them.
The higher figures from the Central Bank on agricultural loans do not include merchant credit. There is growing anecdotal evidence that the level of merchant credit has again grown in recent times given the disastrous year and the increase in the levels of feed concretes being used.
Possible €2 billion off-farm debt
The difference between the Central Bank data on the amount of outstanding debt and the Teagasc estimate for on-farm debt implies that the farming sector has accumulated debts of nearly €2 billion for investment off- farm. If this is the case it will have many and far reaching consequences for the individual farmers and the sector. Farmers who have substantial off-farm investment with borrowed money are more likely to be in or face insolvency and to be more at risk than farmers with only on-farm investments. Excluding off-farm investments the level of indebtedness on Irish farms is quite low and particularly so when compared with the situation on Danish and Dutch dairy farms in particular.
A significant number of farmers have no farm business related debt according to the Teagasc data. Just 26 per cent of all farms have a farm business related debt compared to 50 per cent of dairy farmers and over 32 per cent of livestock farmers.
Where there is a farm insolvency problem it is likely to be relatively quite substantial particularly if it arises from a mixture of off-farm and on-farm related debts. If the numbers involved are significant it could have implications for expansion of the dairy sector as those involved in any debt relief are unlikely to be able to expand funded from own resources or by borrowing.
The Personal Insolvency Legislation
The upcoming personal insolvency legislation will provide a mechanism where unsustainable debt will be written off either immediately or over time so as to provide those debtors with a new start. However, there have been grossly exaggerated claims surrounding the new legislation. It quite clear that the new debt forgiveness will neither be readily available nor painless and will have long time implications, in terms of subsequent credit worthiness rating and cost by way of interest loading, for any farmer who avails of it.
Farmers as sole traders are to some extent in a no man’s land between consumers and companies. New legislation is be enacted to provide for low cost examinations for smaller companies the so -called “examinership lite” by which such companies will be able to get Circuit Court protection for creditors thus reducing the current relative high cost barrier to securing of examinership. Indeed farmers who have supplied these companies and who are owed money may be at the receiving end of this process and lose out as unsecured sole trader creditors.
Three new debt relief arrangements
The new debt resolution arrangements provide for three separate schemes namely Debt Relief Notice, Debt Settlement Arrangement and Personal Insolvency Arrangement. The relationship between the various arrangements and the traditional informal negotiation and arrangement with a bank are as set out in the accompanying Table. The legislation also reduces the bankruptcy time for compliance to three years under certain conditions as well as increasing the bankruptcy threshold debt amount to €20,000.
The debt relief notice measure has no practical purposes for farmers as one of the qualifying criteria is that assets must not exceed €400. This debt relief arrange is primarily for unsecured consumer debt.
The debt settlement arrangement and the personal insolvency arrangement will most definitely be used by farmers where negotiations with the banks fail to provide an otherwise voluntary agreed settlement. However these arrangements have substantial qualifying criteria and associated business cost. To avail of any one of the arrangements a farmer debtor must prove that he is insolvent which is defined as meaning that the person is unable to pay his or her debts in full as they fall due.
To enter either of these arrangements the farmer debtor must appoint a Personal Insolvency Practitioner (PIP) and make a full disclosure of all assets, debts and income. The PIP then draws up a prescribed Financial Statement and advises the farmer on the options available to him and whether or not he should opt for a of the debt settlement arrangement (DSA) or a personal insolvency arrangement (PIA). For example, the PIP must outlined to the debtor the possibility of further informal negotiation with creditors which may be successful or indeed at the other end of the spectrum, and as a last resort, availing of the ultimate debt forgiveness mechanism – namely bankruptcy.
The debt settlement arrangement as it can deal only with unsecured debt is unlikely to be used extensively by farmers given that most farmer borrowing are now secured by way of a change on the land. If the PIP is satisfied that the farmer debtor is a suitable candidate he will arrange, after full enquiries, for a meeting of creditors. Creditors holding 65 percent or more of the value of the debt must vote in favour of the arrangements. The approved arrangements for debt relief will be binding on all the debtors creditors.
Personal insolvency arrangement applies for secured and unsecured debt of up to €3 million. The proposals for such arrangements would be put forward by the PIP on behalf of the farmer and must be approved by 65 per cent of creditors in value and at least 75 per cent of secured creditors and 55 per cent of unsecured creditors.
This on one hand provides a considerable veto to a bank where there is just one bank or in many cases where more than one bank are involved. However the alternative to this personal insolvency arrangement is likely to be bankruptcy that the creditors are likely to recover less of the outstanding debt under bankruptcy than under the personal arrangement or personal insolvency arrangement. Farmers and the advisers will no doubt use this negotiating strategy.
It is impossible to cover all the aspects of the new arrangements in a short article. However it is important that farmers and their advisers would be aware of the fundamentally changed circumstances of debt, banking and credit in Ireland compared to a few years ago. The vast majority of individual farmers may never engage with the new solvency legislation but it will form the background to negotiation with the banks on loan restructuring. The new debt arrangements most definitely do not come with zero cost and farmers and their advisers should endeavour, where ever possible, to strike voluntary bilateral agreements with their banks and other creditors.