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Executive Summaries Apr 2, 2019

How Can Farmers Avoid the Negative Impact of Insolvency Laws?

In a political effort to offer support to struggling farmers, a law was passed over 20 years ago recognising farmers' financial issues and offering them a solution to their challenging circumstances. Is the logic behind providing such protection still applicable in today's context?

The main purpose of the Farm Debt Mediation Act (referred to as "Act") is to provide struggling farmers some "breathing room" by offering them the right to a stay of proceedings of creditor claims made against their property and the right to request mediation in an attempt to resolve their financial issues. 

It "allows a farmer to continue operating while taking advantage of a grace period to reach an agreement with creditors with the assistance of a committee of experts acting in a conciliatory capacity"[1].

The Act is structured in such a way in order to allow the farmer, if eligible under this Act, to obtain advice and remedy a challenging but temporary financial situation. 

Which Farmers Are Eligible?

The farmer may only apply for mediation in one of the following cases:

  • they are unable to meet their obligations as they become due;
  • they have ceased paying their current obligations in the ordinary course of business as they generally become due; or
  • the aggregate of the farmer's property is, upon fair valuation, insufficient or will be insufficient, if sold at auction by authority of law to enable payment of all their obligations, due and to become due. 

Suspension of Creditor Recourse

Thus, a farmer in one of these three cases would have the right to request a stay of proceedings, which his creditor may have instituted against him, the examination of his financial situation and mediation between him and his creditors with a view to reaching an arrangement acceptable to both parties. 

Creditors should know the following about this exceptional regime:

  • All creditors are subject to the stay of proceedings, including secured creditors.
  • The minimum period during which creditors - whoever they may be - may not take action is 30 days. An additional period of up to 90 days may be granted.
  • The stay interrupts the effects of any proceedings, including a request for forced abandonment and sale under judicial control against the farmer once a notice of stay of proceedings is issued.
  • The creditor is unable to assert his rights or even request payment.
  • Any action taken by the creditor in violation of this stay is null and void and the affected farmer may institute any appropriate proceedings against the creditor before a court of law.

Finding a Compromise to Gain Breathing Room

Once the mediation process has begun, the mediator reviews the farmer's financial report and meets with the persons under mediation, namely the farmer and his creditors (whether secured or unsecured under the circumstances). To reiterate, because he must be impartial, the mediator cannot advise the parties involved. 

Contract by Way of Compromise and Binding Contract

An arrangement is the Act's ultimate objective: to find a compromise to provide the eligible farmer with "breathing room". Above all, it is a contract concluded between the farmer and his creditors on a voluntary basis in order to improve the farmer's financial situation. 

Because the compromise is based on the wishes of the parties involved, all affected creditors must be notified of the existence of such an arrangement, otherwise they will not be bound by it. 

How Does This Work in Practise? 

The Act's underlying objective is to provide a mechanism whereby insolvent farmers and their creditors can attempt to reach arrangements that will satisfy all parties regarding the farmers' debts and obligations. 

The success of this objective depends mainly on the cooperation of the parties involved, particularly creditors, who must reconcile their expectations with the farmer's financial capabilities. However, some loopholes may cancel out the positive effects of the conciliation sought by this law.

In practise, farmers unfortunately use the mediation services too often once the situation reaches a point of no return. The trust relationship with their creditors, particularly their financial institution or short-term lender, without whose support the survival of their business, may be jeopardised once they leave the protection of the mediation service. 

Like the farmer, his supplier-creditors depend on the farmer's liquidity. If the latter cannot count on the financial support of his so-called short-term lender, the success of the recovery plan is not guaranteed. 

Thus, it would be very beneficial for the administrator or mandated expert to meet with the short and long-term lenders at the outset of his administration. The former's aim is to discuss the challenges and potential solutions that would prevent these lenders from simply asking for payment at the end of the suspension period.

To learn more about agricultural mediation, do not hesitate to contact Claude Paquet, Partner and Lawyer in banking litigation.


[1] Corp. Les Produits de la Jardinière v. Banque Nationale du Canada, [1996] A.C.F. no 460.

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