Chapter 3

Views on the Bill

The intention of the Bill

3.1        The Bill amends the Bankruptcy Regulations 1996 to exempt the EC Exit Package from bankruptcy proceedings, where a final order in bankruptcy has not been made prior to the commencement of the Bill.

3.2        The Bill's overall approach was outlined by Senator Xenophon in his Second Reading Speech as follows:

Under the provisions of this Bill, the EC Exit Package will be exempt from bankruptcy proceedings, so long as the final orders have not been made. This is to ensure that the intention of the scheme is upheld: to assist farmers to leave their properties, to relocate and to retrain in new employment so they can continue to support themselves and their families. Ultimately, the significant purpose of the EC Exit Package is to enable farmers who wish to leave the land with dignity to use the funds received under the Package to start afresh. This amendment will ensure that this can occur.[1]

3.3        The submissions received for this inquiry highlighted a divergence of opinion among stakeholders on the treatment of government rural support schemes for bankruptcy purposes.

Support for the Bill

3.4        The Queensland and Western Australian Governments support the Bill.[2] The Queensland Minister for Agriculture, Food and Regional Economies explained his reasons for support as follows:

... the EC Exit Package is a taxpayer funded assistance measure specifically targeting low income and low asset farm owners. I consider it negates the purpose of the scheme and is therefore unacceptable for creditors to force farm families to hand over re-establishment assistance to offset any remaining debt once the sale of property and farm assets has been completed and proceeds have been disbursed.[3]

3.5        Some state farmer groups such as the South Australian Farmers Federation support the intention of the Bill. The Western Australian Farmers Federation believe that 'under current arrangements' the Bill will be of benefit, although they raised some broader concerns about how the EC Exit Package operates.[4]

Criticism of the Bill

3.6        The national peak farmer representative body, the National Farmers' Federation (NFF), however, questioned the need for the Bill as they were 'unable to find information that suggests that this is a widespread issue'[5] (this issue is discussed further at paragraph 3.27). The NFF further stated its concern that:

... the amendment would allow the claimant to leave a rural community and not service debts owed to members of the community.[6]

3.7        The Department of Agriculture, Fisheries and Forestry (DAFF), submitted that:

On the face of it, allowing exit grant funds to be available to creditors appears to defeat the purpose of the grant, and there have been (unsubstantiated) reports that farmers have not applied for a grant because they couldn’t see any point when the money would just be passed on to creditors.[7]

3.8        However, DAFF suggested the amendments proposed by the Bill may actually be inconsistent with the goals of the EC Exit Package:

Paying off debts should be seen as a positive action given the grant recipient is trying to make a fresh start, unencumbered. The EC Exit Grant assists with a new start, and if the best way to make that new start is to pay off debts then this would seem to be a good use of the grant money.[8]

Submitters' views on specific issues

3.9        The main issues raised in submissions were the possible impacts the Bill may have on farmers making timely decisions about their future in the sector, the effect on other businesses in regional communities, and concerns regarding the conduct of the financial sector, equity of treatment and complicating the bankruptcy process.

Early action

3.10      A key concern in assessing the merits of the Bill is how changes to the bankruptcy treatment of government grants will affect the decisions made by recipients, or possible recipients, of those grants.

3.11      DAFF explained how the structure and eligibility criteria of the EC Exit Package incorporates the policy aim that farmers make timely decisions about their future:

The grant assists farmers to make the hard decisions about their future in farming before they reach a point, financially, from which it would be very hard to recover. Some farmers remain, hoping for a good season to repay their debts, but this is very risky if they are already burdened by debt. The guidelines encourage farmers to consider their position before it is too late by requiring that, to receive a grant, an applicant must be effectively in control of the farm enterprise immediately before the sale of the farm. The EC Exit Grant was not made exempt from any future bankruptcy action so as to avoid deterring farmers from taking early action.[9]

3.12      The Western Australian Farmers Federation 'agree that early action is preferred', but argued the Bill:

... will allow farms to remain eligible when so many factors are out of their control, such as delayed property transactions.[10]

3.13      The National Farmers' Federation also noted broad concerns about the need for farmers to make timely decisions when in financially difficult situations:

The decision to leave an industry, often a long held family enterprise, is a hard one and can be the source of great anxiety for individuals and families. However, the NFF has long called for a shift in the policy focus from 'drought relief' to 'drought management and preparedness' and ensuring that farmers are supported and have the tools to manage their businesses. These tools include appropriate business plans which can be used to inform financial decisions and avoid circumstances where farmers are looking to leave the industry because they are bankrupt.[11]

Impact on regional communities

3.14      Another issue the committee examined was the likely impacts on regional communities and small businesses which dealt with the ex-farmer if the EC Exit Package was exempted from bankruptcy.

3.15      The Western Australian Farmers Federation suggested that the EC Exit Package significantly assisted in debts within regional communities being repaid:

WAFarmers members have commented that they consider the EC Exit Grant as an opportunity to pay back unsecured creditors, many of whom co‑exist in the same small, close knit community as the applicant, and who rely on cash flow to stimulate local employment, much of it dependant on agriculture. Thus it is the absolute desire of the grant recipients they can continue to live and work in their beloved community 'without to having to cross the street to avoid contact'.[12]

3.16      DAFF provided a case study from a rural financial counsellor which provides a practical example:

The client was declared bankrupt by a fuel company and the client chose to distribute his exit grant funds pro-rata to his creditors through negotiation by his creditor. Money owed was mainly paid to local small businesses in the town where he lived. This meant he could exit farming but still live in the town with a little dignity. The process was extremely long and drawn out, over some 24 months.[13]

3.17      The National Farmers' Federation, however, had concerns about the recipient of a grant leaving the community without servicing debts owed, and queried whether the Bill would help encourage these types of outcomes:

Rural communities have suffered significant hardship during the recent droughts, with many small local businesses extending credit to farmers in the community. It would be disappointing if the Bill served to weaken the trust that exists within these communities by leaving these creditors exposed.[14]

Conduct of the financial sector

3.18      An issue which some submissions raised was the actions of creditors. Indeed, this was a key trigger for the Bill being introduced:

... there have been reports that farmers who have received the EC Exit Package have been threatened by creditors that they will have them declared bankrupt, seeking to capitalise on the funds they have received under the Package.[15]

3.19      The South Australian Farmers Federation submitted:

It is unconscionable that financial institutions and other creditors, who may have been involved in putting pressure on such farmers to sell, are able to threaten bankruptcy so that they can get access to this government funding.[16]

3.20      Another submitter also discussed the conduct of the financial sector and suggested:

... it may be a suitable time to consider the parameters of individual social circumstances, legal obligations of financiers and administrative processes against the objects of the exceptional circumstances legislation.[17]

3.21      The Western Australian Farmers Federation, however, queried what the likely response of the creditors would be to any changes in bankruptcy treatment of the EC Exit Grant, such as that proposed by the Bill:

Anecdotal evidence suggest that whilst the banks cannot demand the grant be paid to them, the EC Exit Grant gives the bank more incentive to pressure farmers to liquidate assets at a greater loss, knowing that the grant will be available.[18]

3.22      The Insolvency Practitioners Association (IPA) also suggested that the Bill could lead to more instances of bankruptcy among farmers. The IPA outlined the following possible scenario to demonstrate this point:

... a creditor may apply to the court to order that the farmer be made bankrupt. If the farmer's grant moneys are protected, the creditor may have little incentive to take that action. However the creditor could, as an alternative, simply proceed to use legal recovery processes to garnishee or otherwise try to recoup its debt from the farmer's grant money. That then gives the farmer some incentive, or pressure, to go bankrupt in order to obtain protection from the creditor's claim to the funds.[19]

Equity concerns

3.23      One of the main areas of opposition to the Bill was based on questions of equity. These arguments took two forms. The Attorney-General's Department, which has overall responsibility for bankruptcy policy, pointed out:

... as there are many types of Government payments to individuals and there is no blanket exemption the selection of which Government payments to exempt will always be somewhat arbitrary.[20]

3.24      DAFF suggested further equity issues would arise due to the Bill's outcome of ex-farmers being treated differently to other business operators:

It can be argued on equity grounds that former farmers should face the same treatment as other sectors of the business community in any commercial dealings they enter into after farming ... The case has not been made as to why farmers receiving exit assistance should have these funds quarantined from bankruptcy. Other members of the community do not receive similar treatment.[21]

3.25      The IPA also highlighted this issue by noting as an example the treatment of payments associated with disaster relief:

There are various Commonwealth and State payments and/or grants for financial assistance relating to natural disasters which are affected by bankruptcy; that is, disaster fund payments made to a bankrupt vest in the trustee for the benefit of the bankrupt's creditors.[22]

Increasing complication to the bankruptcy process

3.26      The Attorney-General's Department suggested that adding the EC Exit Package to the types of property that are exempted from counting as divisible property would complicate the bankruptcy process, possibly resulting in the costs of administering bankruptcy estates increasing and increased uncertainty among creditors.[23]

3.27       While this may be an issue in principle, these concerns are likely to be mitigated by the low number of recipients of these types of government grants. DAFF advised that according to Centrelink data, between 25 September 2007 and 30 June 2011 only 56 recipients of the EC Exit Grant had a net debt (ranging from $492 to $2.2 million). The average total net asset position of recipients prior to receiving the grant was $188,238.[24]

3.28      The submission from the Queensland Minister for Agriculture, Food and Regional Economies also highlighted the low number of cases likely to be captured by the Bill. It noted that the Queensland Department of Employment, Economic Development and Innovation's Farm Financial Counselling Service had identified two case studies where financial institutions have required farmers to hand over government exit package grants to offset against residual debt following the sale of property and farm assets—and only one concerned the EC Exit Package.[25]

3.29      The eligibility criteria associated with the scheme also disqualifies individuals who are subject to bankruptcy proceedings, which further limits likely instances of EC Exit Package funds being considered in bankruptcy matters. DAFF advised that between 25 September 2007 and 30 June 2011, 53 applications for the EC Exit Package were rejected because the applicant was not effectively in control of the farm when it was sold.[26]

Alternative approaches

3.30      In its evidence to the committee, DAFF suggested that other approaches be explored rather than making amendments to bankruptcy law:

Creditors, who have lent money in good faith, are entitled to be repaid. On the other hand, the exit grant has been provided to assist farmers re‑establish outside of farming. These two demands on scarce resources appear incompatible. The conflict between these competing demands will not be solved through bankruptcy but could be, to some degree, through informal or formal agreements acceptable to all parties.[27]

3.31      DAFF's evidence described the approach being taken to these types of issues in South Australia, and suggested that other jurisdictions could take a similar approach:

Banks in South Australia are reportedly writing off debts ... following the negotiation of a non-binding agreement between the South Australian Farmers' Federation and the Australian Bankers' Association in consultation with Primary Industries and Resources South Australia, the Rural Financial Counselling Service SA Inc and the Law Society of South Australia ... As part of the agreement, financial institutions have undertaken that they will use their best endeavours to not attempt to recover government income support payments or exit grant funds.

The strategy endeavours to resolve financial problems through their early identification, open communication, and access to professional advice, with the aim of achieving a win-win situation for all involved. However, bankruptcy is still available as an option of last resort and is most effective when all assets of the bankrupt are divisible among creditors.[28]

3.32      Other submitters suggested that provisions related to the EC Exit Package be amended further to address other issues associated with farm debt:

... WAFarmers feels that to reduce the banks 'reward' from pressuring farms to liquidate assets at a lower price, knowing that the farmers will exit with a grant, that a further amendment be introduced that allows voluntary return to the bank of farming assets be sufficient to access the grant, given the current delayed transaction times.[29]

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