Argricultural Charges under the Agricultural Credits Act 1928

 

Farming businesses come in various shapes and sizes and legal guises. We have the full spectrum of legal persons from sole trading entities through partnerships to incorporated bodies. When dealing with corporates the security which can be taken mirrors that available in the industrial sector and therefore will be well known and well understood by all in the insolvency community. Less well understood are the specialist forms of security which are utilised in the agricultural sector. It is on these and in particular the agricultural charge ("Agricultural Charge") taken pursuant to the Agricultural Credits Act 1928 ("the 1928 Act") on which the first part of this talk will focus.

 

The 1928 Act allows a farmer (including a partnership but not a corporation) to grant an Agricultural Charge to a Bank.

Prior to the introduction of the 1928 Act if the farmer was a private individual or a partnership (and therefore could not grant a debenture) any security over moveable assets (ie not land) known as Chattel assets, had to be taken as a Bill of Sale.

Any charge created pursuant to the 1928 Act is exempt from the requirements of the Bill of Sale Act. This has allowed the farmer in theory to more easily utilise Chattel assets as security.

By virtue of s.13 of the 1928 Act even if a tenancy expressly prohibits the tenant from creating a charge under the 1928 Act such a charge can be created.

 

Only a farmer may grant an Agricultural Charge. Farmer is defined as any owner or tenant of land who cultivates for profit. This can be either a sole trader or a partnership. Note a single partner can bind all the partner. You should however check how the farming business is described in the charge and compare this with the farmers' accounts and tax returns. Family partnerships are common even if some of the family members are not involved in the business on a day to day basis.

 

An Agricultural Charge may only be granted to a Bank. The Bank must be a registered deposit taking Bank.

 

Not all assets associated with the farming business can be subject to this type of security. Security can only be granted "over stock or other agricultural assets" as defined within the Act.

 

Farming stock is defined as "crops or horticultural produce, whether growing or severed from the land, and after severance whether subjected to any treatment or process of manufacture or not; livestock, including poultry and bees, and the produce and progeny thereof; any other agricultural or horticultural produce whether subjected to any treatment or process of manufacture or not; seeds and manures; agricultural vehicles, machinery, and other plant; agricultural tenant's fixtures and other agricultural fixtures which a tenant is by law authorised to remove."
 

An Agricultural Charge taken by reference to this definition will include all growing crops. By virtue of s.8(6) of the 1928 Act even if the farmer has granted a separate fixed charge over the property and even if this was taken in priority to the 1928 Act Agricultural Charge the 1928 Act Agricultural Charge in so far as it relates to the growing crops will take precedence over the fixed charge.

 

"Other agricultural assets" is limited to "tenant's rights to compensation under the Agricultural Holdings Act 1986 except under section 60(2)(b) or 62 for improvements, damage by game, disturbance or otherwise a tenant's right to compensation under section 16 of the Agricultural Tenancies Act 1995 and any other tenant rights."

The Bank does not stand in the shoes of the tenant and cannot as "assignee" claim the compensation under the Agricultural Holdings Act 1986 direct (Ecclesiastical Comm of England -v- National Prov Bank Ltd).

 

 

While there is an obligation on the farmer under Section 6 of the 1928 Act to pay any compensation received in respect of livestock destroyed by DEFRA under a government sponsored scheme to the Bank this does not constitute a security right.

 

 

 

It is believed that reference to "manures" does not include chemical fertiliser.

 

There is no clear case law as to whether or not horses are covered by the agricultural charge.

 

What is clear is that leasehold or freehold land is not an asset which can be included in a 1928 Act Agricultural Charge.

 

This quota is being retained along side the SPS

 

The only quota which can fall within the definition is milk quota as it carries rights of compensation for a tenant when quitting a holding. It arguably therefore falls under the definition of "other tenants rights" and therefore is capable of being charged if the charge documentation so provides. Compensation in relation to quota is only payable upon quitting of a protected 86 Act tenancy not a farm business tenancy.

 

It will not be the quota itself which the Bank can charge but only the tenant farmer's right to compensation on surrender of the tenancy which would result in the quota being returned to the Landlord. The Bank would have no better interest in the quota than the tenant farmer himself and therefore if the Bank takes possession of the charged assets (under the Agricultural Charge) the Bank will not be able to sell it as the ownership will not be vested in the tenant farmer. In the case of a freehold farmer with milk quota this can be charged under a fixed charge over land but is not capable of being charged under an Agricultural Charge.

 

In the case of tenant farmers there are often disputes between the tenant and the landlord in relation to who is entitled to the quota. Frequently agents argue S is due to the tenant although there is no legal justification for this.

 

These payments replace the AICS and livestock schemes.

These cannot be charged under an Agricultural Charge. A Bank can take separate bespoke security over this class of assets.

 

The 1928 Act refers to the farmer charging assets which "belong" to him. Where an item of plant is on hire purchase it is not owned by the farmer at the date of creation of the Agricultural Charge it can therefore arguably not be covered by the charge until the absolute ownership passes to the farmer. This issue however has not been litigated and therefore it may be possible to charge an interest less than absolute ownership.

 

While this is not covered by an Agricultural Charge, it will be subject to the Bank's right of set off.

 

 

These will not be covered by such security and in the case of farmers who are unincorporated one must follow the amended Bill of Sales legislation so as to avoid falling foul of section 344 of the Insolvency Act 1986.

 

 

These are totally different rules to those which apply in the case of corporate security. The Agricultural Charge can be fixed if the assets are specified in the charge but can only be floating in respect of assets coming into the farmer's possession after the date of creation.

 

Any progeny of any livestock or replacement agricultural plant bought in substitution for specific plant covered by the fixed charge at the date of creation will also be covered by the fixed charge.

 

 

There is a need to register the Agricultural Charge with the Agricultural Credits Department (Plymouth) ("ACD Plymouth") within 7 days of creation. If not registered it will be void against any third party but still enforceable by the Bank against the farmer.

 

 

Charges take priority in accordance with their date of registration. However all fixed charges take priority to floating.

 

 

 

The Farmer is still permitted to sell assets subject to a Fixed and Floating Agricultural Charge. The 1928 Act requires in relation to proceeds of sale of charged assets that:-

 

 

The farmer must account to the Bank in respect of the proceeds or any specified insurance proceeds.

 

The insurance proceeds are only those payable in respect of the charged assets or compensation payable under the Diseases of Animals Acts or Destructive Insects and Pests Acts. As noted above this does not give the Bank any security over these payments.

 

 

The farmer must account to the Bank in respect of the proceeds or any specified insurance proceeds or reinvest in stock or other agricultural assets whereupon the newly acquired asset becomes subject to the floating charge provisions of the security.

 

 

While the farmer will commit a criminal offence if he deals with the proceeds of sale of the charged assets other than in accordance with the 1928 Act, the protection afforded to third party purchasers (even with notice of the 1928 Charge) means that the Bank's position can be prejudiced by such improper sales. The purchaser has no obligation under the 1928 Act to ensure the sale proceeds of the assets are paid to the Bank nor does any third party recipient of the proceeds of sale (s.6.4)).

 

 

The bank does however retain its common law rights to claim a proprietary claim to any proceeds and a personal claim for repayment if the proceeds have lost their identity.

 

 

In the case of a proprietary (trust claim) it will be necessary for the Bank to be able to identify the trust fund. No fault or knowledge on the part of the recipient is necessary.

 

 

In the case of a personal action against a third party where the funds received have been converted into something else or dissipated, knowledge is an essential element. This remedy will only be available where it can be shown that the recipient had knowledge of the farmer's obligation to the Bank under the 1928 Act charge.

 

 

After service of the crystallisation notice, bankruptcy, or death of the farmer or dissolution of partnership the floating charge element is converted to fixed charge. Thereafter any further assets acquired by the farmer after crystallisation do not fall within the scope of security. It is therefore important that the appointment of a Receiver follows on quickly.

 

 

The farmer's bank account will not be subject to the Agricultural Charge. This will therefore need to be separately frozen as even assets bought with these monies will not be covered by the Agricultural Charge after crystallisation. The Bank will always retain its right of set off in respect of any credit balance in any account.

 

 

The case of Re-Opera is believed to apply. Therefore judgement creditors will take priority over assets subject to the floating charge but not fixed charge assets prior to crystallisation. A landlord will have right to distrain over all assets prior to appointment of a receiver.

 

 

Any charge under the 1928 Act created within 3 months of date of presentation of a petition (on which an order is made) will only be valid to the extent that fresh post charge consideration was provided (s8(5) of the 1928 Act).

 

 

In common with other fixed charge security the Bank has the right under its security to take possession of the assets in its own name (section 6 of the 1928 Act) where there has been an event of default (as defined in the Agricultural Charge).

 

 

The usual method of enforcement remains however the appointment of a receiver. Such a power can be incorporated as a matter of contract or will be implied into any charge taken as a deed by virtue of section 101 of the Law of Property Act 1925. ("LPA").

 

 

It is usual for any charge to vary section 109 and 103 of the LPA 1925. Section 103 states the circumstances where a customer is deemed to be in default while section 109 gives a Bank a power to appoint a receiver where there has been an act of default as defined in section 103 and goes on to set out the limited powers granted to any receiver.

 

 

The appointment must be in accordance with the Agricultural Charge document although there are no statutory formalities.

 

 

The receiver does not have to be an insolvency practitioner.

 

 

Any appointment pursuant to the LPA implies an appointment of the receiver as agent. This can also be incorporated as a matter of contract. In addition the limited LPA power to collect and account for rents will apply if the charge was executed as a deed which is likely to be the case. All other powers must be stated in the charge. (Including a power of sale).

 

 

The major deficiency in those powers granted by the LPA will always be the inability of the receiver in the absence of any separate appointment under a fixed charge over property to enter into possession of the farm itself. A right to enter onto the property for the purpose of taking control of the chattels subject to the 1928 Act Agricultural Charge is however implied although there will always be difficulties as to when and how frequently this can be exercised.

 

 

Any receiver will be entitled to an indemnity out of the assets of the farmer over which he is appointed.

 

 

The receiver will either be entitled to remuneration at a rate of 5% on money received (pursuant to LPA s.109) or as otherwise provided for within the charge.

 

 

The order of payment of creditors by the receiver will be either in accordance with s.109 or as varied by the charge (s.109 is attached).

 

 

The rules which apply to Company floating charges in relation to preferential creditors do not apply to charges under the 1928 Act. The receiver will therefore only need to discharge costs incurred and the appointing Bank's debt.

 

 

 

 

The system of quotas was introduced in order to restrict production of milk. They were first introduced on 1 April 1984 at which point all producers of milk were allocated quota. This quota either related to direct sale or to wholesale although subsequently these categories have been added to by the issue of a special category quota such as SLOM quota.

 

The quota system restricts production by imposing a penalty on farmers who produce milk without sufficient quota. Any farmer who produces milk without quota will be subject to a super-levy. This is approximately 115% of the target buying price for milk in any given year.

 

Despite the introduction of the SPS quota is being retained. While this is on the basis that it will be phased out of The life of the system has been extended on the many occasions to date.

 

 

Quota is registered to a particular holding and is therefore not necessarily owned by the farmer who utilises the quota. If the farmer is a tenant farmer he will have a right to use that quota but upon quitting the holding will only have a right to claim compensation under schedule 1 of the Agricultural Act 1986 for both additional quota bought onto the land by the farmer and the so called tenants fraction. This in broad terms is the amount of quota allocated to the holding in 1984 which was directly attributable to the tenant's own improvements of that holding prior to that date.

 

 

All quota sales are registered by the Intervention Board for Agricultural Produce. The Board can sanction sales of quota in isolation where the parties to the transaction can show that the sale will lead to "improvement in the structure" of both vendors and purchasers farming businesses. It has been difficult to establish such a mutual benefit and therefore quota has traditionally been sold along with the underlying holding to which it relates. The market value of quota (April 2005) is 8.4p per litre. In previous years prices have been much higher hitting 35 pence. The price is always lower at this stage of the year as super levy is calculated at the end of the financial year. Also the number of farmers leaving this sector has depressed the price.

 

Much of the problems associated with sale of quota have been obviated by the market for leased quota. Quota may be leased without the need for transfers of land and the rate for leased quota (in April 2005) was 2.7p per litre.

 

 

The key question in relation to security of this nature is whether quota can be charged separately from the land holding to which it relates. While it appears clear that quota can be charged under a fixed charge over freehold land (See Harries v Barclays [1997] 2), a stand alone charges poses difficult legal issues.Ultimately with the current uncertain state of the law it is better for the Bank to take charges over Milk Quota (provided reliance is not placed on it for lending purposes) so that in an appropriate case where quota realisation make the difference between repayment in full or a shortfall, the point can at least be argued.

6 CAP reform - Single Payment Scheme ("SPS")

6.1 Introduction
The CAP reform simplify the application arrangements for subsidy payments by replacing ten major CAP payment schemes with one new single payment. Subsidies will be decoupled from production. Previously farmers were paid for producing products in many cases which the consumer did not want. This led to stock piling of goods bought at intervention prices. In addition under the new regime, environmentally friendly farming practices will be better acknowledged and rewarded.

 

SPS - Application forms deadline of the 16 May 2005 has been set. To claim payment under the Single Payment Scheme, a claimant must be a farmer who exercises an agricultural activity, and land that supports that claim has to be at the farmer's disposal for at least a 10-month period. The 10-month period can begin at any time from 1 October in the year before the claim to 30 April in the year of the claim. The farmer has the opportunity to choose his own start date. If none is set the default date is 1 February. Only one start date is permitted per holding.

 

A key date summary is attached.

 

 

Cross compliance is a series of standards that farmers need to meet in order to receive their subsidy payment in full.

 

As under the AICS scheme farmers still have to set aside a set portion of their land if they are to qualify for SPS payments broadly speaking in England for 2005 this is 8%. This, however, is varied in certain areas such as upland.

 

 

Modulation redirects a proportion of CAP subsidy payments into agri-environment and rural development schemes (Pillar II) and was first introduced in the UK in 2001 at a low, flat rate of 2.5% increasing gradually over time. The current rate of modulation is 3.5%.As a result subsidies which would otherwise go to farmers are retained by the government for redistribution to other farm related projects.

 

6.5 Security over SPS from corporates

 

The wide ranging nature of debenture security means that if subsidy payments are due to a farming company any payments due to that company will be caught by a standard debenture.

 

 

As the terms of Agricultural Charges are not as wide as corporate debentures there is therefore a need to consider alternative ways of obtaining security. The best way to proceed is to take a charge over the monies due under the schemes as a simple book debt. Where the farmer providing the security is not a registered company, one would usually need to follow the complicated Bill of Sale legislation when preparing security. There is, however, an exception to the general statutory rules which excludes choses in action from the definition of personal chattels within Section 4 of the Bill of Sales Act 1878.

 

The only impact of the Bill of Sale legislation is in relation to the question of registration. A general charge over book debts, would need to be registered as if it were a bill of sale. This process is a little drawn out and requires affidavits to be produced and various certified copies submitted to the Court along with a fee.

 

 

DEFRA have accepted notification of assignment of subsidies and note that assignment so that payments can be redirected to the Bank. This is clearly key to the effectiveness of security of this type. It is not clear if they will continue this practice with SPS payments.