The strict procedures behind receivership
Farmer Freddy has been learning about mortgages and receivership
“It’s terrible all of this stuff I’ve been reading in the paper recently about farms going into receivership and being sold out from under the owners,” says Freddy to Pebbles one Sunday morning as they sit (in the sun, then rain and then sun again) reading the papers.
“I don’t understand how a bank can just put a farm into receivership and sell it at any time they want. It just doesn’t seem right,” exclaims Freddy.
“Are you sure you’ve got your facts straight Dad?” interrupts Pebbles.
“I would be very surprised if a bank could appoint receivers and sell the farm unless the company that owned the farm was in default under its loan and security documents. There are strict procedures that a bank must follow before it can do that sort of thing. Let me explain how the process usually works.
“If you can’t make the loan repayments on your car, eventually the finance company will repossess and sell the car to get their money back. Receivership is the “business” equivalent of that process. It usually happens when a bank has loaned money to a company and the company has granted a charge over its assets as security for that loan. That type of charge is commonly called a general security agreement, or a GSA. One of the provisions usually found in a GSA is that the bank may appoint a receiver over the assets of the company if a default occurs. The receiver is the person who takes control of the assets so they can be sold to repay the debt (and to cover the cost of the receivership).”
“These days, many large farms are owned by companies. The directors of those companies are usually the farmers themselves and the assets of the company are the land, the machinery and the stock.”
“In addition to the GSA, the bank will generally also take a mortgage over the farm land. If the company breaches the terms of the loan and security documentation, for example by failing to repay money when it becomes due, the bank must follow the procedures set out in the Property Law Act 2007 before it can enter into possession of, or sell, the land. This includes service of a “Property Law Act Notice” on the land owner which sets out the details of the default and a date by which the default must be remedied. If the default is not remedied by the specified date, the power of the bank to take possession of, or sell, the property, arises.”
“It’s important to understand that the bank must follow the process set out in the agreements and provided by law. By the time the bank takes any of the above action, it should never come as a surprise to the farmer,” explains Pebbles.
“Thanks Pebbles,” says Freddy. “You’ve really cleared that up for me. I’ve got a few more questions too, but that can wait for another day…”
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