- The farming and agricultural sector continues to experience financial pressures. Agricultural charges remain an important form of security available to banks when lending to the agricultural sector, but nevertheless how useful they can be and the cost saving they can bring on enforcement is often not fully appreciated.
- Although the term ‘farmer’s debenture’ is in some ways useful to convey the powers available to a bank under an agricultural charge, it can be misleading if applied without thought to the assets which may be charged by an agricultural charge.
- Unless the point is dealt with specifically, in future the law relating to agricultural charges may become more complex after the reform of the Bills of Sale Act and a new form of personal security over chattels is introduced.
There are many pressures facing the agriculture sector. Higher employee costs, lower sale prices and a weak pound all play their part in this. When it comes to taking security from farmers – and enforcing that security – the agricultural charge is key.
Those banks (and advisers) who lend to the agriculture sector will be familiar with the concept of an agricultural charge granted by a farmer. However, for the uninitiated the agricultural charge is an alien concept. It is a security over chattels granted by an individual (albeit of a particular class of individual) which is not subject to the same byzantine requirements of the Bills of Sale Acts and which can create a floating charge security interest over an individual’s assets. However, even for the initiated, the agricultural charge can still retain some surprises.
What Is An ‘Agricultural Charge’?
Businesses operating in the agriculture sector have traditionally operated as sole traders or family partnerships. While some businesses are incorporated, the unincorporated model is still by far the most commonly found. In the 1920s, it was determined that there needed to be a special form of security available to specific creditors of unincorporated farming businesses to meet the funding needs of agriculture sector. So the Agricultural Credits Act 1928 (ACA 1928) was passed and the concept of the agricultural charge created. An agricultural charge may only be granted by a ‘Farmer’ (as defined by the ACA 1928) in favour of a ‘Bank’ (as defined by the ACA 1928). Once created the charge is registered with the agricultural credits department by filing the required form AC1. Searches to determine whether or not there are any prior ranking agricultural charges are made by writing to the Agricultural Charges Department with a completed form AC6.
What is charged?
The ACA 1928 is prescriptive as to what may and what may not be charged. The two categories of assets set out and defined in the ACA 1928 are ‘farming stock’ and ‘other agricultural assets’. Farming stock encompasses the main asset classes which may be charged and essentially includes crops, livestock (including progeny), seeds, manures, agricultural vehicles, plant and machinery. However, the definition encompasses more than is mentioned in this article and if there is a particularly valuable asset it would be worth checking with a legal adviser as to whether it is captured within the definition. Other agricultural assets encompasses a tenant’s’ right to compensation under the Agricultural Holdings Act 1986 and Agricultural Holdings Act 1995 (with some exclusions) and other tenant’s rights.
The charges created over the assets will be fixed to the extent that such assets are scheduled in the charge document and importantly this fixed charge extends to any replacement equipment or animal progeny, to the extent that such are scheduled. Any assets acquired after the creation of the charge are subject to a floating charge. Given that there is no prescribed part applicable to insolvent farming partnerships, the distinction between the fixed and floating charge assets appears to have an impact which is limited to: (i) approval of office holder fees for dealing with that asset; and (ii) the farmer’s ability to dispose of the asset and freely handle sale proceeds.
The agricultural charge was not intended to interfere with security law relating to real property or affect the position in relation to book debts under the Bankruptcy Act 1914 (now see s 344 of the Insolvency Act 1986 (IA 1986)). Accordingly, an agricultural charge cannot charge land nor can registration of it act as a bill of sale to perfect security over book debts for the purposes of s 344 of the IA 1986. By way of reminder, s 344 of the IA 1986 states that any general assignment of an individual’s book debts is void against a trustee in bankruptcy if not registered as a bill of sale. It follows that book debts and real property of a farmer need to be secured and perfected in other ways.
While the position as to real property is unsurprising and relatively uncomment-worthy, the position in relation to book debts should be considered further in relation to the practical effect this may have on plant and machinery recorded as an asset in accounts. Agricultural equipment is expensive and farmers and merchants alike have turned to hire purchase agreements to fund acquisitions. Many bankers may see the farmer’s ‘equity’ in the hire purchase equipment (‘HP ‘equity’’) as falling within the bank’s security net. This is understandable since many will simply see the agricultural charge as a form of ‘farmer’s debenture’ and apply what they recognise in corporate insolvency to agricultural charges and farmers. However, there are several points to consider before concluding whether or not HP ‘equity’ is captured by the charge (whether fixed or floating).
Firstly, the agricultural charge only charges property belonging to the farmer. HP ‘equity’ is not strictly speaking property belonging to the farmer, since it is merely the contractual promise of the hire company to pay over the excess received on sale of the equipment as set off against the amount due to the hire company under the agreement and the payments received from the farmer. Indeed, the use of the word equity is misleading and used colloquially due to the mistaken analogy with a mortgagor’s equity of redemption under a mortgage. The farmer’s right to the HP ‘equity’ is merely a contractual promise
by the hire company to pay funds to the farmer, not an equitable proprietary right equivalent to a mortgagee’s equity of redemption. It is better to see the HP ‘equity’ as a book debt, which for want of a specific assignment or a general assignment protected by registration as a bill of sale would not be available to a bank on enforcement of an agricultural charge. There does not appear to be any case law to support this view, but the logic of it appears to merit a cautious approach when putting
together estimated outcome statements or when including HP ‘equity’ in any security valuation.
Key Points For Banks
Although the agricultural charge is a standard part of agricultural security the relative rarity of an agricultural enforcement means it is not often fully understood nor its powers appreciated by the banks which hold them. Set out below are some of the key points which are not often understood:
- As stated above, a fixed charge created over an asset remains fixed in relation any asset acquired to replace it (or progeny in the case of livestock).
- The farmer must account to the bank in relation to the proceeds of the sale of any floating charge or reinvest such proceeds in the purchase of assets which then also become subject to the floating charge.
- Banks must consider the nature of the assets charged by the agricultural charge when valuing security. On enforcement livestock is expensive to maintain and subject to welfare obligations as a priority, it is also relatively easy to dispose of locally and difficult to trace.
- If it is held in conjunction with other charges (eg over land), a bank which holds an agricultural charge may be a qualified floating charge holder for the purposes of the Insolvent Partnership’s Order 1994 (as amended) and so have the right to appoint administrators to a farming partnership using the out of court procedure. This is an important power and not usually appreciated. However, the savings in time and money over the court appointment route will be significant, not to mention the benefit of getting control of assets which are otherwise all too easily converted to cash (eg livestock, silage, small but vital equipment etc).
- The provisions as to the prescribed part do not apply in the case of an administration of a farming partnership and so there will be no corresponding reduction in the amount available to a bank under its floating charge realisations.
- The prohibition on administrative receivers has not been carried over to a prohibition on appointing agricultural receivers and so this option remains open for banks holding agricultural charges post-dating September 2003. However, in practice most insolvency professionals are likely to prefer the more familiar administration regime.
At the time of writing, there appears to be no plans to change or update the law in relation to agricultural charges and with Brexit now taking up the Government’s attention we are unlikely to see reform in the near future. However, it is worth making the point that the upcoming changes to the law relating to bills of sale may have an impact on agricultural security. In particular, the Law Commission’s proposals as to the introduction of a ‘Goods Mortgages Act’ is likely to have an impact on the security available to banks (and other lenders) from farmers. Indeed, it is likely that the increased practical protection afforded by a register of security over vehicles is preferable to the security afforded by an agricultural charge established by a piece of legislation passed in 1928. Although the Law Commission submissions in relation to bills of sale reforms are silent upon agricultural charges any new legislation will have to (or should) deal with the issue of priority in the case of, for example, a vehicle charged under an agricultural charge and a vehicle charged (and registered) under any new form of personal chattel mortgage.
As and when the bills of sale regime is reformed the law surrounding agricultural charges is likely to become a little more complex and perhaps more obscure as England takes a further step toward modernising its security law. That said, agricultural charges are and will remain a useful form of security for banks lending to the agricultural sector and, if not already held, ideally should be taken from farmers in the case of any new lending, refinance or other opportunity to take security. Agricultural charges offer not just the benefit of additional assets but the opportunity to avoid potentially expensive, contested and lengthy court proceedings to gain control of an unincorporated farming business.