Landmark debt deal to save 'asset-rich, cash-poor' farms
Lenders have agreed a deal allowing a couple to keep their €1.5m dairy farm despite falling into arrears, in the first deal of its kind.
The significant court decision will offer a lifeline to farmers faced with losing their livelihood to banks or vulture funds.
In the first case of its type, a dairy farmer and his wife were able to secure their family farm through the agreement of a personal insolvency arrangement (PIA).
The arrangement, which involved the restructuring of €1.1m in debt, is being seen as a game changer as until now the debt resolution mechanism has been predominantly associated with safeguarding family homes.
The couple got creditor and court approval for a deal covering both their home and farm.
They did not seek a debt write-down, but will get improved interest terms and an extended period of 25 years to clear what they owe.
The arrangement, which was approved at Kilkenny Circuit Court earlier this month, is the first in around 30 similar PIAs currently working their way through the system.
A feature of the case was that the farmer and his wife were asset rich but cash poor.
Their home was valued at €220,000 and farm at upwards of €1.5m.
While they were in positive equity, they did not have the required cash flow to repay their debts when these were called in.
Under the terms of the arrangement, Start Mortgages, which is owed €388,000 secured on the couple’s home in Co Tipperary, will receive a reduced rate of interest, down from 5.45pc to 3pc.
The couple can make interest only repayments for the first six years of the arrangement. The deal also involves the restructuring of debt secured against their farm
Pepper Finance DAC, which is owed €387,000, and Everyday Finance DAC, which is owed €123,000, will also receive interest-only payments fixed at 2.63pc and 2pc respectively for a six-year period.
When the six years are up, all three secured creditors will be paid for a further 19 years until the farmer is 75. The six-year holiday on repaying the principal will give the couple breathing space to repay unsecured creditors, owed around €220,000. No interest accrues on unsecured debt in a PIA.
The repayment of unsecured debt - debts not backed by an underlying asset such as a house or land - is seen as vitally important. Unsecured creditors can include service providers such as silage contractors, creameries and vets, whose goodwill is essential for the farm to prosper in future.
Under the arrangement, the couple's arrears were capitalised and spread out so they can be repaid over a longer period along with their principal debt. This is a normal solution in debt deals on family homes, but would not have been seen before in farming.
In court, the farmer's counsel, Keith Farry BL, instructed by Elizabeth Howard Solicitors, said any alternative to the proposed arrangement, such as the sale, surrender or repossession of the property, would result in his client being made homeless and the farm repossessed.
The PIA was put together by personal insolvency practitioner Gary Digney of PKF-FPM Accountants. Mr Digney told the Irish Independent people wrongly believed PIAs were only about the family home and people in negative equity.
He said while the family home must be part of the arrangement if a court is to review it, a PIA could cover all secured debt, including that linked to other assets, such as a farm.
"I think there is a major problem for farmers whose loans have been sold [by the banks]. What is happening is the vulture funds are bankrupting them. These PIAs are the only way to address it," he said.
Mr Digney said while some future farm-related PIAs may involve a write-down, many won't.
"A PIA isn't necessarily a write-down. A PIA is based on affordability," he said.
"In a lot of cases, the farmer's assets are a lot higher than their liabilities. So there will not always be a write-down. But what there would be is an extension of time or a revision of interest rates just to allow the farmer to pay their debt."
While courts do not tend to approve PIAs which would end after a debtor's 68th birthday, Mr Digney said farmers could work well beyond that age.
He also said succession will be a feature of proposed PIAs in the near future, where courts could be asked to sanction arrangements where any remaining debt would be serviced by a son or daughter after inheriting the farm.
ICMSA president Pat McCormack said the approach taken was legally and financially sound. "We're absolutely confident this is going to be a way forward for many farmers in this quandary," he said.
Source: Irish Independent