Farming, like any other business, involves financial risk. Even the best managed business can experience financial difficulties when market prices decline, part of the farm business fails to generate the expected profits, or financing arrangements are inadequate.

Making a decision is an important step in managing the stress created by financial difficulty. Not only does it reduce uncertainty but it also provides some sense of control to the family in difficulty. While this information is primarily focused on the farm business, it cannot be emphasized enough that family and personal issues are equally important and must be addressed.

It would be foolish to imply that there are simple answers for businesses experiencing financial difficulty. The decisions that need to be made are difficult. Two questions must be answered about the business:

1. Can the farm business, in its current form, continue to operate?

2. If it cannot, can changes be made which would allow the business to continue?

An analysis of the farm business is the first step to answering these questions and will

• Show you the production and financial condition of the farm.

• Help you determine if the difficulties have been caused by a one time single event or by an ongoing problem.

• Indicate if debt restructuring or management changes could solve the problems.

Farm businesses must answer the question "Can the business continue to operate?" Six possible problems areas include low production and efficiency, inability to service debt, low profitability, low equity, not enough cash flow, and poor projected performance. An analysis of these areas forces the farm business to make a decision about whether the business can survive if changes are made or if it would be better to exit from the business and conserve the remaining equity in the business. Changes to the business might include improvement in production and efficiency, a change in the size of the business, a change in the debt structure, lifestyle changes or obtaining off farm income.

The OMAFRA Factsheet Troubleshooting Your Farm Business, Order No. 00-107 also explains how to analyze cash flow problems a business may be experiencing.

If your farm business has experienced significant losses, you may be at a point where you want to prevent the loss of any more of your farm equity. To preserve the remaining equity, you may decide to exit from farming.

The results of the analysis should give you some concrete information on which to base your decisions. You may decide that even though changes would allow the farm to continue, family or career considerations make an exit from the business your best choice.

Whatever conclusion you reach it is important to view it as a management decision you control.

If advice is needed to address financial concerns, there are services to help you get a clear picture of your farm business.

The Canadian Farm Business Advisory Service (CFBAS) provides financial management and business planning counseling to farmers through two services:

1. Farm Business Assessment

2. Specialized Business Planning

3. Planning and Assessment for Value-Added Enterprise

These CFBAS services are available to any qualifying producer, regardless of financial situation. A farmer may be experiencing financial difficulty or simply want to fine tune the farm business and increase its profitability.

1. Farm Business Assessment

Under this program, producers can access a total of 5 days worth of planning expertise from a private sector financial planner for a nominal fee of $100. The remaining cost is paid for by government under the Agricultural Policy Framework (APF).

The program is intended to help you better understand and document your current business situation and develop a basic action plan to move forward. Qualified professionals provide the following:

Farm Financial Assessment:

• up to 3 days’ worth of consultation, at least one day of which would be spent on the farm

• a business profile, and financial statements

• a farm business ratio analysis

• an income and expense statement for the previous 3 years

• a review of opportunities, goals and options.

Action Plan:

• 2 days’ worth of consultation to review chosen option and goals and assess the impact of changes

• financial planning, including cash flows and ratio analysis

• strategies

• financial projections of chosen option

• a written report.

Follow-Up

• 1 day of consultation to review farmer file, compare projected to actual, and do a post assessment

• beginning farmers can access 3 follow-up days of consultations.

2. Specialized Business Planning Services

The Specialized Business Planning Services component is available to farmers who require a more specialized business plan for a specific business activity. This program offers a 50% rebate, to a maximum of $8,000.00 of government assistance for the following:

• Purchase specialized consulting services, to assist in planning for succession, expansion, marketing, diversification, etc.

• The farmer chooses and hires the consultant service based on the needs identified.

3. Planning and Assessment for Value-added Enterprise (PAVE)

The Planning and Assessment for Value-added Enterprises (PAVE) program is available for producers who are considering establishing or expanding a value-added enterprise.

This program offers a 50% rebate, to a maximum of $10,000.00 of government assistance (higher limits for group applications) for a feasibility assessment or the development of a business plan.

Who is Eligible for CFBAS and Pave?

The services are available to all farmers with gross farm incomes of at least $10,000. It will also be available to beginning farmers.

Eligible farmers will be able to access any part of the CFBAS or PAVE services. Producers can use each of the services once in the five-year period of the program, which ends March 31, 2008.

Contact Agriculture and Agri-Food Canada at 174 Stone Road West Guelph, Ontario N1G 4T1. 1-866-452-5558

Legal and Accounting Advice

Legal and accounting advice is important when considering available alternatives. Your accountant will advise the tax consequences of selling certain assets. A lawyer can advise on the implications of various security arrangements and the legal steps to ensure a title is transferred or debt obligations discharged.

The OMAF Factsheets entitled A Guide to Agricultural Security Agreements, Order No. 03-069 and Taxation on the Sale of Farm Business Assets, Order No. 03-021, provide an overview of the tax implications of selling farm assets and legal issues regarding security agreements.

Negotiating Financial Settlements

Farm businesses that have encountered financial difficulty and wish to continue farming can try to negotiate a settlement with their creditors. They can do this privately or through the Farm Debt Mediation Service, provided by Agriculture and Agri-Food Canada.

Farm Debt Mediation Service

The Farm Debt Mediation Service (FDMS) is an Agriculture and Agri-Food Canada program providing insolvent farmers and their creditors with mediation services to help them arrive at a mutually satisfactory arrangement.

The service is a private, confidential and a less expensive alternative to the process of resolving insolvency disputes in the courts. Past experience indicates a 70% success rate, meaning that farmers and their creditors are able to work out a plan 70% of the time.

There are two options for a farmer who wants to use the Farm Debt Mediation Service

1. The Stay of Proceedings, Review and Mediation

2. The Review and Mediation without a Stay

The significant difference between these two processes is the application of the Stay of Proceedings under the first option. This is very important where creditors have already begun legal actions against you.

The steps for both options are the same except for the application of the stay. Once the administrator confirms eligibility:

• A financial expert is assigned to conduct a detailed review of the farmer’s financial affairs. The expert may also help the farmer prepare a recovery plan outlining what the farmer proposes to do to resolve their financial difficulty.

• The administrator appoints a mediator to meet with the farmer and his or her creditors.

• If the farmer has applied for a stay, the meeting would include all creditors.

• In applications without a stay, the meeting includes all secured creditors and any other creditors who need to be involved in reaching a settlement.

• With the assistance of the mediator, the farmer and creditors discuss and possibly amend the recovery plan. If an agreement is reached, the settlement is put into writing and, when signed by all the parties, becomes a binding contract.

What is a Stay of Proceedings?

Secured creditors are required by law to serve farmers with a Notice of Intent to Realize on Security before undertaking any action to recover debts. A farmer has 15 business days to respond to this notice before legal action begins. A farmer can, at that point, choose to apply for the stay of proceedings to prevent further action by the creditor. However, legal advice should be received as to the best time to exercise the stay of proceedings and to clarify the farmer's situation with respect to legal proceedings that have already begun.

The farmer could also apply for a stay when being sued for a debt by an unsecured creditor. Though unsecured creditors are not required to provide the Notice, the stay still protects the farmer’s assets during mediation. The initial stay of proceedings is for 30 days, but can be extended to a maximum of 120 days.

If a Notice hasn’t been served and legal action hasn’t been taken, the farmer may prefer to apply for review and mediation only, without applying for a stay.

Who is Eligible?

Individuals, corporations, partnerships, co-operatives or other associations of persons "engaged in farming for commercial purposes" who are insolvent are eligible for debt mediation.

To be considered insolvent, applicants must meet one of the following criteria:

• be unable to meet their obligations as they generally come due

• have ceased paying their current obligations in the ordinary course of business as they generally become due, or

• the value of their property, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all their obligations, due and accruing due.

Contact the Farm Debt Mediation Service Agriculture and Agri-Food Canada

Telephone: 1-866-452-5556

Privately Negotiated Settlements

Lenders and financial specialists admit that not many individuals prepare a recovery plan on their own and then approach their creditors with it. However, it is an option to consider. Farmers, who see financial difficulty on the horizon and want to take action privately, before it becomes more serious, may take this approach. Some caution should be exercised on the timing of the negotiation. Approaching a lender before preparing a plan of action could cause the lender to lose confidence in your ability to manage the situation. As a result, the lender might place restrictions on the business or take unilateral action against you.

If a creditor has served you with a Notice of Intent to Realize on Security, consider the Farm Debt Mediation Service. Consider the following suggestions if you want to proceed privately.

• Locate a competent financial consultant. This could be your current accountant, lawyer or a consultant.

• The plan needs to show the benefits of the changes you are proposing. Be prepared to show the financial advantages your lenders will gain in letting your business restructure and continue instead of winding down.

• Creditors also want to know if your business is able to survive in the long term. A plan should demonstrate that the business is viable in the long term, able to make debt payments and build equity.

• In any negotiation mutual trust is needed. Being honest with creditors helps establish this. At the same time creditors demonstrate trustworthiness by giving clear answers and timely commitments.

• Some businesses are able to attract outside investment. An infusion of capital can help you through financial difficulty but comes with conditions. Outside investors often want partial ownership in the business and a say in how it is run.

• As the business owner, you must demonstrate a willingness to make the necessary changes. This might mean selling some assets or changing your management practices to increase profits.

Planning An Exit From Farming

The decision to make a career change and leave agriculture is never an easy one. For some the decision comes after a series of difficult years. For others creditors or the occurrence of a disastrous event makes the decision for them. This section looks at some issues around planning an exit from agriculture. The exit process is discussed under several headings:

1. A Voluntary Exit

2. A Forced Exit

3. Bankruptcy

4. Implications of Loan Guarantees

A Voluntary Exit

When the warning signals of financial difficulty show up, some farmers choose to may make a voluntary exit. A planned departure can be advantageous. It can allow for the sale of assets at the best time, reduce the stress of uncertainty on the family and provide more time for the owners to plan a career change. A number of options are available.

Planned Sale of Assets

If sufficient equity remains, a planned sale of assets makes sense. With cooperation from the lenders and proper tax and legal advice, the greatest amount of capital can likely be salvaged. Debts can be paid off and legal documentation prepared to show these debts have been discharged. Obtain advice on the timing of the sale, along with the taxes payable, from an accountant.

Bankruptcy

Farmers should attempt to reach negotiated settlements with their creditors whenever possible. However, when an agreement cannot be reached bankruptcy my be necessary in order to be released completely from the unmanageable debt and to prevent creditors pursuing them in the future. Part 3 below covers this topic more completely.

Can You Walk Away from the Business?

You can walk away from a business, but it is not likely the best option to choose. A quit claim deed is an instrument used to turn over the title of a property to a lender and is most often associated with some type of negotiated settlement where little of no equity remains. Lenders may insist upon foreclosure or power of sale action as an alternative to a quit claim deed. Although it can be used to turn real property over to a lender, there still may be tax liabilities to be concerned with and other creditors who want payment. It would be best used as part of a negotiated settlement with all the creditors involved.

2. A Forced Exit

When a borrower provides security to a lender, he or she gives the lender an "interest in" or certain rights in the secured property. This interest remains until the loan is paid off and the security document is discharged.

If a borrower fails to live up to the terms of the loan agreement, legal action may be taken to satisfy the debt. Even after action is taken, there may be an opportunity to negotiate an orderly and gradual sale of assets. As long as the creditor does not think that the security is in jeopardy, a planned sale will likely return the greatest amount to both the lender and borrower.

A lender is able to take a variety of legal actions if a borrower defaults on a loan.

Land Mortgage Action:

Mortgage Foreclosure is a court-supervised action the lender may choose when the borrower is in default under the land mortgage agreement. By foreclosing on the mortgage the lender takes possession and title to the land. If the lender sells the land for more than the amount owing on the mortgage, the lender keeps the difference. If the property sells for less than the debt, the lender cannot sue the borrower for the shortfall.

Power of Sale is an alternative way to realize on land when the borrower is in default under the land mortgage agreement. The mortgage contract gives the lender the right to sell the land, but not title to the land. If the land sells for more than the amount of the debt, the surplus goes to the borrower unless another creditor is entitled to it ahead of the borrower. If the land sells for less than the amount of the debt, the lender can sue the borrower for the difference.

Action for Security on Personal Property:

Personal property is assets other than real estate.

Realization of Security describes the action taken against the borrower’s property under the Bank Act or the provincial Personal Property Security Act (PPSA). Under the realization process, the lender normally demands payment. When payment is not made, the secured assets can be seized and either sold to reduce the debt (in which case, the lender can usually also sue to recover any shortfall) or kept in satisfaction of the debt.

Before realizing on PPSA security, a secured party must give notice and then wait 15 business days under section 21 of the Farm Debt Mediation Act.

Receivership Procedure:

Some security agreements allow the lender to appoint a private receiver or receiver-manager when the loan is in default. The receiver works for the lender, but the borrower pays the fees.

In some cases, lenders may ask the court to appoint a receiver. A court appointed receiver gets all instructions from the court and must consider the interests of all creditors, not just the one who requested the appointment.

The receiver can carry on the business and apply profits to reduce debt, or sell the whole business, or wind down the business and sell assets separately. During a receivership, it is possible that the business can be adjusted and a part of it salvaged. Normally though, a business is wound down during receivership and the assets are sold to pay the debts.

3. Bankruptcy

Bankruptcy, while unpalatable, is an option for farmers who have unmanageable debt, little or no equity remaining, and who have been unable to reach an agreement with their creditors. It is a legal process, which releases a debtor from his debts and divides up assets amongst creditors.

Bankruptcy may be voluntary or forced.

Voluntary Bankruptcy:

Any business or individual may declare bankruptcy on a voluntary basis. This is called "an assignment into bankruptcy". An individual may take this step at any time. Once the person has filed for bankruptcy there is a stay of proceedings on any other action being taken to recover debt. This does not apply to secured creditors who have already taken possession of assets or who have commenced proceedings to do so at least 10 days prior to the filing for bankruptcy.

Forced Bankruptcy:

A farmer, whose principal occupation is farming and who is farming as a sole proprietorship, cannot be forced into bankruptcy by a lender. However, a partnership or corporation can be forced into bankruptcy. A creditor can file a petition with the court to have the business placed into bankruptcy. An individual that incurred the debt while part of a partnership that is now dissolved can also be petitioned into bankruptcy.

Lenders do not use this option very often because of the expense and time that it takes. It is usually faster and less expensive for them to realize on their security.

The Bankruptcy Process

The following is an outline of the steps and details of the bankruptcy process. Apart from the initial step, both the voluntary and forced bankruptcy proceedings are the same. An individual who assigns themselves into bankruptcy contacts a Trustee in Bankruptcy and then files the appropriate papers. In a forced bankruptcy, the court appoints a trustee.

The Trustee:

A trustee, usually associated with a chartered accounting firm, may be found in the yellow pages of the telephone directory or by contacting The Office of the Superintendent of Bankruptcy, Industry Canada: (416) 973-6486. Your accountant or lawyer can usually recommend a trustee.

If a potential bankrupt person has no funds, the Superintendent of Bankruptcy can help you obtain a trustee through the Bankruptcy Assistance Program (B.A.P.).

Creditors:

The trustee and debtor meet with the creditors to disclose the financial situation. As the assets are sold, each class of creditor will receive a percentage of the proceeds according to the security in place. Because Revenue Canada is a creditor, bankruptcy removes all tax liabilities. Because nonsecured creditors are identified and paid off (even if only 10 cents on the dollar), the former farmer will not be pursued for future earnings.

Debts Not Erased:

The following debts are not erased by bankruptcy:

• debts for necessities of life like clothing and heating fuel

• support payments for a child or spouse

• fines or penalties imposed by a court

• debts obtained by fraudulent means

• student loans.

Bankruptcy Discharge:

There is an automatic discharge for first-time bankrupts 9 months after they become bankrupt. This occurs unless the trustee recommends a discharge with conditions or if a creditor or the trustee of the Superintendent of Bankruptcy opposes it.

Bankruptcy in itself is a stressful event. Although most farmers consider it only as a last resort, its purpose is to relieve honest debtors from financial situations that have become unmanageable. This relief can in turn allow them to move forward and pursue other career paths and opportunities.

What Does the Trustee Do?

The debtor must:

• turn over all of his assets to a trustee

• provide the trustee with all financial records

• disclose all liabilities, and

• provide details of recently disposed assets.

The trustee becomes a steward of the assets. The debtor must work closely with the trustee, gain clearance for any payments, keep him advised of place of residence and employment, refrain from acquiring more debts, turn over any gifts, inheritances or windfalls, etc. Ontario’s Execution Act allows the bankrupt person to maintain a few personal and household items and tools of the trade.

4. Implications Of Loan Guarantees

A guarantee is an agreement between a lender and an individual (called a guarantor) in which the guarantor promises the lender, that the guarantor will pay the money that a particular borrower owes the lender if the borrower defaults on the debt. The guarantee may also give the lender security over some or all of the property of the person providing the guarantee.

Most guarantees do not require a lender to first pursue the debtor or other individuals who have given guarantees. This means a lender can decide to collect from the guarantor without ever attempting to do so from the borrower who defaulted on the loan. If this occurs, the only recourse for the guarantor is to try to collect from the borrower they signed the guarantee for. In that situation the guarantor has now become a creditor to the person who defaulted on the loan. They can, in some cases, take over the lender's security and attempt to realize on it in order to recover their money. It is usually safe to assume however, that if realizing on security had been a reasonable method for recovering the debt, the lender would have pursued it.

If a government agency has guaranteed a loan as part of a program and the borrower defaults, the government could then become a creditor.

These debts owed to guarantors must be dealt with in the same manner as any other creditor. If the borrower exits from farming and does not declare bankruptcy, the guarantor must be contacted and a deal struck to liquidate the guarantee. If there is no equity remaining, the guarantor may be prepared to write off the guaranteed amount.

If the borrower fails to contact the guarantor to make arrangements, s/he may face legal actions from the guarantor. The bankrupt party must list the guarantor as a creditor when working with the Trustee in Bankruptcy. The guarantor will accept the proportion of the guarantee that can be realized from the liquidation of assets.

Limited or Unlimited Guarantees

A guarantee may be limited or unlimited. An unlimited guarantee might have wording that states the guarantee is responsible for all present and future debts of the debtor. The wording may also be broad enough to allow the lender to change the terms and amounts of the original loan without needing the consent of the guarantor.

A limited guarantee would state how much the guarantor would owe the lender in the event of a default.

For further information check the OMAFRA website or

Toll Free: 1-877-424-1300