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Farm owner must pay milk payment regardless of claim against sharemilker

31 July 2019

Federated Farmers Sharemilking Agreements are commonly used in New Zealand by farm owners and sharemilkers to govern their relationship. Disputes between farm owners and sharemilkers are usually resolved using the dispute resolution process set out in the Agreement. They rarely come before the courts. Recently however, High court action was necessary to resolve serious issues between a farm owner and a sharemilker.

Sharemilker applies to Court for liquidation of farm owner

The sharemilker sought an order from the court for the liquidation (or winding up) of the farm owning company because the company refused to pay milk payments due to the sharemilker. Under the Companies Act there is a process enabling a creditor to apply to the court to liquidate a company when the company has not paid the debt owed to the creditor. The creditor must show the company is insolvent. The creditor must not use the process if the debt is disputed. The court has the discretion to decide whether or not in the circumstances it should make the order putting the company into liquidation.

An application to put a company into liquidation can be a useful tactic to obtain payment of a debt for several reasons:

  1. On liquidation of the company its debts would be paid first (so far as the company had funds to pay those debts) before any share capital would be repaid to the shareholders.
  2. If the company is wound up it would be unable to continue trading resulting in adverse financial consequences.
  3. The advertisement of an intention to wind up the company must be advertised meaning negative publicity for the company.
  4. The winding up process can be a default under contracts entered into by the company, such as leases and bank loan agreements, which can lead to further action against the company.

The farm owner’s defence

The company opposed the liquidation on the grounds it was entitled to deduct (or set-off) from the milk payments due to the sharemilker the amounts owing to the company for breaches of the Agreement by the sharemilker. The company also argued its right to deduct amounts it was owed meant it was not a creditor of the sharemilker and therefore the Court could not order the liquidation of the company.

The judge’s decision

The judge referred to the following clauses in the Agreement:

  1. The “No Withholding of Payments or Set Off” clause (no set-off clause). This clause states that the farm Owner must pay the sharemilker the milk payments in full, without deducting or withholding any amount.
  2. The dispute resolution clause. This clause requires disputes to be resolved by a process of negotiation and, if that fails by conciliation. If both negotiation and conciliation fail, disputes are to be resolved by arbitration.

The judge found that the terms of the Agreement meant that the farm owner must make the milk payment “without dispute” and was barred from disputing the sharemilker’s entitlement to the milk payment on the grounds it wished to raise a set-off. This meant the sharemilker was a creditor of the farm owner and was entitled to use the liquidation process. However, because the sharemilker would have to show the company’s insolvency to obtain the order, the judge adjourned the proceeding to enable the company to establish solvency by paying the milk payment. The farm owner will now need to pursue its claims against the sharemilker without the benefit of the set-off.

Fairness of the decision

Although the decision could be seen as unfair to a farm owner who has genuine claims against a sharemilker, that should be balanced against the unfairness and consequences to a sharemilker if a farm owner is able to withhold milk payments without having to first prove justification for doing so.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.

 

Barbara McDermott