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Agrarian receipts: advantages and disadvantages of usage

The use of agrarian receipts, their legal definition and taxation remains its relevance. On May 19, 2020, the Verkhovna Rada of Ukraine referred for finalization the bill “On Amending Certain Legislative Acts of Ukraine Regarding the Functioning and Circulation of Agricultural Receipts” No. 2805, by which the legislator wanted to equate the agricultural receipt with a security.

Currently, the concept of agrarian receipts is enshrined in the Law of Ukraine “On Agrarian receipts” dated on 06.11.2012 No. 5479-VI (hereinafter-“Law”), defines it as a document of title recording obligations of the debtor to deliver agricultural products or pay funds and is secured by a pledge for a future harvest.

There is no analogue of the security mechanism provided for by the Law on Agricultural Receipts in Ukrainian legislation. Agrarian receipt is a tool of pledge of the future harvest. Whereas at the time of securing the obligations of the collateral subject does not exist in nature (future crop, due to drought or other weather conditions may not meet the planned volumes, quality characteristics, etc., or did not grow at all), there are understandable risks for lenders not to receive fulfillment of financial obligations / deliveries in the future, and not to levy execution on the subject of pledge due to lack of harvest, or to bear significant financial losses due to the discrepancy of the harvest with qualitative characteristics and volume.

In addition, the crop is a movable and perishable property that can only be identified by type, it does not contain individual characteristics. In fact,  its “freezing”  as a pledge of real estate (prohibition of alienation – the notary will not register for the new owner, sealing access to the premises, etc.), cars (has a registration number plate – prohibition of alienation), equipment (can be held until fulfillment of the obligation etc.) is impossible.

That is why the Law on Agricultural Receipts introduced a number of provisions that include the specifics of the subject of the pledge and at the same time protect the rights of the creditor and at the same time provide the producer / farmer with the opportunity to be financed, even if he does not have a real subject of pledge, real estate, etc.

The farmer will be able to receive direct financing not only from legal entities, but also through the bank, although such lending is rare. The credit policy of the bank does not allow financing without collateral, including to the farmer, if the latter does not own property. However, after introduction of agricultural receipts such a lending product appeared on the financial services market.

What are key issues for farmer to pay attention on?

Previously, the bank could not levy execution on agricultural land plot, since there was no agricultural land turnover in Ukraine. In addition, according to the provisions of the Land Code of Ukraine, the bank could not be the subject of ownership of agricultural land. However, with the entry into force on 01.07.2021 of the Law of Ukraine “On Amending Certain Legislative Acts of Ukraine Concerning the Conditions for the Turnover of Agricultural Land” dated on 03.03.2020 No. 552-IX, from 01.07.2021 in the absence of a harvest, the bank may levy execution on land plot (subparagraph b, p. 15, part 4, article 145).

Benefits of Using Agricultural Receipts for Lenders:

– Registration of the pledge of the future harvest in the State Register of encumbrances of movable property;

– The lender’s right to monitor the future harvest (monitoring the debtor’s compliance with the cultivation technology, unhindered access to the land on which the crop is grown (subject of a pledge), unhindered access to the premises where the harvest is stored) – Art. 8 of the Law on Agricultural Receipts;

– The order of priority for satisfying creditors’ requirements has been regulated (Article 12);

– Responsibility of the debtor with all his property on an agrarian receipt in the absence of a pledged item – future harvest (part 3 of article 13);

– The right of the creditor to levy execution on the subject of pledge, even if it was sold by the debtor to a third party, or at the expense of other property of such a third party (if it already does not have a pledged item). In a third party, the right of recourse to the creditor arises (part 4 of article 13). That means, the legislator transfers responsibility for the purchased goods to a third party (the necessity for third party to independently verify the goods purchased)

– Ability to transfer rights by agrarian receipt (Article 11);

– The possibility of implementing an notarial writ of execution and performing it within 7 days (part 2 of article 13);

– An opportunity to receive additional guarantee of a financial institution on an agricultural receipt (Article 14).

Features of agricultural receipts use by the creditor

– The Law on Agricultural Receipts (Article 9) provides for the possibility of issuing several agricultural receipts for lending of various types of crops. An agricultural receipt is issued separately on each type of the crop.

In this case, it should be remembered that  the creditor’s claims are being satisfied in order of priority (part 6 of article 13). The order begins with an agrarian receipt issued earlier. In other words, first of all, the rights of the creditor are satisfied on the first agrarian receipt for this land plot. Thus, the creditor is obliged to check the land for registration of previous agricultural receipts and analyze the volume of obligations under them, in order to understand the priority of satisfying their requirements. For this purpose, the procedure for maintaining the Register of Agricultural Receipts was approved at the legislative level and it is assumed that the agricultural receipt is considered to be issued only from the date of registration in the Register of Agricultural Receipts.

– The creditor is liable with the property / funds received from the debtor on an agrarian receipt to another creditor if the debtor fulfilled obligations to him with violation of the order of fulfillment of obligations (Part 4 of Article 13).

Benefits of Using Agricultural Receipts for Farmers

– Ability to finance sowing for future harvest;

– The possibility, in agreement with the creditor, of the partial fulfillment of obligations under an agrarian receipt (part 8 of article 12);

– If agreement is not reached with the creditor to replace the subject of the pledge in the event of loss of   future harvest, the debtor may transfer the future harvest of agricultural products to the subject of pledge to be grown on the land on which the dead crops were located (part 6 of article 7).

Disadvantages of using agricultural receipts for farmers

– The ability of the creditor to satisfy his claims at the expense of any property of the debtor (part 3 of article 13). This provision is valid only in the case when the debtor did not transfer the subject of pledge to the creditor on an agricultural receipt, but sold it to a third party.

– Only agricultural land owners or persons who have the right to use such agricultural land legally to produce agricultural products can issue an agricultural receipt (part 2 of article 2). In other words, an agrarian receipt may be issued by an agricultural producer who is the owner or user of an agricultural land plot only in case of state registration of such a lease or property right. It is worth to remember that this cadastral number must be given to this land plot.

If the right of ownership or use of the land belongs to two or more co-owners or users, agricultural receipts are issued jointly by them. The legislator provides joint liability for such co-owners or users (part 2 of article 2).

Agricultural receipts are made in writing on the letterhead in two copies, one of which is stored in the notary’s files, and the second is transferred to the creditor on an agricultural receipt. At the request of the debtor on the agrarian receipt, a certified copy of the agrarian receipt issued by him may be provided.

The agrarian receipt is subject to notarization (Article 9), and the notary shall enter information about the agrarian receipt in the Register of Agricultural Receipts. The agrarian receipt is considered to be issued from the date of registration in the Register of Agricultural Receipts. According to paragraph 11 of the Resolution of the Cabinet of Ministers of Ukraine dated  on 07.07.2013 No. 665, an record about the issue of an agrarian receipt is entered into the register on the day of its notarial certification.

The notary also records information about the subject of a pledge on an agrarian receipt in the State Register of encumbrances of movable property.

If there is additional security for the agrarian receipt, information on such security may be recorded  in the respective registers in accordance with the legislation.

Source: AgroPortal

Posted by: Inna Zalesskaya