Loans between family members and family entities, sometimes for very significant amounts, are common. Often their terms are undocumented and there is no specific repayment agreement. But what if you really had to force the borrower to pay?
By law, such loans are repayable on demand – no wonder. So you may think that if something happens and Dad wants his money back, all he has to do is demand it. However, in NSW the time for recovery runs for the purposes of the Restrictions Act at the time the loan is made – not from the moment the demand is made. So, if such a loan was granted more than six years ago, it may well be non-repayable.
This can lead to dramatic changes in the balance of assets within a family – e.g. the assets of one family member versus another, and between family members and family trusts and companies.
The most practical loans are those that could be called “family friendly” loans. Loans granted by professional lenders, such as banks or other lenders, are well-documented and usually have carefully stated repayment terms.
Avoid future problems
If you have taken out a loan from an undocumented family member, there may still be some steps you can take to avoid adverse consequences, especially if the loan was granted less than six years ago. We can discuss the options, but some of them are as follows:
- Add a forecast for demand
Such loans should be substantiated without further delay, preferably by deed, so that they can be repaid on a certain date after the submission of the claim – e.g. one month, six months. This will make it clear that there is no time until demand is met.
- Receive confirmation or partial payment
Alternatively, a “confirmation” of the loan that complies with section 54 should be made – see above. This can be by document or partial payment.
Where do problems with “on demand” loans arise?
Problems can arise in many areas. Some examples are given below and suppose that the recovery of the relevant loan is statute-barred after six years.
Family Law – Example I: In a family law settlement transaction, the parties disclose all their assets to each other. The husband claims that his $ 1 million gross assets are exhausted from his obligation to repay a $ 400,000 loan his father made more than six years ago to enable his son to start a business.
Problem: The loan ends up as part of the marital property – it is not recoverable from the father. The wife argues that either the money provided was in fact a gift and not a loan at all, or, alternatively, if it was a loan, the father never intended it to be repayable – and the Family Court should have taken this factor into account in assessment of the “financial resources” of the spouse. But since the loan was undocumented and granted more than six years ago, it does not matter much – as the loan is in any case non-recoverable to NSW. The result is that the spouse’s total assets and the spouse’s share of them are probably larger than they would otherwise be, and the spouse – who expected that at some point in the future they would receive the benefit of the $ 400,000 loan from father – ends up doing less well than he expected, actually having to share the loan amount with his wife. And the father ends up with nothing.
Real Estate Design – Example II: Family assets include a family trust, the beneficiaries of which are children and their descendants (and not the parents). The gross assets of the trust are $ 600,000 and the net assets are apparently mediocre $ 200,000 because the trust’s investments were financed by a $ 400,000 loan from the father shortly after the trust was established. The father’s personal assets are apparently $ 1,200,000 consisting of $ 800,000 plus the $ 400,000 loan. He wants his wife to have all his personal assets and intends to leave absolutely nothing in his will to his children. The trust was founded 10 years ago.
Problem: The assets end up in the wrong place. The loan from the father to the trust is non-repayable. Therefore, the assets of the property left to the wife are only $ 800,000, not $ 1,200,000. The net assets of the trust have become $ 600,000 – all for the benefit of the children – and not to the mother.
Asset Management – Example III: An elderly widow has $ 1,500,000 in assets. Gives a Permanent Power of Attorney to her eldest daughter whom she implicitly trusts. There are three other children. During her lifetime, when the widow has little interest in managing her own finances, the eldest daughter helps herself with $ 500,000 from her mother’s assets to finance some home renovations for herself. At the time, she tells her siblings that the money is a gift to her from her mother, but when the mother is confronted with it by the siblings, she says the money given was just a loan. There was no documentation. Eight years later, the mother dies, leaving her estate to her four children equal to her will. The other three children want the loan to be credited to the Estate as an asset, so they can share it. But the eldest daughter still says the money the mother gave was a gift, not a loan.
Problem: The money was given more than six years ago and even if it was a loan and not a gift, it is at first sight not recoverable. That is, whether the money given was a gift or a loan no longer matters for this purpose.
Further issues: Of course, the eldest daughter as a proxy may also have breached her duty to act in the widow’s interest and may be liable accordingly. In addition, executors may want to consider whether the redemption principles (including the acquisition of an inheritance from a portion) may apply to consider that the money given to the trusted eldest daughter satisfies her inheritance corresponding to a quarter of the estate. .
Insolvency – Example IV: A father lends his son $ 400,000 to help his son run a business. After eight years of business struggle, however, the son goes bankrupt as his business fails and he has personally guaranteed a very significant debt to the bank. The son’s gross assets are $ 200,000 and he owes the bank $ 300,000.
Problem: The father ends up not having a share of the bankrupt son’s assets. The loan was given by the father more than six years ago and was undocumented, and therefore non-recoverable. This means that the father can not substantially prove the bankruptcy for his debt and the bank (and any other creditors) will take all the available assets for distribution.
How does the 1969 law restricting the NSO work in these circumstances?
According to Article 14, a legal action under a contract can not be maintained after 6 years, but it is Article 63 that is crucial: it clearly states that the effect of the law is that the right to recover a debt is “extinguished”. The courts in many cases have upheld these simple words as the meaning of what they are saying. In other words, debt is not only uncollectible as a legal process, but virtually ceases to exist for any purpose.
Can you overcome that?
If your loan was taken out more than six years ago, we usually looked at the details of the facts to see if a problem could be avoided.
A very important factor to consider is whether the debt has been “confirmed” in accordance with the requirements of Article 54. If the debt is properly “confirmed” within six years (it will also be done late), time will begin. to run again from the moment of confirmation. Some topics to consider include:
Is a reference to a debt in books or other documents of a company enough to be “configuration” ??
Has the debt been partially paid within 6 years?
Has interest been paid?
Sometimes it fits into the family arrangements for debt repayment, even though it may have gone out. But can this be done without adverse consequences? All facts must be taken into account, including whether the deceased’s property is involved and in a specific legal position or whether the directors or directors are entitled to agree to repay a loan that they are no longer legally obliged to repay.
Is a change in NSW legislation possible?
In 2004 the NSW Legal Reform Committee examined the position on on-demand loans, found it unsatisfactory, proposed a change in the law and drafted a bill to achieve it. Provide time not to run until a formal claim is submitted and for 3 years limitation. However, for unknown reasons, he was never introduced in Parliament. In 2014 I wrote to the Attorney General asking that the issue be addressed as he recommended 10 years ago. The response so far has been that the government has referred the matter to various stakeholders (such as the Law Society of NSW and the Bar Association).
The content of this article is intended to provide a general guide to the subject. Expert advice should be sought for your specific circumstances.