It’s not uncommon for one family member to loan money to another family member without preparing a written agreement and with the intention that it will be repaid when the person loaning the money asks for it. Such a loan is termed an on demand loan, that is, the loan is repayable on demand. You would assume therefore, that if dad loans $300,000 to his son and dad wants his money back he can just ask for it and his son is required to repay the amount.
The problem with these loans is, however, that in New South Wales the time for recovery of the money runs not from the time the demand is made but from the time the loan is made. Therefore, if dad, 10 years ago, lends his son $300,000, dad has no recourse under the law for recovering money as the limitation period has passed. In fact, section 63 of the Limitation Act 1969 provides that on the expiration of the 6 year limitation period “for a cause of action to recover any debt damages or other money, the right and title of the person formerly having the cause of action to the debt damages or other money…is extinguished.” This means that the debt actually ceases to exist for all purposes.
This can cause significant financial issues in families and change the balance of assets within the family. Some of the ways in which problems can arise and significantly affect the families are as follows:
- 10 years ago, dad lends his son $300,000 for an unspecified period of time. The agreement is not documented. The son’s marriage breaks down. The former wife contends that the money was a gift and not a loan. Given that the 6 year limitation period has expired, the loan amount is irrecoverable and therefore forms part of the marital assets and the subject of any property settlement.
- An elderly father lends his daughter $500,000 to help buy a house. 7 years later the father dies and his other two children contend that the $500,000 given to their sister was a loan and not a gift and should form part of the assets of the estate which is to be shared equally between the children. Given that the agreement was not documented and the limitation period has expired, the estate has no right to recover it regardless of whether it was a gift or a loan. This may be unfair to the other children.
- A mother lends her son $400,000 to assist him with his business. The mother always intended for the money to be a loan. 9 years later the son goes bankrupt. As 6 years from the date the money was given has passed, the mother cannot prove in the bankruptcy for the debt.
- Alternatively, a confirmation of the debt within the requirements of s54 of the Limitation Act 1969 could be made. This could be by the person to whom the money was loaned:
- The loans should be documented by way of deed so as to make it repayable at some date after a demand for the money is made. This will make it clear that a time limit does not run until a demand is made.
What should you do if you have loaned an amount to a family member less than 6 years ago and it is undocumented?
- acknowledging in writing that the loan was made and signing the acknowledgement;
- making a payment of interest;
- making a part payment of the loan.
If a confirmation of the loan is made under s54, the time before the confirmation does not count in the limitation period.
What should you do if you have loaned an amount to a family member more than 6 years ago and it is undocumented?
You should request the person to whom the money is loaned enter into an agreement by way of deed, prepared by a lawyer, setting out the terms of the loan agreement and providing for payment on demand. If the person to whom you loaned the amount will not enter into a deed, you could request the person make confirmation of the loan as set out above.
What should you do if you are planning to loan an amount to a family member?
You should make sure the loan is documented by way of a deed prepared by a lawyer and contains a provision for payment on demand which will ensure the limitation period does not run until repayment of the loan has been demanded.
This article is for general information only and not legal advice. Legal advice should be obtained before taking any action or otherwise rely upon the content of this article in any way. This article was prepared on 28 February 2017 and has not been revised to account for any changes in the law since that time.