A CLIENT COMES INTO YOUR OFFICE ASKING YOU TO DOCUMENT A LOAN TO THEIR SON.
The loan is:
- Interest free
- With the principal to be repaid on demand
- To help the son and his wife with some business expenses
After the loan is documented, the client says:
IF MY SON AND HIS WIFE SEPARATE I COULD JUST DEMAND THE LOAN BE REPAID, RIGHT?
Wrong. In the circumstance above, the principal, if any remained, would be included as property of the son and his wife to be divided, and the there would be no corresponding debt owing to your client. It would be, in effect, a gift from your client to his son and his son’s wife.
WHAT SITUATIONS DOES THE COURT CONSIDER A “LOAN” TO BE A “GIFT”
Loans have been considered gifts in circumstances where:
- There has been no regular repayments
- The interest on the principal is 0%, or some uncommercial rate
- there is limited evidence of the lender’s intention to “actively pursue a claim” to recover the loan
- the statutory limitation period to recover the debt has run out
WHAT CAN I DO TO ENSURE THAT THE COURT WILL REALLY CONSIDER A LOAN AS A LOAN?
- As a general rule, debt recovery cannot be brought after more than six (6) years from the commencement of the action to recover the debt.
- Provide documentary evidence (including signed contracts, emails etc.) of the intention of the person providing the loan from the time the loan occurred.
WHAT ADVICE CAN I GIVE TO MY CLIENTS TO GIVE THEM CONFIDENCE IN THEIR LOAN AGREEMENT?
You can assist your clients in the following ways:
- Draft a loan agreement with commercial terms, and tell your client to insist on close adherence to those terms
- Document the client’s intention that the loan be repaid, and that the loan is a bona fide loan
By far the best protection is to have the son and daughter in law (in this scenario) engage a lawyer to draft binding financial agreements.
Binding Financial Agreements are legally binding documents in which parties can define their interest in property that might otherwise be classed as matrimonial property, and they may draft these documents before separation. In this case it would be as simple a matter as to say that the parties’ property will be divided as per the normal family law rules, with the exception of the loan, which will be repaid as a first step on separation.
AND IF THE WORST HAS COME TO PASS, YOUR CLIENT’S SON IS ALREADY IN THE FAMILY COURT, YOUR CLIENT’S BEST OPTION MAY BE TO SUE HIS SON.