Family Law: Take care with family loans

Many of us make loans to family members, for a whole range of reasons. It might be a parent helping a child to buy their first home. It may be to assist a sibling establish a business, or to meet an unexpected debt. .

Anyone who is considering a family loan should think carefully about the terms of the loan, even if it is documented. If something goes wrong you may find that if proper care has not been taken, it will be impossible to recover the debt.

The NSW Supreme Court recently considered a family loan of $25,000.00 [Gray v O'Connell 2009]. In Gray parents loaned to a son and his new wife to assist with the purchase of a home. The parents not only had a formal loan agreement, they also obtained a mortgage over the home as security. The marriage later broke down and the parents tried to recover the debt. In the Local Court they were unsuccessful. The Local Court Magistrate said that because the loan was “repayable on demand”, this meant the debt arose immediately the loan was advanced. Since the time limit for suing to recover a debt was only 6 years, and the parents had not sued within that time frame, the claim was dismissed. On appeal to the Supreme Court the parents were successful. The Supreme Court found the debt was actually “repayable on demand in writing”.

This apparently minor change in wording, had significant legal consequences. The Court said that because there was a precondition to recovering the loan (ie, a formal demand in writing had to be made first) the debt did not arise at the time the loan was made: it only “crystallised” when the written demand was made. In Gray the demand was made less than 6 years prior to court proceedings so the Court said the parents were entitled to sue.

The lesson from this case is that even with apparently simple and amicable loan transactions, care should be taken to get the documents right – otherwise what may have been intended as a recoverable loan may in effect end up being a gift.

Tony Cavanagh is a partner at Mullane & Lindsay, and practises extensively in commercial and other litigation. We are available for consultations at our Tea Gardens office each Monday, Wednesday (by appointment) and Friday between 2:00 pm and 5:00 pm at 191 Myall Street Tea Gardens or at our Newcastle office at any other time during business hours (T: 4928 7300).