undoumented loans

Undocumented loans between friends and family

It is very common to advance money to a friend or family member for a business or personal expense where they are in financial need. These loans are often verbal without a specified date for repayment. Employers may also lend a sum of money to an employee or other entities (and vice versa) where it is understood that the other party will repay the loan amount when asked. These are examples of loans ‘payable on demand’.

There are two ways in which a loan may be payable on demand:

  1. when it is stipulated as such in the loan agreement; or
  2. when there are no repayment terms specified.

A loan payable on demand is implied in common law per the High Court case of Young v Queensland Trustees Ltd (1956) 99 CLR 560.

Loans immediately payable -Young V Queensland Trustees Ltd

This was a case where Executors for the deceased were claiming repayment of moneys lent to the Defendant, by the deceased. The Defendant admitted to the loans given to him but claimed that he had repaid them to the deceased during her lifetime.

In determining when money payable is considered to be a debt, the Court stated that “a loan of money payable on request creates an immediate debt”. This means that when a loan has no terms for repayment or payable when demanded, it is implied that the loan is immediately payable from the moment the loan is provided.

As a borrower this is crucial to appreciate – the loan you have taken from a friend or family on trust may be recalled at any time. If you are unable to pay the loan at the time of the request for payment, you or your business may be insolvent.

One common mistake is to assume the family member or friend would never recall the debt in this manner, but the reality is that relationships can deteriorate over time, particularly where money is involved. Where the lender dies or becomes bankrupt, a third-party trustee or executor may step in to manage the lender’s affairs. An executor or trustee has legal obligations to recover debts and may not be sympathetic to the borrower’s interests.

It is strongly recommended that any borrower ensures that the repayment terms are agreed in writing. Notwithstanding the issues for the borrower, there are very good reasons for the lender to also have a written agreement, as revealed by the Victorian case of VL Finance Pty Ltd v Legudi [2003] VCS 57.

 

Limitation of Actions – VL Finance Pty Ltd v Legudi

In this case VL Finance Pty Ltd had advanced money to a company which later went insolvent. It was discovered that the funds advanced to the insolvent company were in turn advanced to several individuals (Legudi) without any payment terms or conditions many years earlier. The right to recover the debt from Legudi was assigned to VL Finance.  The relevant issues in contention were whether a debt existed and if so, whether it was statute barred.

This is an important point because in most Australian jurisdictions, claims for recovery of debts need to be commenced within six (6) years from the date on which the cause of action arises. This effectively means that, for loans payable on demand, the 6-year limitation period for a cause of action starts the moment the loan is made. After this time has passed, the cause of action is deemed to be statute barred and the debt cannot be recovered.

However, there are instances where an action for loan repayment may be brought after the 6-year period. This exception occurs when the person liable for repayment acknowledges the claim or makes a payment in respect to the loan. What constitutes an acknowledgement was discussed in the case of VL Finance Pty Ltd v Legudi.

VL Finance argued that the time to bring a cause of action started again when the directors made acknowledgement of the debt in the 1994 Annual Returns for the company. If this was accepted by the Court, this would reset the limitation period allowing VL Finance to pursue the debt. The judgement stated that the position in Australia is that:

“A document does not constitute acknowledgement unless it is in substance expressive of the debtor’s intentions to admit the debt and to have the document produced and used for that purpose”.

This issue is critical where a lender has a long term, undocumented and outstanding loan to a family or friend. To avoid the limitation period expiring, the lender should insist on the loan being documented, or at minimum the borrower periodically acknowledging the loan in writing.

What to Do?

With any loan, it is important to check whether there is any formal agreement that sets out the terms of the loan and any repayment. If this is on demand or if there are no repayment terms, the loan is payable from the date it is received. It is important to remain informed and be certain of the law on loans payable on demand and how this could affect you or your business.

Our Commercial team are happy to provide an obligation free consultation to discuss concerns around any loan provided or putting together a formal loan agreement.

Written By

Daniel Dash
Senior Associate
NB Lawyers – Lawyers for Employers
danield@nb-lawyers.com.au 
+61 (07) 3876 5111

Zahra Rashedi

Lawyer

NB Lawyers – Lawyers for Employers

zahrar@nb-lawyers.com.au

Daniel Dash and Zahra Rashedi are part of the commercial law team at NB Lawyers, the lawyers for employers working with individuals and business owners on a range of matters including business sales, property disputes, estate disputes, shareholder agreements, intellectual property, litigation and taxation matters.

Print