Inter-Family Loans In Family Law Matters

October 10, 2017 stackd.design

It is very common in family law property settlement proceedings for one party to argue that a sum of money advanced to one spouse, or to the couple by a relative was a loan rather than a gift. In many cases the other party will argue in reply that the sum of money was intended to be a gift and was not repayable.

The 2014 Full Family Court case of Vadisanis considered the issue of loans between family members.

In this case the husband’s mother sought leave to intervene in the proceedings and asked the Court for declarations that the husband and wife owed her $330,000.00. If the Court made that declaration the property pool for division between the husband and wife would be reduced by about half so that any payment the husband had to make to the wife would be correspondingly reduced.

In this case the wife argued that many of the loans alleged by her mother in law were unenforceable because more than 6 years had expired from the date of the loan advance and under the statute of limitations in South Australia, her right to recover those loans had extinguished (in Queensland the limitation period is different, it is 6 years from the date on which the cause of action arose (i.e. when the loan had to be repaid) by which date Court proceedings must be commenced, or that right is lost).

In Vadisanis the wife argued that more than 6 years had expired since the date of the loan. The Loan Agreement of one of the loans stated that the sum was repayable on demand, while another Loan Agreement stated the loan was repayment upon the expiration of 3 months’ notice.

The Full Court of the Family Court held that there was a difference in the treatment of loans depending on whether they are repayable on demand, or upon an event. For example repayable 2 days after the demand.

The Full Court restated that where a contract is simply payable on demand the general rule is that the cause of action, or the commencement of the limitation period, begins from the date the contract is formed, meaning the Borrower is overdue every day of the loan.

The Full Court found that the loan from the mother in law to her son, which was repayable on demand was unenforceable on the basis that 6 years had passed before the mother in law made a demand for the sum to repaid. However the loan payable upon “the expiration of 3 months’ notice” was not statute barred as the limitation period commenced upon the expiration of the 3 months’ notice.

Practical Tips

If you are considering borrowing or lending money with the intention that the sum advanced would be repaid (i.e. it is not a gift), then you should seek advice from one of our Lawyers and have the Loan Agreement properly drawn up to reflect the intention of the parties at the time of the advance.

In cases involving disputed loans, generally the Court in family law matters will view loans between related parties suspiciously with all of the evidence being closely examined, including the terms of any signed Loan Agreement, any security and any evidence of repayments.

The point to keep in mind from this case is that in order to minimise the risk of the loan being statute barred after 6 years, the Loan Agreement should specify a date, or as in this case a period when the loan becomes due. In the alternative, it could be repayable on the happening of an event such as it is repayable one month after a demand is made, or in the event of one party becoming bankrupt, or a breakdown of the marriage relationship.

If you need assistance with property settlements and family law matters, then please contact the Madsen Law Team. If you need assistance with an interfamily Loan Agreement, then please contact David Madsen.