Wednesday, 15 March 2017

Was it a loan or was it a gift?

A common feature about Australian families is that parents often support their children financially. They either make gifts or lend money to their children. This is often an issue if the adult child splits up from their spouse or partner: was it a loan or a gift?

In my view, anyone who is in this situation and approaching a relationship bustup (or if their son or daughter is about to have one) should get legal advice- quickly.

Too often, the parents and their child will scream out: "It was a loan!" Not surprisingly, too often, the former spouse, who benefited from the money, will say: "No, no it was a gift!" The difference in approach can be significant:

  • If it's a loan, it might be able to be sued upon, meaning that the parents might start separate court proceedings to get their money back (which then pressures the former spouse). Their child typically will say that it was a loan and the money needs to be paid back. These proceedings might end up with the parents being joined to the property settlement proceedings between husband and wife.
  • If it's a loan, there might have been substantial interest owing on it. The capitalised interest might wipe out everything else that the husband and wife might own, meaning that the expartner gets nothing.
  • If it's a gift, then it won't be a deduction from the balance sheet.  It will be taken into account in assessing the financial contributions of the parties on property settlement. Depending on the amount, when it was made and what was made of the money (for example if it were frittered away or was used as a springboard that resulted in all the wealth of the parties being accumulated after that), it might make a significant change in the percentage division to each of the parties, or it might not.
  • Sometimes, in the right types of case, it will make little difference either way.
And even if it is found to be a loan, then is it still owing? For example- many years ago I was acting for the husband. The wife's parents lent the parties a lot of money. With interest it equalled half the value of everything that they owned. If that was removed from the property pool, then there was little left.

What was surprising was that there was loan documentation. It wasn't a recent invention as I have sometimes seen. It was the real deal, prepared by lawyers, and clearly documenting a loan from the wife's parents to her and the husband.

However, there was a problem for them. The loan documentation had not been prepared thoroughly- and it meant that the loan was not repayable because it was outside the time limit for a civil claim in contract. Whoops!

My client was keen to take advantage of the slip up. He would be better off financially, but when taking the course of relying on the Statute of Limitations, there is the real risk of blowback. It is often seen as a low act to rely upon the time limit. He relied on the time limit. He did a very good deal, because the loan was treated as a gift, but subsequently his kids did not talk to him because of their perception that he had ripped off their grandparents.

Be careful what you wish for.

This whole issue of loans was highlighted in a recent Queensland case, decided in the District Court between parents and their son. It did not involve the usual marital bustup, but a falling out between parents and son. The parents claimed that their son owed them almost $300,000 because of loans they had made to him. They failed, despite their son being called a "sponge" by the judge, because despite his promises to pay back, and despite the payments to their son wiping out any savings that they might have for retirement, an essential contractual element- the intention to create legal relations- was missing:

"The plaintiffs were deeply religious people who had a simplistic view of a person’s moral obligations. They were generous in their charity and not merely motivated by financial gain. On the other hand, the defendant cynically abused their generosity and shamelessly sponged on them when he found himself in dire financial circumstances. I found the defendant’s evidence to be self-serving and I did not find him to be a credible witness. I prefer the testimony of the plaintiffs to that of the defendant although it was notably lacking in detail concerning the transactions in question and both plaintiffs were evasive at times. As noted above they were only able to calculate what they alleged they were owed by trawling through bank statements years later. I accept the evidence of the plaintiffs that it was the intention of the parties that the monies advanced by them to the defendant were to be repaid by him. This is supported by what he says in the email correspondence quoted above. I am also satisfied that alleged loans 4, 5 and 6 were made. However, I do not accept that the plaintiffs have discharged the onus of proving that there was an intention to create legally binding loan contracts with the defendant. Even if, extraordinarily, the defendant used the same mantra of “I’ll pay you back in full and more and look after you in old age” practically every time the plaintiffs provided him with money, this is a general statement consistent with him being morally obliged to repay his parents rather than one which bears the indicia of entering into a binding loan agreement. In circumstances where no ledgers were kept and no demand was made until 2015, the transfers of money did not indicate an intention to create legal relations. Rather, in circumstances where the defendant’s business... was struggling and this business employed his sister, the plaintiffs’ daughter, it is understandable that they extended their charity to this organisation. The giving of the credit cards to the defendant for his use whilst he was injured and impecunious also does not indicate an intention to create a binding loan agreement enforceable at law."

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