It is not uncommon to help a family member or friend by providing them with a loan, whether with or without interest. Although the loan is not intended to be a gift, all too often, the details are not formalised and there may be no stipulation as to when and how the loan must be repaid.
Often directors of a company provide a loan to their company or a family member lends money to a family trust, without formally documenting the transaction or stipulating when repayment is to be made.
A loan falling into these categories will generally be considered a ‘loan payable on demand’.
Despite good intentions between the lender and borrower, these types of loans may create unintended adverse consequences.
Legal nature of loans payable on demand
If you make an informal loan to a friend, relative, family company or trust, the interplay of the following legal principles should be considered:
- A loan made with no stipulated date for repayment, or that is payable on request, is a ‘loan payable on demand’. Once the money is handed over, the lender has an immediate right to sue for recovery of the debt.
- Legislation in Queensland (and other Australian jurisdictions) places time restrictions on a person’s right to commence legal proceedings for various types of action. For loans in Queensland, a cause of action cannot be brought after the expiration of a six-year limitation period from the date that the cause of action accrues. For a loan payable on demand, the cause of action to recover repayment accrues when the loan funds are advanced.
The effect of these principles is that because a loan payable on demand creates an immediate legal right for the lender to sue from the time the money is advanced, the limitation period is triggered at this point and the lender will only have six years from that time to pursue the borrower for repayment of the debt.
What to do if you are lending money or have lent money
If you propose to lend money, whether to a family member, a friend, a family company or a trust, it is important to have a written deed or loan agreement in place. The agreement should stipulate that the loan will become payable at some future date so that the limitation period will not begin to run until that date is reached. The loan agreement should also deal with other important matters, for example, whether interest is payable and the lender’s rights in the event of the borrower’s default.
Your lawyer can assist in preparing the loan agreement to ensure that the limitation period will not be triggered as soon as the money is advanced and to otherwise protect your rights
If you have already loaned money without a formal agreement, you may still be able to avoid the limitation period running from the date of advance, by obtaining a confirmation of the loan or requesting the borrower to enter into a loan agreement.
The limitation legislation makes provision enabling the limitation period to restart upon acknowledgement or confirmation by the borrower of the debt.
Loans made informally without a stipulated date for repayment can lead to unintended consequences. If a lender does not request repayment of the loan within six years after it is advanced, it may become impossible to recover repayment.
No matter how close you are to a person to whom you propose to lend money, you should always consider documenting the terms of the loan in writing to avoid any uncertainty and to protect your rights.