It is common for loans particularly between family and friends to contain no term as to repayment. This may lead people to believe that the money only becomes payable when the other party demands its return. That is incorrect. A loan of money which contains no agreed repayment term becomes continuously recoverable at all times. Therefore any cause of action arises the instant the money is advanced. This has implications when determining:
- if the collection of a debt is statute barred;
- whether a company is insolvent; and
- the calculation of pre-judgment statutory interest.
In VL Finance Pty Ltd v Legudi  VSC 57 loans owed by directors were created by book entries. No formal agreements existed. The only documentary evidence of the loans were in the company's financial statements. The loans were created in 1992. The Plaintiff sought to sue in respect of them in 2000. The Defendants claimed that the debts were statute barred.
Nettle J found that in the absence of any stipulation as to the date of payment a debt will become recoverable the instant the money is advanced.
The Plaintiff argued that the directors did not have the money which would have been needed to repay the loans and therefore the parties must have intended that the directors be given time to pay if ever called upon to do so. Therefore, such a term should be implied into the loan agreement.
Nettle J held that to infer such a term into the loan agreement there must be "express words or necessary implication to establish contrary intention." It is not enough to imply a term merely because it may be reasonable. The usual contract rule applies, that is, a term may not be implied unless necessary to give business efficacy to the contract. Otherwise, in the absence of any stipulation as to the date of payment, a debt becomes due and payable instantly upon the money being advanced. It follows that the cause of action arises at the same time.
The Limitation of Actions Act (1969) (NSW) section 14 provides that a creditor has six years to commence an action in relation to an unpaid debt.
In Ottavio v Hayvio Pty Ltd  NSWSC 1125 Ward J found that:
"in the absence of an agreement as to the time at which the loan would be repaid, this would be characterised at law as a loan repayable on demand."
In VL Finance the Plaintiff alternatively claimed that even if the cause of action did arise as soon as the money was advanced the Limitation of Actions Act 1958 (VIC) provides that time will start to run again if the debtor acknowledges the debt. Any acknowledgement must:
- be in writing;
- identify the amount of the debt or be ascertainable by the extrinsic material; and
- be signed by the debtor.
The Plaintiff argued that the 1994 Annual Return of the company constituted an acknowledgement which caused time to start running again.
Nettle J rejected this and said:
"a document does not constitute an acknowledgement unless it is in substance expressive of the debtor's intention to admit the debt and to have the document produced and used for that purpose....an annual return is not capable of constituting an acknowledgment by the directors of the company of debts which they owe to the company."
The action was dismissed on the basis that the collection of the debt was statute barred.
In Coates Hire Operations Pty Ltd v D-Link Homes Pty Ltd  NSWSC 1279 the company owed a debt to its director, which was not subject to a formal agreement. The director gave evidence that he would not, in the immediate future, demand payment of the debt. The Court held that:
- in the absence of any term for payment the debt was payable on demand; and
- a debt payable on demand does not, for the purposes of solvency, become legally due and payable until demand is made;
White J held that:
"Solvency is essentially a cash flow test. Whilst the whole of the company's financial position is relevant to determining its solvency, the company is not insolvent merely because its liabilities may exceed its assets."
Section 95A of the Corporations Act 2001 (Cth) was construed by the Court "as if it provided that a company is solvent if it is able to pay all its debts as and when they become due and payable as a matter of commercial reality." The director had no present intention of requiring the company to repay the loan. Therefore the commercial reality was that the debt was not due and payable and the company was solvent.
White J also said that if his construction of section 95A was incorrect winding up is a discretionary remedy and the nature of the debt was a material consideration when determining whether to exercise the discretion. The fact that the director had no present intention of demanding payment was material in determining whether the company was insolvent and should be wound up.
The Civil Procedure Act (2005) (NSW) section 100 provides that the Court may award pre-judgment interest from the time that a cause of action arises (but there is a discretion). Therefore, in a claim for a debt with no agreed payment terms interest may be claimed from the date that the moneys were advanced and not when a demand for repayment is made.
In Tadrous v Tadrous  NSWSC 1388 Pembroke J ordered interest to apply from the date of demand but said that it would have been appropriate to claim pre-judgment interest by reference to each payment.
However, in Ottavio Ward J awarded pre-judgment interest from the date of the first demand for repayment.
Lessons to be learned
- Creditors who have loaned money with no payment terms, or "payable" on demand, should either:
- Seek a signed acknowledgement of the debt (including the amount owed) from the debtor; or
- Sue for the debt
before the expiration of six years from the date of the advance.
- Creditors should describe the loan as "repayable two days after demand made" to ensure that time runs after demand is made rather than upon the advance.
- All directors loans to the company should have no payment terms or be "repayable on demand" to ensure they are not taken into account when determining solvency.
- Creditors may be able to claim interest from the date that the money is advanced. Debtors should argue this arises from the date of demand.
The assistance of Heather Collins, Solicitor, of Addisons in the preparation of this article is noted and greatly appreciated
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.