It is commonplace for family members to loan money to other family members. As blood is said to be thicker than water, there is often little thought about documenting the agreement, let alone agreeing to clear repayment terms.
In circumstances where a party loans another party money without any terms of repayment, the loan is deemed to be payable on demand. Alternatively, the parties may expressly agree that the loan is payable on demand.
This may create a unique problem for the parties where the relationship breaks down and repayment of the loan is sought by the creditor.
This article discusses the problems associated with a loan payable on demand and considers what creditors can do to protect themselves.
Payable on demand
Where funds are loaned from one party to another, there is typically an agreement in place which documents the rights and obligations of the parties, including the terms by which repayment of the loan must occur. A loan agreement is often drafted by lawyers and equally often overlooked as an unnecessary expense, particularly where the parties are related.
The existence of a written loan agreement between the creditor and debtor can save the parties significant cost and heartache in circumstances where the relationship breaks down and the creditor is seeking to recover the funds from the debtor under the loan.
If the parties have not committed to any terms of repayment, the loan is deemed to be payable on demand. In Young v Queensland Trustees Ltd1, the High Court stated that 'a loan of money payable on request creates an immediate debt.'
The Limitation of Actions Act 1978 (Qld) ("LAA") section 10(1) provides that an action founded on a simple contract or quasi contract cannot be brought after the expiry of six years from the date the cause of action arose.
This means that the cause of action to enforce the loan against the debtor arises from the date the funds are advanced. In layman's terms – you have six years from when you loaned the money to pursue repayment through the Courts.
Where the loan is payable on demand, creating an immediate debt, the creditor cannot enforce the loan against the debtor if no acknowledgement of the debt or repayment is made within six years from the date the funds were advanced pursuant to section 10(1) of the LAA.
This problem often arises in circumstances where parents loan their child money which is expressed to be payable on demand (or otherwise with no repayment terms such that the loan is deemed payable on demand).
If the parents do not receive acknowledgement or part-payment of the debt, within the six-year limitation period, the parents will be statute barred from bringing an action to enforce the loan.
This does not mean, however, that the creditor cannot bring proceedings to enforce repayment of the loan but that the debtor can defend those proceedings on the basis that the limitation period has expired.
Implications for creditors to a loan repayable on demand
If you are presently a creditor to a loan repayable on demand and it has not been six years since you advanced the funds, there are two ways for you to secure your right to enforce the loan:
- Receive written acknowledgement of the debt from the debtor; and/or
- Receive part-payment of the debt from the debtor.
Both circumstances are captured by section 35(3) of the LAA, which provides that:
"Where a right of action has accrued to recover a debt or other liquidated pecuniary claim, or a claim to the personal estate of a deceased person or to a share or interest therein and the person liable or accountable therefor acknowledges the claim or makes a payment in respect thereof, the right shall be deemed to have accrued on and not before the date of the acknowledgment or the last payment."
This means, in short, that the limitation period renews on receipt of acknowledgement of the debt or on part-payment towards the debt.
What is considered sufficient to acknowledge the debt was considered by the High Court in Stage Club Ltd v Millers Hotel Ltd  HCA 71. The Court stated at paragraph 9 that:
"Where the claim is for payment of a debt, an acknowledgment, to be sufficient, must recognize the present existence of the debt."
Therefore, a creditor can ensure that they do not become statute barred from bringing proceedings to enforce a loan payable on demand by having the debtor provide written acknowledgement of the debt signed by the debtor, or by compelling the debtor to make part-payment of the debt.
If you are considering loaning money to a friend or a family member, or have already done so, please contact our office for a confidential discussion about how we can protect your interests.
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.