In an ideal world, all loans would be the subject of a written loan agreement with clear repayment terms. As many practitioners will be aware, however, undocumented loans are commonplace. They frequently feature in dealings between family members and within small businesses and community organisations. The problems created by the absence of a proper record of the loan terms often become prominent in circumstances far less congenial than those that existed when the funds were advanced, or in an insolvency context.
Woodhouse v Woodhouse[1] (Woodhouse) was a recent decision which considered undocumented loans and many of the related practical difficulties. These included establishing the existence of such loans and limitation period issues. As such, the decision is a useful vehicle via which the problems associated with undocumented loans may be examined.
Facts in Woodhouse
Woodhouse involved a dispute between mother and son (Nicola and Philip Woodhouse). The mother alleged a $250,000 loan was made to the son by oral agreement in June 2010. The mother sought repayment of this amount, which she alleged to be the principal outstanding as at 1 July 2015.
The son denied that there was any loan agreement at all or, alternatively, said that any loan was unrecoverable by operation of an applicable limitation period. That defence was advanced on the basis that if there was loan, the mother had not established any agreed loan term, such that any principal and interest of the loan could only be repayable upon demand.[2] It followed, therefore, that the cause of action accrued from the date the loan was made and, accordingly, was statute barred by the time the mother commenced proceedings against the son.[3]
Proving the loan
The mother sought to establish the existence of the loan by pointing to a balance sheet maintained by the son (which, on 30 June 2011, recorded a loan to him in the amount of $267,237.02). However, her Honour Ward CJ noted that considerable caution ought to be exercised in placing weight on the son’s financial records given that they were not prepared by him, but rather by his accountant (Mr Drummond) either with the assistance of a bookkeeper or the mother herself. Her Honour found there was nothing to independently corroborate the mother’s assertions regarding the term of the alleged loan.[4]
Further, the mother also argued that the son’s income tax returns for the financial years between 30 June 2011 to 30 June 2014 claimed certain sums as interest expenses, and also recorded a loan to the mother as a liability.[5] However, her Honour again stressed that those income tax returns, whilst signed by the son, were not prepared by him and had been prepared by Mr Drummond.
Correspondence regarding the alleged loan was exchanged between the mother and the son’s respective solicitors. Relevantly, on 29 July 2015, the son’s solicitors denied the existence of any loan.
Ultimately, her Honour concluded[6] that whether a binding loan agreement between the mother and the son was entered into in 2010 made no difference to the outcome of the mother’s claim. Her Honour was not persuaded, on the balance of probabilities, that a loan was entered into in the terms alleged by the mother, or that the loan was repayable on a fixed date.
Accordingly, having reached those factual conclusions, if there was a loan at all it could only be treated as being repayable upon demand, such that the loan is to be treated as an immediate debt. Referencing the High Court of Australia decision of Young v Queensland Trustees Ltd[7] (Young), Her Honour concluded that any such loan would have become statute barred 6 years from the date of the advance.[8] Her Honour accordingly dismissed the mother’s claim.
Undocumented loans and limitation periods
In most Australian jurisdictions, a limitation period of 6 years applies with respect to a cause of action founded upon a breach of contract.[9] However, in the Northern Territory the applicable limitation period is only 3 years from the breach of contract.[10]
As was discussed in Woodhouse, where there is no express term for the repayment of a loan (whether the loan is made in writing or is purely oral), that loan is treated as being repayable upon demand. A loan may also expressly provide that it is payable upon the demand of the lender. The relevant limitation date for such loans arises 6 years from the date of the advance of the loan (see for example Young, together with the Queensland Court of Appeal decision of Haller v Ayre[11] (Haller) which contains a helpful discussion of the relevant authorities).[12] In Haller, it was held that the lender’s cause of action arises “instanter” on receipt of the money by the borrower.[13] Western Australia has however altered the common law position. Section 59 of the Limitation Act 2005 (WA) provides that “a cause of action for the repayment of a debt repayable on demand accrues when there is a failure to comply with the demand for repayment”.
Other similar causes of action, such as an action in moneys had and received (being an action in quasi contract),[14] are also subject to a 6-year limitation period from the date on which the relevant sums were paid.[15]
In broad terms, an acknowledgement of a debt (which generally speaking must be made prior to the relevant limitation period expiring) could have the effect of extending the limitation period, provided that the acknowledgment is in writing and signed by the debtor.
Interest on undocumented loans
What about a lender’s entitlement to interest with respect to a wholly oral loan? Assuming the existence of the loan in which proceedings are commenced within time, and that the loan does not provide for interest, a lender may have an entitlement to pre-judgment interest should judgment be granted in favour of the lender.[16] Alternatively, interest may be orally agreed as an express term of the undocumented loan.
Some applications of undocumented loans
Determining the recoverability of undocumented loans is important for at least lenders, company directors, along with liquidators and bankruptcy trustees. Undocumented loans are frequently alleged in disputes between unsophisticated parties. In those circumstances, it may be necessary to distinguish the loan from a gift.
In their investigations of the affairs of companies, liquidators may discover loans recorded in company financials where, in the context of related entities, there is quite often no corresponding loan agreement. Typically, those loans have been entered into company accounts by an accountant. As illustrated in Woodhouse, financial records may not be determinative. In those circumstances, it is critical that a liquidator commences proceedings against the relevant borrower to recover the loan within the relevant limitation period of the loan agreement’s existence. However, a liquidator is faced with the difficulty of determining whether that was in fact the date of the advance of the loan.
Determining whether undocumented loans are presently recoverable (and not statute barred) is also relevant to insolvency practitioners when a liquidator or bankruptcy trustee is adjudicating as to proofs of debts lodged by creditors. Further, in a bankruptcy context, where a debtor provides a liability to a lender on their statement of affairs, a debtor signing that document could be construed as making an acknowledgement of that debt. Woodhouse may have been decided differently if the tax returns recording the loan had been prepared by the son personally instead of the son’s accountant. The mother may then have argued that those signed tax returns amounted to an acknowledgment of a debt.
For company directors, loans that are repayable on demand, at least arguably, ought to be considered as a current liability of the company as, in theory, such loans could be “called in” at any point. This could have ramifications for a company director in considering the solvency of a company.
Conclusion
It goes without saying that it is generally speaking always preferable for a loan agreement to be reduced to writing with clear repayment terms. That has the effect of deferring the commencement of the limitation period to the date of the breach of the repayment term rather than the date the loan was advanced. Seeking a formal acknowledgment of a debt is another tool lenders should consider to confirm the debt prior to the expiry of the relevant limitation period.
Where a liquidator, or a bankruptcy trustee, has limited information on the circumstances in which a loan came into existence, or where the loan is not able to be substantiated (as a matter of evidence), it is prudent for that cause of action to be commenced within the relevant limitation period on which the loan was advanced. Even where there are other contemporaneous documents which may tend to prove the existence of the loan, as Woodhouse illustrates, a court may take a rigorous view when it comes to accepting the existence of an undocumented loan.
[1] Woodhouse v Woodhouse [2022] NSWSC 204; BC202201355.
[2] Above, at [118].
[3] Above n 1, at [3].
[4] Above n 1, at [47].
[5] Above n 1, at [54]–[57].
[6] Above n 1, at [166].
[7] Young v Queensland Trustees Ltd (1956) 99 CLR 560; [1956] ALR 939; BC5600800 at [566].
[8] Above n 1, at [165]–[166].
[9] See for example, Limitation Act 1985 (ACT), s 11(1); Limitation Act 1969 (NSW), s 14(1); Limitations of Actions Act 1974 (Qld), s 10(1); Limitation of Actions Act 1936 (SA), s 35; Limitation Act 1974 (Tas), s 4(1); Limitation of Actions Act 1958 (Vic), s 5(1).
[10] Limitation Act 1981 (NT), s 12(1)(a).
[11] Haller Ayre [2005] QCA 224; BC200504341.
[12] Above, at [16]–[32].
[13] Above n 11, at [19] and [24].
[14] Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) (2012) 16 BPR 31,011; [2012] NSWSC 587; BC201203726 at [274].
[15] Emanuel Management Pty Ltd v Foster’s Brewing Group Ltd (2003) 178 FLR 1; [2003] QSC 205; BC200303844 at [1342].
[16] See, for example, Civil Proceedings Act 2011 (Qld), s 58.