Loans repayable on demand. Are they safe?

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Many clients of ours request simple one or two page loan agreements be prepared for circumstances where funds are being lent between family members or friends. Often, to keep it simple, we are instructed to set the repayment date as “to be repaid upon demand made by the lender/or at call”.

There is nothing inherently dangerous with the above situation for short term loans. However, client lenders need to be well aware of the ramifications of not making demand on the loan in a timely manner.

In the long  established case  of Young v Queensland Trustees Limited 1956 99 CLR 560, the High Court found that where no repayment date is specified in a loan or the loan is specified as being repayable upon demand (or similar), then the cause of action for the lender to seek recovery of the loan funds actually first accrues on the date the loan is first made, not when demand is made on the borrower. That is, the loan is repayable from its very commencement.

Why is this important? In New South Wales the Limitations Act 1969 (the Act) places time limitations (or statute bars) on, among other things, plaintiffs bringing proceedings against defendants founded in contract. For example, for breach of contract, or recovery of a loan repayable under a contract. Each other state and territory in Australia have a similar statute of limitations which sets out a similar limitation period for contractual causes of action, except for the Northern Territory, where the limitation period is only 3 years .

The Act says that a person’s cause of action is not maintainable if it is brought after the expiration of the above limitation period. Where an action is based on a deed (rather than a contract), then the limitation period jumps to 12 years.

How does this effect loans repayable on demand? If the loan is made under contract, then the above case says the loan is repayable from commencement, meaning the lender’s cause of action arises from the commencement of the loan, not the date demand is made for repayment. This means a loan made that is repayable on demand will essentially be unenforceable after 6 years from the date it was first made.

Example: Father lends $500,000 to son under simple loan contract repayable on demand. Father passes away 10 years later. Son is named as an equal beneficiary in father’s will.  Estate seeks recovery of the loan as part of the administration of the father’s will (and distribution to all beneficiaries equally under the father’s will) only to find that the loan is unenforceable. The son is not obliged to pay back the loan and, if all else remains the same, the son will also be entitled to his share in the father’s estate.

Some loans with no repayment date can be distinguished from loans of the type discussed in the above case if they contain wording requiring a precondition to be met before demand can be made. For example, ensuring that reasonable notice must be given before a loan is called in.

What can you do? See a lawyer versed in preparation of loans of this type. Further, if you are a lender in an existing loan of this type, make sure you diarise the expiry of your relevant limitation period and either make demand (and commence proceedings) prior to that date, or amend or enter into a new loan agreement that contains either a fixed repayment date or contains a provision obliging some form of notice to be given prior to a demand being actionable. If you require assistance with these and other issues, please contact Tim Osborn on 4925 2077.

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