Family lending gone wrong: Is it a gift or a loan?

28 March 2017

 

A recent case highlights the importance of documenting and formalising loans even those made to family members.

In Berghan v Berghan ([2017] QDC 47) a mother and father lent $286,471.09 to their son over a four year period. The loans were made by way of bank transfers into the son’s business’s bank account, cash payments and use of the parents’ credit card to assist his struggling business. The son promised to repay the money to his parents and to look after them in their old age.

A family dispute arose in relation to the control over a separate family business.  This dispute led to the parents demanding repayment of the loans six years after the first loan was made. The son refused to repay the money and argued that the funds were a gift.  The son claimed that there was no intention by the parties to form a legal relationship and no legal obligation for him to repay the loans.

The court found that the son’s numerous promises to repay the loan were sufficient evidence to establish an intention that he was going to repay the money in full to his parents.

However, the court could not find sufficient evidence of an intention to create legal relations. The parents’ failure to keep proper records of the money advanced to the son and their delay in demanding repayment indicated that the loans were a form of charity to help the son’s struggling business.

The parents also failed to demonstrate that the loans were personal to their son rather than for their son’s business entity as the funds were paid into the son’s business account.

The parents’ claim was dismissed.

Lessons for families

While it may be an uncomfortable conversation, it is important for family members to document any financial and/or lending arrangements from the outset to prevent confusion and disputes in the future.  

We can assist with preparing loan and mortgage documents and other financial documents you may require. For more information, please contact Richard Waring, Partner on 07 3307 4545 or Brad Clark on 07 3307 4527.

 

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