Third Party Loans in Family Law Proceedings

It is becoming increasingly common to see the baby boomer generation providing financial assistance to their adult children.  However, when the adult child’s relationship breaks down the characterisation of this ‘financial assistance’ often comes into question.  Before advancing money or assets to your children, you should turn your mind to how the court in family law proceedings would view your advance and whether you can reasonably expect repayment (dollar for dollar or if at all), in the event their relationship comes to an end. 

When parties to a relationship separate, as one of the first steps to determining what is a ‘just and equitable’ property settlement between them, the Court must first identify and quantify the parties’ assets and liabilities.  The Court is afforded a broad discretion and may decide to either accept, discount or disregard (in part or in full) any purported debt of a party – for example – a debt a party may owe to their extended family.

Where a parent transfers an asset to their child (i.e. money or an interest in property) due to the nature of their relationship, it is presumed that the parent intends to ‘gift’ the asset to their child without any expectation that they return the asset, repay the debt or hold the asset on trust for their parent.  This presumption is known as the ‘presumption of advancement’.

To rebut this presumption and prove that the asset was not advanced as a gift, the person who advanced the money or property has to produce evidence that the parties did not intend to treat the advance as a gift, as at the date the assets were advanced.[i] Ideally there should be a written loan agreement (signed and dated before the assets are advanced) documenting the borrower’s promise to repay the loan to the lender at either a fixed rate or upon demand, and may or may not include a promise to pay interest on the loaned amount.[1]

The court will also consider the parties’ conduct in relation to any purported loan, for example, whether the borrower(s) made any effort to repay the loan; whether the loan is secured or whether enforcement of the loan is now statute barred.  In consideration of whether an asset or funds were advanced as a gift the court may consider whether the parent had advanced similar sums to the party’s siblings, or if similar advances made to the parties during their relationship were treated differently.

The court may be critical of a party who suddenly asserts that a loan needs to be repaid to their parent, suspiciously soon after separation, or if it can be shown that the purported loan is a “sham” designed to defeat the other party’s claim to a just and equitable property settlement. Even if the Court is satisfied that the funds advanced are properly considered a loan, it may still decide to discount or disregard the value of the unsecured loan which is “vague or uncertain, if it is unlikely to be enforced of if it was unreasonably incurred”.[ii]

In the case of Maddock & Maddock & Anor (2011) the husband’s father advanced $240,000 to the parties to help buy and build a house during their relationship.  The debt was unsecured and there was no loan agreement. The Judge concluded that because of “the complete absence of a term for repayment or a mechanism for it to occur means that the ultimate characterisation of the advances is that they are not repayable…”. That is, the judge took the view that because there was no written agreement stipulating the terms of repayment, while the parties may have repaid the Husband’s father, there was no practical mechanism available to the Husband’s father to compel the parties to repay him. Therefore, the advance of funds could not properly be considered a loan. The Court ultimately held that the Husband and Wife were not obliged to repay the Husband’s father as part of their family law property settlement.

There is no requirement for the court to consider and deal with the rights of an unsecured third-party creditor before making orders with respect to property in family law proceedings.  Therefore it is crucial that any interested third party actively intervene and participate in family law proceedings in order to protect their interests.

For further information on children and parenting issues, please do not hesitate to contact a member of our Family Law Team.

[1] Federal Commissioner of Taxation v Radilo Enterprises (1997)

[i] Charles Marshall Pty Ltd and Grimsley [1956] HCA 28

[ii] Biltoft and Biltoft [1995] FamCA 45, paragraph 57