The loan that wasn't...beware the sponging son
When Barry and Lorraine Berghan made a series of loans to their son and his business over a period of five years, they never envisaged a two year court battle would result in them not receiving any of the money back. Unfortunately that was the decision recently handed down by the Queensland Courts.
Barry and Lorraine, now in their 70’s and with failing health, made a series of 13 loans to their son Murray and his business over a five year period from 2009 to 2013. The loans totalled over $286,000.00. Each loan was provided at the request of Murray and with a verbal assurance that he would pay the money back and more and that he would look after his parents in their old age.
Despite Murray’s numerous assurances, when Barry and Lorraine did ask for the return of their money Murray did not make any repayments and Barry and Lorraine were forced to seek relief from the Courts.
However, the Court found that while Murray had cynically abused his parents' generosity and shamelessly sponged on them when he found himself in dire financial circumstances, Barry and Lorraine did not discharge the onus of proof placed upon them in the Court proceedings that there was an intention to create legally binding loan contracts.
This was despite evidence that appeared to indicate that Murray had acknowledged that he was receiving the money as a loan.
The courts have long upheld that for any arrangement between parties to be a legally binding contract it must contain a number of elements including:
- that the parties must be identifiable
- the terms must be certain
- there must be consideration; and
- that it is the intention of the parties to create legal relations.
In this case the Court accepted the money was paid, and it was the intention of Barry and Lorraine that it would be repaid, but that they could not establish their agreements with Murray bore the necessary elements of entering into a binding loan agreement or contract.
So what is the take away message for those people who do wish to provide loans to their children?
Everyone should accept that the very best intentions of the parties may be worth very little without accurate documentation to support the agreement.
If you intend to provide financial support to your adult children by way of a loan, you must have the appropriate loan documentation prepared and signed. Even if you may ultimately intend to forgive the loan at some point in the future (for example, upon death) this documentation may prove useful in protecting the funds provided in the event of a relationship breakdown or financial difficulty.
But what if you’ve already handed over the money – with no documentation? Well all may not be lost. You may be able to rectify the situation in certain circumstances with legal assistance.
If you want more information about how best to provide financial support or loans to your adult children please do not hesitate to contact the Tax, Structures and Planning team at Clifford Gouldson Lawyers. We would be happy to assist.