There’s an expiry date on my family loan

Loans between family members, particularly between parents and children, are no new concept. Depending on the circumstances these loans can be of substantial value, such as when assisting a child purchase their first home.

Unsurprisingly, these loans also tend to be minimally documented, lacking clear terms as to repayment and/or generally repayable ‘on demand’. Some creditors are comfortable with this, given the close relationship and trust between family members. Despite this, there is one critical that factor tends to be overlooked – time.

Limitations Act 1969 (NSW)

In New South Wales, the Limitations Act 1969 (NSW) (the Act) prescribes a general limitation period of six years from the time that the cause of action accrues to recover a debt arising under a contract [1] and twelve years from the time that the cause of action accrues to recover a debt arising under a deed. [2] Put another way, depending on the level of documentation, a creditor has either six years or twelve from the time that the cause of action accrues to commence proceedings seeking recovery of the debt.

A key element to these limitation periods is the determination of when the cause of action ‘accrues’. In contract generally, the time that the cause of action accrues is when one party breaches the contract. For example, on a valid and enforceable loan contract with bank, this could be when a party defaults on the loan (i.e., fails to make a repayment). On demand loans are different, with the time that the cause of action accrues being the time that the funds are advanced.

This timeframe may seem irrelevant to creditors such as parents, who would never consider commencing proceedings to enforce a debt against their child, but instead would prefer to allow their child to repay the debt over a further extended period. However, the Act further provides that the right to recover a debt is ‘extinguished’ after the relevant action period. [3] In effect, this means that the debt is considered to longer exist, which can have a critical impact on the rights of both the creditor and the debtor.

Can you avoid these limitation periods?

Despite the strict timeframes prescribed by the Act, there are options available to safeguard your position.

A creditor who has already advanced funds may seek ‘confirmation’ of the debt, commonly either payment of principal, payment of interest or written acknowledgment of the debt. If the parties decide to confirm the debt in writing only, there are certain factors which must be met, such as the confirmation must be in writing, signed by the debtor, recognise the presence of the debt, and admit that the debt remains outstanding, all within the relevant limitation period. [4]

Importantly, if valid ‘confirmation’ has been provided, the relevant limitation period will start running again from the time of that confirmation.

Alternatively, a creditor who is yet to advance funds may consider consulting a solicitor to prepare a formal loan deed, which includes among other things, a provision for demand. The benefit being that the limitation period is extended to 12 years and the debt is repayable after a demand is made, ensuring no time is to run until a demand is made.

Conclusion

Before advancing funds, all creditors (particularly family members), should be aware of the applicable limitation periods for enforcing debts in New South Wales.

If you have a loan with a family member that you are unsure you can enforce or would like assistance in enforcing that debt, contact our commercial law team who can advise you of your options.

[1] Section 14 of the Limitations Act 1969 (NSW).

[2] Section 16 of the Limitations Act 1969 (NSW).

[3] Section 63 of the Limitations Act 1969 (NSW).

[4] Section 54 of the Limitations Act 1969 (NSW).