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How does family law deal with loans to couples by family members?  When does the law consider those debts to be secured or unsecured and what is the difference?

In the unreported Full Court decision of Winston v Winston (No 2) [2013] FAMCFC 147, the mother of the husband appealing against the decision had provided the husband the husband with a loan of $1,353,100 to purchase a property, as well as a smaller loan of $15,5176 for improvements made to the former matrimonial home.

The Federal Magistrate found that the husband’s mother would never enforce the loans and said that “there is simply no chance whatsoever that Ms Winston will ever require repayment”.

On that basis, the loans were not included as liabilities of the husband in calculating the property pool to be divided between the parties.

The case was appealed and the Full Court found that in reaching his decision, the Federal Magistrate took into account the following factors:

  • The husband had always been completely financially reliant upon his family of origin;
  • The husband’s mother had a good relationship with the husband, and trusted and held him in high regard, nominating him as an executor of her will;
  • The husband’s mother had substantial personal wealth held in trust structures which she controlled and which were worth in excess of $20 million;
  • The husband’s mother wanted her son to move to a place closer to his family of origin;
  • The husband’s mother was aware that the husband did not have the funds to enable him to repay the debts;
  • The timing of the husband’s purchase of property and the circumstances surrounding the loan from his mother – specifically, the husband entered into a loan agreement with his mother 9 days after the trial of the matter and settled the purchase of the property 15 days after the trial in circumstances where the husband did not raise the purchase of the property at any point during the trial.

Notwithstanding the above, on appeal, the Full Court found that the Federal Magistrate fell into error in two ways by completely disregarding the debts.

The first error was that the Magistrate failed to give appropriate weight to the unchallenged evidence of the husband’s mother and provided insufficient reasons for his rejection of her evidence that the loans were repayable.

The second error that the Magistrate failed to appreciate the difference between a secured creditor and an unsecured creditor.  Specifically, the Magistrate relied on two earlier cases of the Family Court dealing with the enforceability of loans from family members and said that those cases allowed him to disregard the loans from the mother in this case.  The Full Court examined the cases referred to by the Magistrate and noted that while the Court may disregard the unsecured liability where the evidence of the parties is vague or uncertain, or if it is unlikely to be enforced or if it was not reasonably incurred, the position is different where the liability is secured.  In the earlier case referred to by the Magistrate, the Full Court noted that the liability was not simply deducted but was applied at a discounted rate because the Court found in that case that had the husband not separated from the wife, the husband’s father may have been prepared to wait indefinitely for the loan to be repaid.

The above case shows that it is important that where family members provide a loan to each other, and where it is not to be a gift, the loan should be documented, and secured to the extent possible.  The lack of security may be fatal to the question as to the enforceability of the loan.

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