“It was a gift”
“No it was a loan”
This is a scenario that family lawyers frequently come across:
A couple are divorcing; one spouse states that their family have lent them money which must be paid back before assets are divided in the divorce. The other spouse claims the money was given as a gift and does not need to be repaid at all. This is most commonly (but not exclusively) seen when money is provided for the purchase of a house.
So, what does a family law court do when presented with such a dispute between a couple?
Earlier this year, in the case of P v Q (Financial Remedies) [2022] EWFC B9, His Honour Judge Hess provided a helpful summary of the law that has evolved on this issue and the approach of the court.
In simple terms, where there is an argument about how such monies should be treated, the court must first decide whether the money is a gift or a loan. To treat the money as a gift, it has to be established to the court’s satisfaction that there was the intention to give the money away.
If the court decides the money was not a gift and was intended to be a loan, it can then be characterised in two different ways:
- A ‘hard loan’
- A ‘soft loan’
A hard loan is treated by the court as akin to a commercial loan and it will work on an assumption that a valid debt has been created which must be repaid and which has the characteristics of a commercial arrangement. If the court decides a debt is a soft loan it is more likely to take the view that it will not need to be repaid. In those circumstances, the court is more likely to ignore the arrangement.
In P v Q the judge helpfully produced a list of some of the factors that may point to a loan being categorised as either a soft loan or a hard loan (although he was careful to emphasise that this should not be taken to be an exhaustive list).
In order for there to be a persuasive case for determining a loan to be a hard loan ,the factors which were highlighted were:-
- The borrower’s obligation was to a finance company
- The terms of the obligation had the look and feel of a normal commercial arrangement (e.g. the loan attract a commercial rate of interest, it was accompanied by a robust set of undertakings and events of default (unless repayable on demand) and perhaps there were some fees payable)
- There was a written agreement, as opposed to a loose verbal arrangement
- There was a written demand for payment, a threat of litigation, actual litigation or the third party who provided the loan had intervened in the court proceedings (i.e. applied to be made a party in the proceedings)
- There had been no delay in enforcing the borrower’s obligation to repay or any other material obligations under the loan
- The amount of money lent was for such an amount that it would be less likely that a creditor would be likely to waive the obligation, in part or full (e.g., the loan was for a large sum of money).
In order for there to be a good case for a loan to be categorised as a soft loan, the factors which were highlighted were:-
- The borrower’s obligation was to a friend or family member who remained on close terms with the borrower, which would mean the lender would be unlikely to want the borrower to suffer hardship
- It was an informal arrangement and the terms did not have the looks and feel of a normal commercial arrangement (e.g. interest free, minimal undertakings and obligations on the borrower, etc)
- There had been no written demand for payment despite the due date for repayment of the loan having passed
- There has been a delay by the lender in enforcing the borrower’s obligations
- The amount loaned was for such a sum that it would be more likely that the lender would be prepared to waive the obligation to repay, either in whole or part
In any given case a single factor, or a combination of factors, could lead to a finding that a loan is a hard loan or a soft loan and it’s fair to say that each case must therefore be considered on its own merits. There may be factors pointing in each direction, as set out in this article, in which case the court will have to make a determination based on what evidence it has before it and what a Judge considers to be fair and reasonable in the circumstances and context of the case.
What is clear is that it will certainly help in any argument over a ‘soft’ or ‘hard’ loan to have drawn up a formal written agreement, ensuring that the loan is subject to relevant commercial terms. If you need assistance or advice in relation to any of the matters raised in this article please contact our Family Team on 0161836 8927 or Richard Cowan in our Banking and Finance Team on 0161 836 8889.
