Tuesday, February 12, 2019

Ensuring loans are loans and people are people

Following last week’s post, the case of Berghan & Anor v Berghan [2017] QCA 236 is a stark reminder. As usual, if you would like a copy of the decision please contact me.

Broadly, the factual matrix was as follows:

1) A son had borrowed (either directly or via related entities) a six-digit sum from his parents over an extended period.

2) The total amount lent was by way of instalments on a number of separate occasions.

3) On every occasion, there was a confirmation from the parents that they intended the amount to be a loan.

4) In saying this however, no formal agreement was ever entered into.

5) There was also an extended delay between the point in time at which the loans were made and when the parents ultimately sought recovery of the loans.

In the initial court decision, it was held that despite the reference to the loans, the conduct of the parents was more analogous to a gift, and on this basis, there was no obligation at law (ignoring any moral argument) that the son had to repay the amounts.

While on appeal, the parents were successful in having the court confirm that the amounts were actually loans repayable on demand, the fact that there was a protracted legal case to achieve this outcome is a stark reminder to ensure that comprehensive legal agreements are implemented.

The court focused on the factual matrix to determine whether the transactions had objectively demonstrated that the payments were made by way of an oral loan agreement and were not gifts. Once it was determined that the advances were loans, it was confirmed that at law, in the absence of anything to the contrary, such loans are deeded to be at call and repayable on demand.

Finally, independent legal advice should be obtained by each party to ensure that the prospects of, particularly the borrower, arguing that the arrangements were in fact a gift is unsustainable.

** for the trainspotters the title of the post today is riffed from 1984 and Depeche Mode’s ‘People are People

Tuesday, February 5, 2019

Ensuring a loan is a loan (or alone with you**) – part 1

Arguably, in relation to any form of loan arrangement, it is fundamentally important that there are documents confirming the exact terms that apply.

Purely from an asset protection perspective, ignoring wider issues such as the commercial arrangements, estate planning and tax, the importance of documenting loan arrangements in writing cannot be underemphasised.

Similarly, it is critical to consider:

1) Regular repayments, even if only nominal, to ensure that the terms of the agreement remain on foot and acknowledged by the parties. In this regard, as profiled elsewhere in these posts, government legislation can automatically cause loans to become unrecoverable and statute barred.

2) Possibly implementing security arrangements in relation to the loan, for example, by way of mortgage or registering an interest under the PPSR.

3) Ensuring that each party to the loan receives independent legal advice. Particularly in relation to arrangements between family members, the failure to ensure each party receives independent legal advice can cause a loan to become unrecoverable on the basis that a court decides that the loan was in fact a gift.

The requirement for independent advice is arguably the most important aspect in family situations, such as parents lending funds to a child and their spouse.

If the child and spouse have a relationship breakdown it is likely that the funds advanced will be argued to be a gift by the estranged spouse, even if a loan agreement has been signed.

If the amount is treated as a gift it will be an asset of the relationship (not the parents as lenders) and thus unrecoverable by the parents.

** for the trainspotters the title of the post today is riffed from the early 1980’s and The Sunnyboys ‘Alone With You’, see them perform live!

Tuesday, January 29, 2019

Trust creation – the 4 key elements

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a 'vidcast'.

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

On the basis that a picture tells a thousand words, we find the best way to explain a trust is via diagrams. Generally, we use triangles to represent a trust, rectangles for companies to keep things simple.

If pictures, symbols and diagrams are used then when you explore some of the technical issues with trusts it invariably makes it a lot easier. This is particularly the case when you then get into the detail of a trust document that run to dozens of pages.

If we, therefore, explore the creation of a trust arguably there are really only ultimately 4 key principles that need to be in place in order for there to be a trust relationship.

Many readers would probably argue very quickly, “Hang on, there’s a whole range of additional things that need to be satisfied.” On many levels that feedback is fair. However arguably the response is that, “Any other idea that you can come up with would be, I would argue, falls under one of the 4 headings.”

The first one is that you need to have legal ownership. Invariably, that’s the trustee. Invariably with a discretionary trust, that trustee will be a company. Its sole role is having the legal ownership of the underlying asset.

Where is that underlying asset? It's held within the trust, which is point two.

Without an asset, there is no trust relationship. It might again sound abundantly simple but it is a really key point.

Point three is that there are some rules. Invariably those rules will be set out in a trust deed, or a trust instrument. Generally this will be a written document.

Finally, the fourth point, is that there must be at least one beneficiary to receive entitlements, whether they be income distributions on the way through the life of the trust or capital distributions either interim or on the final vesting of the trust.

Within those 4 parameters, there are essentially no restrictions in terms of what can or can’t be done in relation to a trust structure.