Loan Agreements and Private Lending

We prepare and review loan agreements for private lenders and borrowers, family loans, loans between related entities, and business lending outside the banking system. This page is about lending generally. Where a private company has advanced money to a shareholder or an associate, the driver is the tax rules rather than credit risk, and a Division 7A loan agreement is a different document with a different purpose.

Why an undocumented loan causes trouble

An undocumented advance is ambiguous by nature, and the ambiguity is resolved against the lender surprisingly often. The recurring problems are:

• Was it a loan or a gift? Parents who advance money to a child commonly intend a loan. Without documents, the child's separating spouse, or the child's trustee in bankruptcy, has every reason to characterise it as a gift.
• When is it repayable? A loan with no stated term may be repayable on demand, or may not be, and the limitation period can start running in a way the lender never intended. A debt can become unenforceable through nothing more than the passage of time.
• Is it secured? An intention to take security is worth nothing. Security has to be granted and, for most assets, registered.
• What did the parties agree? Memories diverge, particularly after a death. A loan account in the accounts is evidence, but it is not an agreement.

What a loan agreement needs to deal with

The money

• the amount, whether it is advanced at once or by drawdown, and what the funds may be used for
• interest: the rate, whether it is fixed or variable, how it is calculated and when it is payable, or an express statement that the loan is interest free
• repayment: the term, whether it is repayable on demand or on a schedule, and whether early repayment is permitted

What happens when it goes wrong

• the events of default, which should extend beyond non-payment to insolvency, breach of covenant, death and disposal of secured assets
• acceleration, so that the whole balance becomes payable on default rather than only the missed instalment
• default interest, and the care needed to make sure the rate is compensatory rather than a penalty
• enforcement, costs, and how notices are given

Support for the debt

• Security. A mortgage over land, or a general or specific security agreement over personal property. Security over personal property generally needs to be registered on the Personal Property Securities Register to be effective against a liquidator or trustee in bankruptcy, and registration has timing rules that are easy to miss.
• Guarantees. Where the borrower is a company or a trustee, a personal guarantee from the people behind it is usually what makes the loan worth making.
• Representations and covenants. What the borrower asserts is true, and what they promise to keep doing, such as maintaining insurance or not granting further security.

Lending to or from a trust

Where either party is a trustee, two extra questions arise. The trust deed must permit the trustee to borrow or to lend, and to grant security if security is being given. And the agreement should record whether the trustee contracts personally or only in its capacity as trustee, because that determines what the lender can reach if things fail. Getting this wrong is common and consequential.

Family loans

Loans within families deserve documents precisely because nobody expects to need them. A short, clear agreement recording the amount, whether interest is payable, when repayment is expected, and whether the advance is to be taken into account in the parent's estate protects everybody, including the borrower, whose siblings may later have a different recollection.

Where the intention is that the advance reduces that child's share of the estate, that should be recorded in the loan agreement and reflected in the will. The two documents have to agree.

What we do

• Draft the loan agreement, and any guarantee, mortgage or security agreement that goes with it.
• Attend to registration, including on the Personal Property Securities Register, within the timeframes that matter.
• Review a loan agreement you have been asked to sign, and advise on what it exposes you to.
• Advise on enforcement where a loan has not been repaid.
• Document loans that have already been made, where that is still possible, and advise on the limits of doing so after the fact.

This page is general information. It is not legal or tax advice, and your own circumstances will change the answer.