Soft Loans in Financial Remedy Proceedings – Raiding the Bank of Mum and Dad

Informal loans are a regular part of Financial Remedy proceedings. It is extremely common to read a party’s Form E and see substantial loans from friends or family towards legal fees or family expenses including the family home or business. Often dating back many years and with little in the way of written evidence of the terms of repayment, such loans present a particular problem.

Often dismissed as ‘soft loans’ and ignored entirely, the risk is that third parties who have provided significant sums to the parties are left out of pocket, or one party is left with the moral or legal obligation to repay money that has been left off the ‘balance sheet’ of the marriage. Such arrangements often carry an almost visceral moral weight with the party who feels their family’s largesse is being taken advantage of by their spouse.

The argument is usually that such loans are either not enforceable or not likely to be enforced. That argument is often made even where it is accepted that money has changed hands and in many cases is justified by reference to the lack of clear terms of repayment.

The status of these loans has been debated for years at the coalface of Financial Remedies practice, but without much real consideration in reported cases. A series of reported cases made reference almost in passing to ‘soft loans’ (see for example M v B (Ancillary Proceedings: Lump Sum) [1998] 1 FLR 53). But no case has substantially tackled their treatment in Financial Remedy proceedings.

On the other hand in the civil case of Chapman v Jaume [2012] EWCA Civ 476 an apparently ‘soft’ loan between cohabitees with little in the way of detailed terms was sufficiently enforceable as to result in a judgment for repayment of the money to the creditor. Mrs Jaume had retained her family home after divorce and Mr Chapman claimed that he had paid around £130,000 from his own funds to make improvements to it. He also paid £14,000 or so towards the legal costs of the divorce proceedings. Mr Chapman then sued after their separation for the repayment of the money as a loan on the basis of express discussions between the parties to the effect that he would be repaid when Mrs Jaume’s youngest child reached 18 years of age.

The judge found that there was an agreement, though not completely finalised or consistently expressed. He found that the terms of repayment specifically were not discussed. He found that since the precise conditions for repayment were not agreed, the claim must fail.

The Court of Appeal disagreed. It was found that where there is an agreement that monies paid were to be repaid but without the precise terms being agreed, the inference must be that this was a loan repayable within a reasonable time after any demand for payment.

Applied to a soft loan in financial remedy proceedings, if a loan from a family member is given, with no presumption that it is a gift (and where the presumption of advancement does not apply) the paying party is entitled to repayment on demand. That the precise terms are not specified does not alter that if on the facts there was an agreement to repay it. But this was not a specific decision on how ‘soft loans’ are to be treated in financial remedy proceedings. It is an argument against dismissing them for lack of enforceability but no more.

P v Q – Some Much Needed Guidance

Guidance, however, can now be found in a case handed down by HHJ Hess in February. Sitting in the Family Court in Reading his judgment in P v Q [2022] EWFC B9 makes for interesting reading. The parties were in their 40s, had children aged 10 and 11 and had a relationship including cohabitation of around 14 years. The assets were relatively modest (at least on the scale of reported cases). They consisted of;

  • A property in London purchased as a family home and later rented out, to which the wife had returned after separation valued at £870,000 net; 
  • A business based in Germany, which had been set up during the marriage and then sold to a larger company in return for shares in the parent company with a net valuation of just over £4,000,000;
  • Pensions of around £375,000; and
  • Various other cash holdings, shares and chattels amounting to about £450,000.

In issue, however, were various debts owed to reach party’s family. The husband’s mother was independently wealthy and in 2010 had advanced £150,000 to each of her children to help them buy a house. Nothing was written down and no terms were set out. There was no evidence that tax planning advice had been taken and no demand had been made for payment. One of the husband’s siblings had repaid some of the money voluntarily and the husband had repaid the entire £150,000 after the separation.

The husband’s mother gave evidence to the effect that the payments were loans to be repaid when she needed the money. She confirmed that nothing would persuade her to take action in court to recover the sums by suing her children – she would arrange her will to reflect any unpaid loan. The husband had referred to the loan as a “down payment on [his] inheritance” early in proceedings but insisted that the money was a loan that he had had to repay.

The wife on the other hand, had received a sum of €30,000 from her father to fund her studies before the relationship began. That payment was contemporaneously recorded as an interest free loan. The terms of the loan were that unless the father demanded a repayment, the wife would repay at her own discretion. No such payment had ever been made, no demand had been issued, and the wife had not even mentioned it in her Form E or narrative statement, raising it in correspondence just weeks before the trial.

These were clearly fairly standard ‘soft loans’. The Judge therefore turned to the law. He held that:

  • “As a matter of general principle, for an advance of money to be a gift there must be evidence of an intention to give – the animus donandi.” As neither party had been able to point to any evidence that the money paid was a gift, it was in each case prima facie a loan.
  • In family proceedings, however, that was not the end of the matter. A loan may be considered differently in the evaluative process based on its “softness”.
  • After considering various authorities and articles the following principles can be derived:
    • “Once a judge has decided that a contractually binding obligation by a party to the marriage towards a third party exists, the court may properly wish to go on to consider whether the obligation is in the category of a hard obligation or loan, in which case it should appear on the judges’ computation table, or it is in the category of a soft obligation or loan, in which case the judge may decide as an exercise of discretion to leave it out of the computation table.”
    • “There is not in the authorities any hard or fast test as to when an obligation or loan will fall into one category or another, and the cases reveal a wide variety of circumstances which cause a particular obligation or loan to fall on one side or other of the line. “
    • “A common feature of these cases is that the analysis targets whether or not it is likely in reality that the obligation will be enforced.”
  • A range of factors might put a case in point on one side or another. Factors which might lead to the conclusion that an obligation is a ‘hard’ obligation or loan include:
    • The fact that it is to a finance company;
    • That the terms of the obligation “have the feel of a normal commercial arrangement”;
    • That the obligation arises out of a written agreement;
    • That there is a written demand for payment or threat of litigation;
    • That there has not been a delay in enforcing the obligation; or
    • That the amount is such that it would be less likely that the creditor would waive the obligation.
  • Factors pointing towards a soft loan include:
    • That it is an obligation to a family member with whom the debtor is on good terms and who is unlikely to want the debtor to suffer hardship;
    • That the obligation arose informally and the terms do not “have the feel of a normal commercial arrangement”;
    • The lack of any demand for payment despite a due date for repayment having passed;
    • Delay in enforcing the obligation;
    • The amount is such that the creditor is more likely to waive the obligation (though this is not necessarily decisive).
  • In any case, there will likely be factors weighing on each side. The job of the judge is to weigh them in the balance and looking at those factors together with the wider picture, to determine which approach promotes a fair outcome.

With that in mind, the judge concluded that the debt owed by the wife to her father was “very much at the soft end of the scale.” It was not likely that it would be enforced or would have surfaced at all but for the existence of the proceedings. The debt owed by the husband was also considered to be at the soft end of the scale.

That the wife’s debt was evidenced by a written arrangement was overwhelmed by the delay and her approach to the debt – she had effectively forgotten it until weeks before the hearing and raised it in counter to the husband’s case.

That the husband’s mother was unlikely ever to demand payment and would only adjust her will to reflect the loan overwhelmed the fact that there was a clear discussion and agreement and that he had in fact repaid it shortly before the proceedings. The judge felt that the repayment was to take it out of account, rather than because the loan had to be repaid at that point.

As such the husband had £150,000 credited to his side of the asset schedule, and the wife was not debited the disputed loan owed to her father. Having made those findings the judge made an order which broadly divided the assts equally, with the wife retaining the house and the husband receiving a transfer of some of her shares in the business and a pension sharing order – a result almost exactly equidistant between the parties’ open positions.

Conclusion

The key thread of this judgment is that while ‘soft loans’ are often technically enforceable (as was the case in Chapman v Jaume) they may as a matter of fact and discretion be so unlikely to actually be enforced as to be left entirely out of consideration in the division of the family finances. The obvious risk of unfairness remains – a court may (perhaps for expediency and ‘fairness’) allow a party to retain the benefit of money that would be legally enforceable as a debt against the other. Parents who may genuinely have expected that they might need to call on their child and that child’s spouse to assist in years to come may find themselves out of pocket, unless they later sue one or both of them or call on their child to pay the entirety. Equally, though, a wealthy parent who would never look to recover the money cannot be used as an excuse to reduce the amount made available to meet the other spouse’s needs.

The issue for the Court will be to work out where that balance of fairness lies. The Court will need to ‘get a feel’ for the agreement. Questions will need to be asked not just about whether there was a written agreement, but also about the circumstances of the creditor, whether and if so why there has been a long gap between the payment and the ‘rediscovery’ of the loan and what the relationship is with that party. Just as with the same judge’s oft-cited judgment in W v H (divorce: Financial Remedies) [2020] EWFC B10 HHJ Hess has provided a concise and erudite checklist to guide us all on the approach to be taken to what is a common issue in many middle-to-low asset cases.

Rupert Chapman

25 March 2022