• The reference
• The current law
• Community Law Reform Program

The reference

1.1 In a letter to the Commission received on 11 February 2004, the Attorney General, the Hon R J Debus MP asked the Commission “to investigate and report on the issue of time limits on loans payable on demand”.

1.2 The Commission produced a draft Report which was circulated to potentially interested parties in June 2004 and made available on the Commission’s website. The Commission received several detailed and useful submissions on the issues raised in the draft Report.¹ The matters raised in the submissions have been incorporated into this Report. To assist in the Commission’s deliberations the New South Wales Parliamentary Counsel drafted the Limitation Amendment (Loans Payable on Demand) Bill 2004. A copy is contained in Appendix A of this Report. The Commission acknowledges the substantial contribution of the Parliamentary Counsel’s Office to this Report.

The current law

1.3 It is settled law that a loan payable on request (that is, one where no time for repayment is specified or where the loan is stated to be payable “on demand”) creates an immediate debt.² This means that the lender’s cause of action accrues when the borrower receives the money; the lender can then commence action for its recovery at any time. Because the cause of action accrues at the first moment the lender can commence action, the loan is subject to a six year limitation period from when the borrower receives the money.³

1.4 While this situation is unlikely to cause injustice in the case of commercial loans (which will usually be concluded on legal advice and stipulate dates for repayment in their terms), it is argued that it may cause injustice in the case of loans between friends or family members where the expectation is often that the money will not be repaid until the lender demands it.⁴ This is illustrated by Woodward v McGregor, a recent case in the New South Wales Supreme Court.⁵ A wife, on the winding up of her husband’s company agreed to give a loan of $65,000 to her husband on 1June 1995. The husband died on 12 August 2001 and the wife attempted to claim the $65,000 from the deceased estate which had become subject to a family provision application by a daughter of a previous marriage of the deceased. Master McLaughlin held, in conformity with the settled law on the question, that the limitation period commenced on the date the loan was made and that any claim on the estate was, therefore, barred. The Victorian Supreme Court had considered a similar situation in 1975.⁶

1.5 The administration of an insolvent estate and the division of property in a divorce are other particular examples of situations where limitations on debts payable on demand may operate unfairly when loans are made between family members and friends. In these cases, the borrower, or their successor in title, can potentially take advantage of the operation of the limitation period to retain the benefit of the loan.⁷

Community Law Reform Program

1.6 Master McLaughlin’s judgment in Woodward v McGregor, including remarks concerning “the unfairness and injustice which can result from the application of this rule of law to loans between family members or close friends”,⁸ was drawn to the attention of the Commission. The Commission conducted a preliminary investigation, as part of its Community Law Reform Program, to determine whether there was a need to investigate its import further with a view to making recommendations for reform. The Commission concluded that there was such a need and requested terms of reference from the Attorney General. In a letter to the Commission received on 11 February 2004, the Attorney General, the Hon R J Debus MP approved the Commission’s proposal “to investigate and report on the issue of time limits on loans payable on demand”.

1. A list of submissions is contained in Appendix B to this report.

2. See Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 566. See also Ogilvie v Adams [1981] VR 1041 at 1043, 1052-1059; England and Wales, Law Reform Committee, Final Report on Limitation of Actions (21st Report, Cmnd 6923, 1977) at para 3.20-3.21. A loan payable on demand is to be distinguished from a loan payable on condition that a demand is made, eg, a promise to pay a collateral sum upon request, which is treated as a condition precedent to the bringing of an action: see Re Brown’s Estate [1893] 2 Ch 300 at 304-305; D & J Fowler (Aust) Ltd v Bank of New South Wales [1982] 2 NSWLR 879 at 882-883, 886.

3. Limitation Act 1969 (NSW) s 14(1)(a).

4. England and Wales, Law Reform Committee, Final Report on Limitation of Actions (21st Report, Cmnd 6923, 1977) at para 3.22.

5. Woodward v McGregor [2003] NSWSC 672.

6. Ogilvie v Adams [1981] VR 1041 where a trustee in bankruptcy sought repayment from a deceased wife’s estate of $63,200 lent by her deceased bankrupt husband in April 1957. The repayment was demanded in July 1972, some 15 years later. The claim was unsuccessful.

7. This Report is concerned only with situations where a borrower denies they have any obligation to pay the debt once they are outside the limitation period. Under the current law, if a borrower can be taken to have acknowledged the debt, the confirmation provisions of the Limitation Act 1969 (NSW) will apply to extend the limitation period (s 54). For example, a borrower making an interest payment to a lender may be taken to have confirmed the lender’s cause of action to recover the principal loan. This situation is not affected by the recommendations made in this Report.

8. Woodward v McGregor [2003] NSWSC 672 at para 85.