The treatment of personal loans from family members during divorce

The recent case of P v Q (Financial Remedies) [2022] EWFC B9 considered the position of loans from family members to one of the spouses in financial remedy proceedings and how these should be treated in the overall financial division. The case summary is below.

In February 2022 after a four day final hearing in the Central Family Court, HHJ Hess considered payments from family members which one spouse was claiming to be a loan that required repayment in the context of financial remedy proceedings.

The payments in question were as follows:

1. €30,000 from the wife’s father to fund her MBA course prior to the parties meeting (there was, in this case, a contemporaneous loan document but there had been no demand for repayment and the wife had actually forgotten about the loan until the month prior to the final hearing so it had not been included in her Form E or section 25 statement); and
2. £150,000 from the husband’s mother to assist with housing costs (for which there was no loan document and there had been no demand for repayment).

The Judge explained that, where there is an advance of money, the first step to consider is whether it is a gift. In order to be a gift, there must be an intention to give – the animus donandi.

In this case, the Judge found that the relevant transactions were loans and were therefore, in theory, enforceable.

After determining that the payments were loans, the Judge’s next consideration was whether or not the loan should appear on the asset schedule and be taken into account as a liability in the financial remedy proceedings. That was said to depend on the ‘softness/hardness of the loan and this was described by the Judge as an ‘elusive topic to nail down’.

Having considered a number of authorities the Judge set out the following key circumstances which may cause a loan to be considered a ‘hard obligation’ or a ‘soft obligation’ (making it clear that he did not intend this to be an exhaustive list):

1. Whether or not it is likely in reality that the obligation will be enforced.

2. Factors which on their own or in combination point the judge towards the conclusion that an obligation is in the category of a hard obligation:

• an obligation to a finance company
• the terms of the obligation have the feel of a normal commercial arrangement
• the obligation arises out of a written agreement
• there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings
• there has not been a delay in enforcing the obligation
• the amount of money is such that it would be less likely for a creditor to be likely to waive the obligation either wholly or partly

3. Factors that may on their own or in combination point the judge towards the conclusion that an obligation is in the category of soft:

• it is an obligation to a friend or family member with whom the debtor remains on good terms and who is unlikely to want the debtor to suffer hardship
• the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement
• there has been no written demand for payment despite the due date having passed
• there has been a delay in enforcing the obligation
• the amount of money is such that it would be more likely for the creditor to be likely to waive the obligation either wholly or partly, albeit that the amount of money involved is not necessarily decisive (there are examples in the authorities of large amounts of money being treated as being soft obligations)

The Judge was clear that this required an assessment in each case, considering all of these factors and other relevant circumstances, as to what the appropriate approach was to achieve a fair outcome.

Applying the principles

Applying these principles in the case the Judge found both of the loans in P v Q to be soft.

1. With the debt owed by the wife to her father, notwithstanding that there was a loan document, it was found to be ‘very much at the soft end of the scale’ on the basis that it seemed very unlikely that she would ever be required to repay it (which was supported by the fact that she had forgotten about it until just the month prior to the final hearing). The €30,000 was therefore not included as a debt on the asset schedule.
2. The debt owed by the husband to his mother was similarly described as being ‘very much at the soft end of the scale’. Again, this came down to the likelihood of repayment. The husband’s mother had given oral evidence at the trial and had herself confirmed that she was unlikely to ever demand repayment.

In this case, the husband had already taken it upon himself to repay the sum of £150,000 to his mother (despite there being no demand for repayment). The Judge therefore decided  to re-credit £150,000 to the husband’s side of the asset schedule and commented:

‘I do not think it would be right for me to raise the husband’s debt to his mother to hard debt status simply because he has repaid it. To do that would be to reward and encourage manipulative behaviour and would, to my mind, be unfair.’

It is not uncommon in divorce cases for one or both spouses to seek loans from personal contacts to assist with interim living costs, other liabilities or legal fees. This case provides a useful summary for family lawyers and their clients as to which factors are likely to be required for any such loans to be considered ‘hard’ and therefore taken into account in the overall asset schedule and division.