The case of P v Q (Financial Remedies) [2022] EWFC B9 examined the issue of loans from family members to one spouse in financial remedy proceedings and how these should be addressed in the overall financial division of assets. The case is summarised below.
Loan or gift?
Judge (HHJ) Hess evaluated payments from family members that one spouse claimed were loans needing repayment in the context of financial remedy proceedings.
The payments in question were as follows:
£30,000 from the wife’s father to fund her MBA course before the couple met (there was a contemporaneous loan document, but no repayment demand had been made, and the wife had forgotten about the loan until a month before the final hearing, so it was not included in her Form E or section 25 statement); and
£150,000 from the husband’s mother to help with housing costs (there was no loan document, and no repayment demand had been made).
The Judge explained that when money is advanced, the first step is to determine if it is a gift. To be a gift, there must be an intention to give – a bit of latin here - animus donandi.
In this case, the Judge concluded that the transactions in question were loans and were theoretically enforceable.
Hard loan or soft loan?
After establishing that the payments were loans, the Judge then considered whether the loan should be included in the asset schedule and regarded as a liability in the financial remedy proceedings. This depended on whether the loan was a "soft loan" or "hard loan", described by the Judge as an ‘elusive topic to nail down’.
The Judge outlined the following key circumstances that may classify a loan as a ‘hard obligation’ or a ‘soft obligation’ (noting this was not intended to be an exhaustive list):
1. The likelihood of the obligation being enforced in reality.
2. Factors that, individually or collectively, suggest the obligation is a hard loan:
An obligation to a finance company
The terms of the obligation resemble a standard commercial arrangement
The obligation arises from a written agreement
There is a written demand for payment, a threat of litigation, actual litigation, or intervention in the financial remedies proceedings
No delay in enforcing the obligation
The amount is significant enough that a creditor is unlikely to waive the obligation
3. Factors that, individually or collectively, suggest the obligation is a soft loan:
An obligation to a friend or family member with whom the debtor is on good terms and who is unlikely to want the debtor to suffer hardship
The obligation arose informally, and its terms do not resemble a standard commercial arrangement
No written demand for payment despite the due date passing
Delay in enforcing the obligation
The amount is such that the creditor is more likely to waive the obligation, although the amount is not necessarily decisive (there are instances of large amounts being treated as soft obligations)
The Judge emphasized that each case requires an assessment of these factors and other relevant circumstances to determine the appropriate approach for a fair outcome.
Applying the principles
Applying these principles, the Judge found both loans in P v Q to be soft.
Regarding the debt owed by the wife to her father, despite the existence of a loan document, it was deemed ‘very much at the soft end of the scale’ because it seemed unlikely she would ever need to repay it (supported by the fact she had forgotten about it until a month before the final hearing). Thus, the £30,000 was not listed as a debt on the asset schedule.
The debt owed by the husband to his mother was similarly described as ‘very much at the soft end of the scale’. This was also due to the likelihood of repayment. The husband’s mother testified at the trial, confirming she was unlikely to demand repayment.
In this case, the husband had already chosen to repay the £150,000 to his mother (despite no repayment demand). The Judge decided to re-credit £150,000 to the husband’s side of the asset schedule and remarked:
‘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 for interim living costs, other liabilities, or legal fees. This case offers a useful summary of factors likely required for such loans to be considered ‘hard’ and thus included in the overall asset schedule and division.
If you would like to discuss your financial remedies case or need support, please contact me by pressing the Contact Button below.
Comments