Recognition of Loan Deed
Loans ‘expire’ after 6 years
Loan Agreements usually stop working after 6 years. This is there have been no repayments during that time.
In Australia, each State and Territory has a Statute of Limitation. Unsecured loans go ‘stale’ or ‘expire’ if no repayments are paid or none are demanded. This is 6-years (3-years in the Northern Territory).
You can restart the 6 year period with a Recognition of Loan Deed. This is also called an
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Acknowledgement of a Loan
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Statement of Recognition of a Loan
Each State has its own rules to stop loans from working after 6 years
The limitation periods for each State and Territory for unsecured loans are:
- Australian Capital Territory: 6 years
- New South Wales: 6 years
- Queensland: 6 years
- South Australia: 6 years
- Tasmania: 6 years
- Victoria: 6 years
- Western Australia: 6 years
- Northern Territory: 3 years
A Loan Agreement becomes worthless after 6 years – the Statute of Limitation
For all jurisdictions (except the Northern Territory) a loan agreement is ‘barred’ after 6 years under the Statute of Limitation. Make sure the Borrower signs the Deed of Recognition of a Loan before the 6-year period to start the 6-year period again.
For the Northern Territory have the Borrower sign the Deed of Recognition of a Loan before the 3-year period to start the 3-year period again.
What is a “Statute of Limitation” for Loan Agreements?
Statute-barred debts are debts to which a statutory limitation period has expired. Each jurisdiction in Australia has enacted legislation that sets limitation periods for different types of debts and other legal liabilities. Once the debt is statute-barred it is then unenforceable. The Lender can no longer claim back the money from the Borrower.
The reason to stop Loan Agreements to working after 6 years is set out by McHugh J in Brisbane South Regional Health Authority v Taylor:
The effect of delay on the quality of justice is no doubt one of the most important influences motivating a legislature to enact limitation periods for commencing actions. But it is not the only one. Courts and commentators have perceived four broad rationales for the enactment of limitation periods.
First, as time goes by, relevant evidence is likely to be lost.
Second, it is oppressive, even “cruel”, to a defendant to allow an action to be brought long after the circumstances which gave rise to it have passed.
Third, people should be able to arrange their affairs and utilise their resources on the basis that claims can no longer be made against them. …
The final rationale for limitation periods is that the public interest requires that disputes be settled as quickly as possible.
There are many types of Loan Agreements to which the Statute of Limitation applies:
- Loan to Children
- Loan to a Company
- Loan from a Company to a human or trust (Division 7A Loan)
- Loan to Parents
- Loan to Spouse
All of them need to be freshened up every 6 years. Otherwise, they risk being statute-barred. Which means that you can not longer enforce the debt.
What about pre-Division 7A Loans? Keep the old section 108 loans?
Did your company lend you some money before 1997? Is it still deemed a ‘protected’ section 108 loan by the ATO? Has the Limitation period deemed that the loan is no longer enforceable by the company? If yes, then it may no longer be a section 108 loan. To protect any old section 108 loans that are still valid and operational then you need to restart the 6 year period via this Acknowledgement of Loan Agreement.
Can you freshen up a pre-Division 7A Loan?
This Acknowledgement of Debt restarts the Statute of Limitation clock for the old section 108 loans. This is provided that they are not statute-barred already. It is important to keep your loan a “complying section 108” loan at all times.
The Statement of Recognition stops the Statute of Limitation from destroying your Section 108 loan. But only if your old section 108 was not statute-barred already.
When does the limitation period start for Loan Agreements?
When does the 6 year period start for a Loan Agreement? Time starts to run from the date on which the right of action starts. While it is not always straightforward, a right of action usually starts when a debt becomes due. This is either because:
- the Loan Agreement requires payment by that date; or
- the debtor defaults on regular instalment payment obligations set out in Loan Agreement.
The date on which a right of action accrues is unaffected by the existence of procedural limitations on exercise of that right. For example, the requirement under the Consumer Credit Code that a section 80 default notice be provided, and that the 30-day period of the notice has expired without the default having been remedied before the creditor can begin enforcement action, does not alter the fact that the right of action has accrued on the date of default: Equuscorp Pty Ltd v Rigert & Anor [2003] VSC 343.
How to restart the limitation period? How to ‘freshen up’ the Loan Agreement?
The 6 year period may be re-started if the Borrower acknowledges the debt in writing. This is called a Deed of Recognition of a Loan.
Deed of Recognition of a Loan
The Deed of Recognition of a Loan gives the right of action:
‘a notional birthday and on that day, like the phoenix of fable, it rises again in renewed youth—and also like the phoenix, it is still itself’.
Busch v Stevens [1963] 1 QB 1, Lawton J at 6
A Deed of Acknowledgement of a Loan requires 3 things
To reset the clock, the Deed of Recognition of Loan is:
- made by the Borrower (or a properly authorised agent of the Borrower)
- in written and signed; and
- states a clear acknowledgment that the debt exists and is unpaid.
Whether a document constitutes sufficient acknowledgment of the debt to re-start time is decided on a case-by-case basis. This is why it is better to build a Legal Consolidated Deed of Recognition of a Loan.
Best witnesses to the Deed of Recognition of an old Loan Agreement?
The witnesses to the Deed of Recognition of a Loan are:
- not involved in the transaction in any way
- not related to any of the parties (no spouses or relations)
- over the age of 18 years
- of sound mind
The best person to use as a witness is a ‘stranger’, someone like a neighbour, accountant or financial planner.
Does the Deed of Recognition of a Loan fix up other problems with the Loan?
The Deed of Recognition of a Loan only restarts the Statute of Limitation period. It stops your loan from expiring under the Statute of Limitation. If the 6 year period has already passed this document does not work.
If your loan has problems, is faulty or there are other issues then you need to have the Loan professionally reviewed.
Help to build a Deed to restart the 6 year loan period
You are building a Recognition of a Loan on a law firm’s website. Telephone us for legal advice.
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers & Solicitors
National Australian law firm
Mobile: 0477 796 959
National: 1800 141 612
Email: [email protected]