In the recent case of P v Q Financial Remedies 2022 EWFC B9, heard in February 2022, one of the issues that Hess HJ had to consider at final hearing was that of “hard and soft” loans in the context of all the circumstances and the law.
Every case depends on its own facts. However, the issue of whether a loan is “hard” or “soft” may impact heavily upon the outcome of a case. A loan is normally classified as “hard” when it is reduced to writing in a formal document and its terms are clearly set out. A “soft loan” is normally far more informal, either an oral arrangement/understanding and if reduced to writing, in the form of an informal letter.
The two extremes of hard and soft loans are for example, (1) an amount of money being lent by a third party to a couple, in order to assist them with the purchase of the family home in respect of which the third party requires re-payment and which loan is reduced to writing and lodged against the title deeds of the property which the third party will enforce by a specific date and/or if and when the property is sold or transferred (which may be classified as a hard loan) as opposed to (2) a third party giving or gifting a couple a certain amount of money in order to assist them with the purchase of their family home, which loan agreement is not reduced to writing and in respect of which the third party does not require nor intend for the money to be repaid (which may be classified as a soft loan).One of the main issues with hard and soft loans and the repayment thereof is whether repayment may and in fact will, be enforced by the third party providing the loan.
In P v Q, as Hess HJ indicated, the extent to which assets affected by respective transactions between each party and members of their own family should be reflected in the asset schedule, was an issue which created a great deal of argument and ill feeling between the parties [para 19].
Hess HJ determined in all the circumstances that 2 main transactions required detailed consideration namely, (1) the loan of £150K by the Husband’s Mother in 2010 (4 years after the marriage in August 2006) and (2) 30,000 Euro’s by the Wife’s Father in 2004, before the parties met, to fund her MBA studies.
In respect of the loan by the Husband’s Mother, the Mother generously advanced £150,000 to each of her 3 children following the sale of her business in 2007. No documentation was drawn up contemporaneously or later to record the terms of the advance and the court had not been informed of any tax planning advice given at the time which would have given it context. Nor was there ever any discussion as to the circumstances in which repayment would or might be expected although the court had been informed of one of the daughters returning some of the money (£30K to £40K) on a voluntary basis. In her written statement, the Husband’s Mother indicated that “The agreement with all three of my children was that these were loans within the family, to facilitate their housing improvements, and on the understanding that this is my money that I choose to use to fulfil the needs of individual family members as they arise. The bottom line is that when I am no longer able to look after myself (I am now 76) they would repay the money in a reciprocal, supportive manner” [para 19].
In her oral evidence, the Husband’s Mother indicated that she could not envisage any circumstances in which she would pursue the loan debts due from her children to a court by way of litigation and if they remained unpaid, she would simply rearrange her will to reflect that any child who had not made any repayment had had the benefit of the unredeemed loan.
The £150K loan became an issue in April 2020 and in June 2020, the Husband without any demand from his Mother and without reference to the Wife, paid his Mother the sum of £150K asserting it to be repayment of the loan. The Husband’s argument was that this money was now gone and should not appear on the asset schedule. The Wife argued that this payment was a cynical manipulative device to remove £150K from the asset schedule so that it did not have to be divided 50:50 with the Wife on sharing principles.
The 30,000 Euro loan was recorded in a document as “an interest free loan (for which) a date for repayment has not been set (and the arrangement included the term that) as long as the father does not demand any extraordinary urgent repayment, the daughter will repay the loan back at her discretion” [para 19]. The Wife had made no repayment and no demand was ever made by her Father. The existence of the potential liability had not been mentioned in the Wife’s Form E, nor in her narrative (section 25 witness) statement. It appeared for the first time in a letter in January 2022. The Wife’s case was that she had completely forgotten about this liability until going over old papers and talking to her Father. No demand for payment was produced by the Wife’s Father nor did he appear at court or in writing demand that the liability be recognised. The Wife informed the Court that she didn’t expect her Father to pursue the debt but felt he could and had raised this issue in view of the points taken by the Husband in relation to his transaction with his Mother.
As Hess HJ indicated [para19] the above 2 main transactions that is, the advance of money to the Husband and the Wife by their respective parents, were quite similar in their circumstances and both raised questions of law which were not uncommon in financial remedy cases.
Hess HJ adopted a 3-stage approach [para 19] and determined that the first question is whether the advances should be regarded (in strict legal terms) as gifts or loans. As Hess HJ indicated, 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. It was held that in neither instance had either party produced persuasive evidence of such intention in the respective advancing parent and the judge was inclined to accept what the Husband’s Mother had told him and what was contained in the 2004 document. On the face of it, HJ Hess found that both the transactions were loans which could, in theory, be enforced.
Secondly, the court considered a number of authorities and an article by Alexander Chandler, “Family loans an(d) intervener claims – taking the bank of mum and dad to court  Fam Law 1505”, from which it derived the following summary of principles:
(a) Once the court has decided that a contractually binding obligation by a party to the marriage exists towards a third party, the judge may wish to go on to consider whether the obligation can be categorized as a hard obligation or loan (in which case it should appear on the judge’s computation table) or 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).
(b) There is no hard or fast test in the authorities as to when an obligation or loan will fall into one category or another; 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.
(c) A common feature of the cases is that the analysis targets whether or not it is likely in reality that the obligation will be enforced.
(d) Features which had fallen for consideration to take the case on one side of the line or another include the following but the court made it clear that this was not intended to be an exhaustive list.
(e) Factors which of their own or in combination point the judge towards the conclusion that an obligation is in the category of a hard obligation include: (1) the fact that it is an obligation to a finance company; (2) that the terms of the obligation have the feel of a normal commercial arrangement; (3) that the obligation arises out of a written agreement; (4) that there is a written demand for payment, a threat of litigation or actual litigation or actual or consequent intervention in the financial remedies proceedings; (5) that there has not been a delay in enforcing the obligation; and (6) that 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.
(f) Factors which may on their own or in combination point the judge towards the conclusion that an obligation is in the category of soft include: (1) 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; (2) the obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement; (3) there has been no written demand for payment despite the due date having passed; (4) there has been a delay in enforcing the obligation; or (5) 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 the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as soft obligations.
(g) It may be that there are some factors in a particular case which fall on one side of the line and other factors which fall on the other side of the line and it is for the judge to determine, looking at all these factors, and maybe other matters, to make the appropriate determinations in a particular case in the promotion of a fair outcome.
The third stage involved Hess HJ applying the legal principles to the case and he held as follows:
(a) The debt owed by the Wife to her Father was very much at the soft end of the scale. It seemed unlikely that these proceedings apart the debt would ever have surfaced. It seemed unlikely that the Wife would be required to make any repayment and the fact that she had forgotten about it until January 2022 supported these conclusions, notwithstanding there was a contemporaneous loan document.
(b) The debt owed by the Husband to his Mother fell very much in the same category – very much at the soft end of the scale. The Husband’s Mother was unlikely ever to demand repayment and certainly would not have contemplated going to court for its enforcement. The court indicated that it was satisfied that the both the Husband and his Mother were quite content until the intervention of the argument on the divorce, to leave things be without any repayment. They were both content to regard it as an advance on the Husband’s inheritance.
(c) Having heard and read the evidence, the court was satisfied on a balance of probabilities that the Husband’s primary motivation in making the payment of £150K to his Mother in June 2020 was because he was concerned that the Wife would share in half of it if he did not do this. The judge did not accept that the Husband had any significant sense of an obligation to make the payment at this point, either legally or morally.
(d) The court accordingly held that it would not be right to raise the Husband’s debt to his Mother to hard status simply because he had repaid it. To do that would reward and encourage manipulative behaviour and would in the court’s mind, be unfair.
(e) The court accordingly held that both of the debts were very soft and for the court to do fairness between the parties, the consequence of that was that it should not include the Wife’s debt to her Father on the asset schedule but should re-credit the £150K to the Husband’s side of the schedule.
The Court having made its determination principally in respect of the above and other associated issues relating to debts and loans, summarised the realisable assets and debts in a schedule set out in paragraph 22 of the judgement. The Court then duly made its award taking into account all the circumstances and law in the context of the section 25 and section 25A of the Matrimonial Causes Act 1973 [paragraph 45].
As determined by Hess HJ above, the issue whether a debt/loan should be treated as soft or hard depends on the circumstances: each case depends on its own facts and although a very helpful guide, the factors listed are not to be intended to be an exhaustive list, one of the touchstones being, whether in reality an obligation will be enforced.