legal Tip 86: Loans and limitations of enforcement

When considering related party loans you must also consider that loans can become unenforceable after certain periods. Under NSW a contract cannot be enforced after 6 years from the date which the cause of action accrues s 14(1)(a) Limitation Act 1969.
http://www.austlii.edu.au/au/legis/nsw/consol_act/la1969133/s14.html

Where a deed was entered into rather than a contract the period is 12 years, s 16, http://www.austlii.edu.au/au/legis/nsw/consol_act/la1969133/s16.html

Note that this is state law and each state has different legislation with different time periods involved.

This means a loan contract under which there has been no payment or activity for 6 years is no longer enforceable.


Normally if money is owed the lender will be chasing the borrower much sooner than 6 years, but not always the case with family or related entities.


This has important implications at death as if there is an outstanding loan owed by the deceased then the executor/administrator of the estate is legally obliged not to pay it. If an executor does pay a loan back when it is over the 6 year period (or 12 years if a deed) then the executor has committed a breach of their duties and they will be personally liable.


Loans can be refreshed by making a payment or causing the borrower to make a repayment.

 

And debt forgiveness can have tax consequences too.