On 10th February 2022, the Central Family Court (HHJ Hess) gave judgment following a four day final hearing in financial remedies proceedings. The wife’s legal costs totalled £169,604 and the husband’s reached £87,775.
The judgment provides important guidance on the treatment of family loans, which according to HHJ Hess, “raise some questions of law which are not uncommon in financial remedies cases.”
“19. I now turn to an issue which has created a good deal of argument and ill feeling between the parties: the extent to which assets affected by the respective transactions between each party and members of their own family should be included on the asset schedule.
The husband’s loan
Initially, the wife asserted that the husband had given his sister £25,000 to which she was not entitled to and should be inserted back into the asset schedule. Following the husband’s evidence, the wife withdrew this assertion and HHJ Hess commented that this was the correct approach to take. The wife also contended that the husband took similar action in relation to his father and this was rejected by the court.
However, the wife also claimed that the husband’s mother in 2010 “generously advanced £150,000 to each of her three children to assist them with their respective housing costs”. No documents were created to establish the terms of this advance and no demand for repayment was ever made. No discussions were had about the circumstances in which repayment would or might be expected, although the husband’s sister had returned some of the money of a voluntary basis.
“In her written statement of 22nd December 2021 the husband’s mother wrote:-
“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.””
In oral evidence, the husband’s mother said 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 parties disputed over the status of the money advanced and in June 2020, without a request from his mother and without reference to the wife, the husband paid his mother £150,000 asserting it to be the repayment of the loan. The husband argued that this money had gone and should not appear on the asset schedule. The wife stated that the payment was “a cynical manipulative device to remove £150,000 from the asset schedule so that it did not have to be divided 50:50 with the wife on sharing principles.”
The wife’s loan
In October 2004, before the parties had met, the wife received €30,000 from her father to fund her MBA studies. There is a document which recorded the arrangement stating it was an “interest free loan” for which “a date for repayment has not been set.” 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 own discretion”. The wife did not make any repayment and the father never demanded one. The wife did not mention this potential liability in her Form E in December 2020 and it appeared for the first time as an issue in 12 January 2022, with the wife stating that “she had completely forgotten about this liability”. The wife said that she did not expect her father to pursue the debt, but she felt that he could, and she raised the issue in light of the points the husband asserted in relation to the transaction with his mother.
Gift or loan?
“19. [emphasis added]:
(viii) The first question is whether these advances should be regarded (in strict legal terms) as gifts or loans. 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. In neither instance in this case has either party produced persuasive evidence of such intention in the respective advancing parent and I am inclined to accept what the husband’s mother told me and what is contained in the 2004 document. On the face of it, both these transactions are loans which could, in theory, be enforced.”
Hard or soft?
(ix) In the family court, however, that is not the end of the matter because the inclusion or exclusion of a technically enforceable debt in an asset schedule can depend on its softness/hardness. This is perhaps an elusive topic to nail down, but it falls for determination in the present case as in many others.”
In consideration of various authorities: M v B  1 FLR 53; W v W  EWHC 2469; Hamilton v Hamilton  EWCA Civ 13; B v B  2 FLR 22; Baines v Hedger  EWHC 1587; and NR v AB  EWHC 277, and an article by Alexander Chandler: taking the bank of mum and dad to court  Fam Law 1505, HHJ Hess derived the following principles:
(x) (a) Once a judge has decided that a contractually binding obligation by a party to the marriage towards a third party exists, the court may properly wish to go on to consider whether the obligation is in the category of a hard obligation or loan, in which case it should appear on the judges’ computation table, or it is in the category of 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 not in the authorities any hard or fast test as to when an obligation or loan will fall into one category or another, and 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 these cases is that the analysis targets whether or not it is likely in reality that the obligation will be enforced.
(d) Features which have fallen for consideration to take the case on one side of the line or another include the following and I make it clear that this is not intended to be an exhaustive list.
(e) 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 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 that the amount of money involved is not necessarily decisive, and there are examples in the authorities of large amounts of money being treated as being 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 of these factors, and maybe other matters, what the appropriate determinations to make in a particular case in the promotion of a fair outcome.”
In applying the above principles, HHJ Hess concluded that both of the family loans were at the soft end of the scale. In the case of the debt owed by the wife to her father, HHJ Hess found that it was unlikely the wife would be required to make any repayment, particularly as she had forgotten about the loan until January 2022. Regarding the husband’s debt, his mother was also unlikely to ever demand repayment and it was regarded by them as an advance on the husband’s inheritance.
Further, HHJ Hess found:
“Having heard and read the evidence I am satisfied on a balance of probabilities that the husband’s primary motivation in making the payment of £150,000 to his mother in June 2020 was because he was concerned that the wife would share half of it if he did not do this. I do not accept that he had any significant sense of an obligation to make the payment at this point, either legally or morally.
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.
My decision is that both of these debts were very soft and, for me to do fairness between the parties, the consequence of that is that I should not include the wife’s debt to her father on the asset schedule, but should re-credit the £150,000 to the husband’s side of the schedule.”