16 January 2024
A blog by Blue Stephenson, Solicitor in the Family Department at Williamsons.
If you are contemplating getting a divorce, then it is likely that you will have a number of questions in relation to matters concerning your property and financial affairs. The breakdown of a marriage can give rise to great financial uncertainty as once-settled economic arrangements become disrupted, and as the parties strive towards eventual financial independence.
The importance of obtaining early legal advice from a family lawyer in such cases cannot be understated. Doing so enables divorcing parties to better manage their expectations by gaining an insight into the applicable legal framework and correcting any misconceptions that they may have previously had.
The focus of this short blog is on family loans and how they are treated by the Court when considering parties’ respective financial claims on divorce.
If you have loaned money from a family member or friend – perhaps towards a deposit on a property that you have purchased, or towards the acquisition of a new car – you may not have considered getting a formal loan agreement drafted. After all, is this really necessary for somebody with whom you trust and with whom you have a close personal relationship? Well, if you wish for such liabilities to be taken into account when negotiating a financial settlement on divorce, then the answer is yes.
However, it is equally important to note that the mere existence of a loan agreement – which itself should be carefully prepared with the assistance of a qualified solicitor – is itself insufficient to make any such debt impervious to legal challenge during the course of proceedings.
In the 2022 case of P v Q (financial remedies) [2022] EWFC B9, His Honour Judge Hess considered the important distinction between “hard” and “soft” loans, and provided some useful legal guidance.
Each case does of course depend upon its own facts. However, the issue of whether a loan is designated as “hard” or “soft” has the potential to 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. Conversely, a loan which is “soft” usually refers to a less formal arrangement, for example an oral arrangement/understanding with a family member or friend, or in the form of an informal letter if such agreement was reduced to writing.
The significance of a loan being designated as “hard” or “soft” is that hard loans will typically be attributed to the debtor party as a liability for computation purposes, when reckoning the extent of a party’s financial resources and their financial obligations. By contrast, a “soft” loan is unlikely to be given the same treatment by the Court.
Whilst there is no ‘acid test’ for establishing decisively whether a loan is “hard” or “soft” in nature, one of the most significant questions that the Court will ask itself is whether in reality the obligation would be enforced by the creditor.
To assist in making such determinations, the Court in P v Q (financial remedies) summarised the following 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 categorised 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:
- The fact that it is an obligation to a finance company;
- That the terms of the obligation have the feel of a normal commercial arrangement;
- That the obligation arises out of a written agreement;
- 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;
- That there has not been a delay in enforcing the obligation; and
- 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:
- 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.
- The obligation arose informally and the terms of the obligation do not have the feel of a normal commercial arrangement.
- There has been no written demand for payment despite the due date having passed.
- There has been a delay in enforcing the obligation; or
- 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) There may be 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.
