Over many years in practice I have seen clients learn (often the hard way) the importance of properly documenting and securing related party loans. By that I mean loans from business owners, family or friends who are business related, or interpersonal loans. Documenting such loans is a very simple thing to do and can reap significant benefits in terms of asset protection, leverage in a dispute, clarifying family positions in a matrimonial or estate disputes, and providing documentation to support compliance obligations, such as with the Australian Taxation Office.
An astute older practitioner I once worked with, who mostly practiced in the pre-computer era, used to have a simple form of Deed of Acknowledgement of Debt that he would get out and complete and could be signed on the spot if this issue arose during a client interview. It was not ideal but it was a lot better than competing verbal claims about what the loan was all about. These days it is much easier to quickly and effectively produce documentation that defines the rights and obligations of borrower and lender and with a bit of extra effort, can provide for security for the loan.
The benefits of security should not need to be explained, but are all too often overlooked. A charge over a company can deliver the power the control the winding up of a company, provide valuable leverage in negotiating with difficult creditors or provide the financier/partner with a means of bringing a difficult partner under control. Under the Personal Properties Securities Act a much larger range of specific assets (not just cars) can be effectively secured and quarantined from the general realisation of a business’s assets. For example a family loan could be made to purchase a specific piece of equipment and the loan can now be secured over that equipment as a first charge.
Similarly a mortgage or charge over property can provide the same sort of benefits and can be invaluable in family law dispute, where if the loan is not documented or secured, the claim from the disgruntled party is all too often that it was a gift. All too frequently I get asked to caveat a property only to have to explain to the client that a debt is not enough to support a caveat, you actually need to have an interest in the land such as a mortgage or a charge.
The documenting of financing and security arrangements frequently gets pushed to one side in the enthusiasm to do the deal, brushed off as a difficulty created by lawyers or, like insurance, “it won’t happen to me”.
Taking the trouble to create and sign the documents do it can reap significant benefits and peace of mind and has the potential to preserve your hard earned assets and dramatically reduce future legal bills if trouble heads your way.