“One of the greatest disservices you can do a man is to lend him money that he can’t pay back.” (Jesse H. Jones, entrepreneur)
A recent High Court decision provides yet another cautionary tale for lenders. The stakes are high: get this wrong, and you could lose everything.
Two big risks for lenders
Before you lend, be aware of two major risks that you need to manage. Both are imposed by the National Credit Act (NCA):
- Not registering as a credit provider: If you lend money without registering when you were required to do so, your agreement will be invalid and unenforceable. You will lose everything unless you can convince a court to make a “just and equitable” order allowing you at least a partial recovery. This is by no means guaranteed, so a risk not worth taking.
As a general guideline, if your loan is made at “arm’s length” you will probably have to register. In contrast, loans not made at arm’s length – such as informal loans between family and friends, or between related companies in a group – may be excluded. But the rules are complex and our courts have had to wrestle with several borderline cases over the definition of “arm’s length”. There is no substitute for advice specific to your situation.
Note that even a single qualifying loan, of any size, can trigger the requirement. The thresholds that previously limited it to commercial lenders and to larger loans fell away in 2014 and 2016 respectively.
- Reckless lending: Let’s turn now to the second risk, which applies whether you are properly registered as a credit provider or not. We’ll illustrate it with a recent High Court decision in which a family trust’s lending was held to be reckless and therefore irrecoverable.
