There were two neighbours who were good friends. One would often borrow money from the other for business purposes. The loans were never documented.
On this occasion, the borrower requested $500K to start a frozen custard franchising business. It was done on a hand shake between the borrower and his son and the lender.
10 years passed during which the lender was incarcerated.
The release of one debtor will release all
The lender brought proceedings against the father and the son but released the son.
This raised the issue of whether or not having released the son, he could sue the father.
There is an important rule which lenders and their lawyers need to remember.
The rule says that if there are multiple debtors who are liable either jointly or jointly and severally and you release one of them that has the effect of releasing all of them. The reason is that the release is inconsistent with the other debtors being able to extract contribution from each other.
To avoid this problem lenders can:
- Instead of releasing a debtor, promise not to sue them
- Have their documents drafted by a properly qualified lawyer
It is well established that if the loan document contains a reservation of rights properly drafted, then a release will be construed as a promise not to sue.
In this case the lender, by releasing one of the borrowers, released them all.
Statute of Limitations
This case also raised the Statute of Limitations. The loan was made 10 years before proceedings were commenced.
The statute of limitations in NSW states that an action cannot be brought after the expiration of six years running from when the cause of action first accrues. The period is 10 years if a deed is involved (there was no deed here).
The court considered whether or not the action fell within one of the exceptions. Firstly whether the lender was under some disability. In this regard the lender raised his incarceration during part of the period. The judge rejected this:
The lender has not established that he was unable, whilst in gaol, to instruct his solicitors to commence these proceedings. The evidence shows that he was able to protect his interests notwithstanding his incarceration.
The next exception the lender raised was the fact that payments were made to him by the borrower and that these confirm the loan and kept it alive for the purpose of the statute of limitations (s 54(2)(a)(ii)). However, the judge was unable to be satisfied which payments were made for which loan:
Where there is more than one debt and a payment is made, a nomination by the debtor as to which debt the payment is to be applied will be effective to preclude time being restarted in respect of the other debt, and also that in the absence of a nomination by the debtor the creditor can select to which of the debts he will appropriate the payment. However, that the appropriation must be made before action.
Since no appropriation was made either before or even during the hearing here the Court cannot discern to which debt the payment is to be applied and hence to which of the three loans the bar imposed by the statute has been lifted.