Financial Remedies: Hard vs Soft Loans

An issue which commonly arises within financial remedy proceedings is whether money advanced by a family member is a gift or a loan and, if it is a loan, whether it is to be treated as a ‘hard’ or ‘soft’ liability. If it is considered a soft loan, the amount may be left out of the court’s calculation of the parties’ liabilities and therefore the net effect of the final outcome. There is no statutory definition of a soft loan, however case law provides extremely helpful guidance.

In the recent case of P v Q (Financial Remedies) [2022] EWFC B9, HHJ Hess provided extremely useful guidance. Firstly, in terms of the distinction between gifts and loans, HHJ Hess stated that, as a matter of general principle, for an advance of money to be a gift there must be evidence of an intention to give. If it is determined that the advance was a loan, the court must determine whether it is to be treated as a ‘hard’ or ‘soft’ loan.

How does the court decide if it is a Hard or soft loan?

Having considered a number of authorities on the issue, HHJ Hess derived the following principles which should be applied when a court is considering whether a liability is a hard or soft obligation:

(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
4. that there has not been a delay in enforcing the obligation; and
5. 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.

The assessment of whether a loan is hard or soft is therefore a discretionary exercise and will turn on the facts of each case, having applied the above principles.

If you require assistance in respect of financial arrangements on divorce or have any queries regarding the treatment of loans within financial remedy proceedings, please do not hesitate to contact us.

Victoria Brown is a Senior Associate Solicitor in the Family team, who practices in all areas of private family law, including divorce, dissolution, financial and children arrangements. If you would like to discuss these issues please contact her at vgb@anthonygold.co.uk or on 020 7940 4060.