The company will repay the loan when it can afford to! How certain is that?
The Supreme Court of Victoria has dismissed an application by a company to set aside a statutory demand which sought repayment of a loan which was to be repaid “as soon as practicable”. The Court held that the term as to repayment was void for uncertainty, and that the loan was accordingly immediately due and payable from its inception.
Dynamic Window Systems Pty Ltd v Robinson  VSC 152
In July 2014, the defendant (Mrs Robinson) lent the plaintiff (Dynamic) $250,000. At the time of the loan, the defendant’s husband (Mr Robinson) was employed by Dynamic. Dynamic sought funding from Mr Robinson. He responded that Mrs Robinson would loan $250,000 to Dynamic, provided that Dynamic provided her with a letter acknowledging that it was a loan. The letter was provided, and the funds were paid. There were no discussions suggesting that the loan would be repayable on demand.
The director of Dynamic (Mr Johnston) deposed that he had discussions in which he said to Mr Robinson that the loan would rank equally with the existing shareholder loans and would be repayable when Dynamic could afford to repay it. The letter which was provided to Mrs Robinson included an acknowledgement of the loan to Dynamic, and stated that the loan would rank equally with the other shareholder loans and would be repaid as soon as practicable. The letter said that Dynamic could not give a specific date for repayment, but would provide continuing updates as to the performance of the business, and would give at least two months’ notice of any repayments.
In early 2016 Mrs Robinson served a statutory demand on Dynamic requiring repayment of the loan of $250,000. In response, Dynamic applied to the Supreme Court for an order setting aside the statutory demand. Its primary contention was that the loan was not “due and payable” because Dynamic could not afford to repay it, and it had not repaid its shareholder loans. Moreover it had not given two months’ notice of repayment..
At trial, Mrs Robinson submitted that the loan was due and payable both at the date of the hearing and at the time the statutory demand was served. Mrs Robinson contended that the terms of the agreement which Dynamic relied upon to argue that the loan was not due and payable, were void for uncertainty and could not be enforced.
The court referred to the decisions of Bailes v Modern Amusements Pty Ltd  VR 436 (“Bailes”) and Argyll Park Thoroughbreds Pty Ltd v Glen Pacific Pty Ltd (1993) 11 ACSR 1 (“Argyll”). In those cases, the courts considered claims for the repayment of certain loans. In each case, there was an agreement in place that the loan would be repaid when the debtor considered that it was in a position to repay it. In each case, the court held that the agreement was void for uncertainty. In Argyll, the court held that where there is an agreement for a loan and the time for repayment is not fixed by the agreement, any money advanced will be repayable on demand. The court said:
It may be that the true distinction between Head v Kelk and Bailes is that if the question whether the agreed time for repayment has arisen can be determined objectively, then the term will be valid; but, if the agreed time for repayment operates in a subjective way by leaving it to the borrower to decide for himself when, if ever, he will repay, the term will be void as illusory…
The court in the instant case then applied Universal Greening Pty Ltd v Sabine  FCA 529 in which the Federal Court considered loans that were alleged to be repayable only when the plaintiff was able to afford to make the repayments. The plaintiff contended that it could not yet afford to repay the loans, and accordingly they were not due and payable. The court held that the term was void for uncertainty and the loans were repayable on demand.
Turning to the term as to repayment in the subject case, the court held that it was also void for uncertainty. The undertaking that “the loan…will be repaid as soon as practicable” was uncertain, and unenforceable. It was dependent upon the subjective intentions of Dynamic as to when that would occur, and there were numerous factors that could come into play. For example, would Dynamic need to satisfy every liability that it had, and then save up enough money to pay the shareholder loans and Mrs Robinson’s loan, before Mrs Robinson’s loan became due and payable? If Dynamic needed to buy new plant and equipment, could that be done rather than repay the loans?
Moreover, the provision that Dynamic would give at least two months’ notice of any repayments did not specify any time limit by when Dynamic was required to give such notice, and added to the uncertainty.
Efthim AsJ held that the term regarding payment was void, and the loan was repayable immediately because there had been no time for payment agreed. There was also no need for any demand for repayment. His Honour applied the decisions in Ogilvie v Adams  VR 1041, 1043, and 1053, and VL Finance Pty Ltd v Legudi  VSC 57, -.
Accordingly, the application to set aside the statutory demand was dismissed.
Where a company borrows money on the basis that it will repay the lender when it can afford to do so, or on some similar basis, it is highly likely that such a term of repayment will be invalid. This will render the loan agreement silent as to the time for repayment, and where a loan agreement is silent as to when repayment is due, the loan is repayable instantly upon the making of the loan, without the need for the lender to make a demand for repayment. This will render the company exposed to a liability to repay the loan from the time of the making of the loan. The lender would be entitled to commence a proceeding to recover payment of the loan without any prior demand. Moreover, the lender would be entitled to serve a statutory demand, which (if not satisfied) would provide a basis for commencing winding up proceedings.