Frequently we see situations where parents lend money to their adult children to help them out in their endeavours, whether that be to help finance their first (or subsequent) home, or for business purposes. While there might be discussions about security at the time, often parents do not go to the trouble and relatively modest expense of registering a mortgage, or second mortgage as the case may be, to secure the loan.

A difficulty arises upon the bankruptcy of a person who has had the benefit of the loan from their family, and where the search conducted by the bankruptcy trustee reveals no security held by the family, for what might be proper funds advanced all with the best intentions. Even worse is where there has already been a late transfer of the borrower’s real property to the parents in the hope of paying them ahead of other creditors.

The relevant sections of the Bankruptcy Act are Sections 120 and 121, which sets out what is ‘proper consideration’. To determine what proper consideration is, the issue of past considerations also has to be addressed. Generally the position of the courts is that past consideration is no consideration, and that attempts to repay old debts with current transfers are likely to be set aside. In essence a late transfer of property in payment of a debt, where there is no security over that property, is likely to be challenged by a trustee in bankruptcy.

The introduction of the PPSA legislation inflicts further complications on such scenarios. If any security is not registered in accordance with this legislation, proof of ownership could be under question.

So how do people in situations such as these protect themselves? Simply they must properly document the loan and take security by way of mortgage at the time of advancing the funds. A solicitor should be engaged to ensure correct documentation and execution. All too often substantial losses are suffered due to incorrect documentation, particularly when monies are lent to a trading entity. A mortgage taken at the time for proper consideration cannot later be challenged when the parents, if they have to, recover their debt from real property ahead of a trustee in bankruptcy.