Editors --- "Age pension: assets; loans to companies; expiration of limitation period does not destroy the debt; value of loans for the purposes of the Act" [2008] SocSecRpr 39; (2008) 10(4) Social Security Reporter, Article 5

• SOMMER and SECRETARY TO THE DFHCSIA
• Background
• The issues
• Discussion
• Formal decision

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Age pension: assets; loans to companies; expiration of limitation period does not destroy the debt; value of loans for the purposes of the Act

SOMMER and SECRETARY TO THE DFHCSIA

(2008/836)

Decided: 18th August 2008 by B. H. McPherson

Background

On 20 September 2007, Sommer (a single person who did not own her own home) made an application for age pension to Centrelink. She qualified in all respects, except for the value of her assets.

During a period from about December 1997 to February 2003,Sommer paid sums totalling $1,458,426.04 to her son and daughter-in-law (Bret and Gordana) and to two companies (World Enterprises Pty Ltd and World Enterprises Group Pty Ltd) which at one time carried on a business under the trade name On-Site Power (the companies).

The payments made by Sommer were recorded in a spreadsheet which was annexed as ex BS12 to an affidavit made by her son Bret, which had been filed in matrimonial proceedings in the Federal Magistrates Court. On 20 March 2008, Federal Magistrate Burnett gave judgment in the matrimonial proceedings. In the matrimonial proceedings there had been a dispute about whether the payments shown in ex BS12 were in fact loans or gifts. Bret and Sommer contended they were loans, whilst Gordana claimed they were gifts. As regards the payments in ex BS12 to Bret and Gordana(which amounted to $358,000), the Federal Magistrate concluded that the payments were gifts. The Federal Magistrate did not make any findings in relation to the nature of the advances made to the companies.

The issues

The issues before the AAT were:

whether the amounts advanced by Sommer to the companies were loans or gifts; and

if loans, the value of the loans for the purposes of the Social Security Act 1991 (the Act).

Discussion

In relation to the payments made to Bret and Gordana, the AAT observed that the Federal Magistrate had made his finding that these payments were gifts after hearing evidence from witnesses who did not testify before the AAT. In the circumstances, the AAT was not prepared to take a different view to the conclusion reached by the Federal Magistrate.

In relation to the payments made to the companies, the AAT considered that the payments (which totalled $1,045,000) were of a different character to the payments made to Bret and Gordana. The AAT noted that there was a six page formal Loan Agreement (dated 20 December 2001) between Sommer(as lender) and World Enterprises Pty Ltd (as borrower). The Agreement, which was prepared by a solicitor, cited the request for an Initial Advance, as well as the possibility of requests to lend additional moneys in the future. Clause 1 of the Agreement defined the Principal Sum as all monies advanced by the lender to the borrower ‘pursuant to or in connection with the Agreement’. By clause 3, the Principal Sum was to be repaid in one lump sum on the seventh anniversary of the date on which the first advance was made.

At about the same time as the Loan Agreement was entered into, a company charge was lodged by the same solicitors, granting a charge to the extent of $300,000 in favour of Sommer, charging the assets and undertakings of the company with payment of all moneys owing to Sommer.

The AAT found that the amount of $1,045,000 was a loan made by Sommer to the companies. The AAT further found that only a sum of $28,000 or$29,000 had been repaid on the loan, and that this repayment had occurred in 2006.

The AAT then considered whether, under the Limitation of Actions Act1974 (Qld) (the Limitation Act) time had run against the debt, and whether the debt now ceased to be enforceable.

The AAT concluded that the parties had, through the Loan Agreement, agreed to depart from the general rule that the limitation period commences running from the time of the lending of the money. The AAT found that clause 2.3 of the Loan Agreement reflected an intention by the parties to postpone for seven years the date at which the borrower was bound to repay the loan. The AAT therefore concluded that the cause of action for recovery of the debt under the Loan Agreement would not accrue until seven years after the particular sum in question was paid and lent by Sommer. Further, in practical terms, it would be 13 years from the date of which a particular loan was made before its recovery would be barred under the Limitation Act.

The AAT noted that legal ingenuity had sought to import into the word ‘lends’ in s.1122 the meaning that there must be a legally enforceable right to claim repayment of the sum lent, and that the attempt to gloss the section in this way was rejected by Branson J in Unicomb v Secretary, Department of Social Security [1998] FCA 204. The AAT concluded that, under s.1122,the value of a loan is not to be discounted because of its irrecoverability, but is fixed at the amount remaining unpaid.

The AAT referred to the Department’s Guide to the Social Security Law which states that a loan ceases to exist when:

- it is repaid ...

- the period specified in the Statute of Limitations has elapsed since the date of the loan, or last repayment, or demand to repay (whichever is the later) so the loan is not legally able to be recovered.

The AAT concluded that it is not correct in law to say that a loan no longer exists if the period specified in the Statute of Limitations has elapsed. The AAT found that the Limitation Act bars the remedy and not the right, and therefore the debt is not extinguished after the statutory period and it continues to survive for various purposes.

The AAT found that the limitation period specified in the Limitation Act and similar other provisions are directed against the bringing of an ‘action’. The AAT further found that it is a rule of procedure that the limitation is operative only if it is pleaded as a defence in the action.

The AAT concluded that there is no recognisable basis in law that would justify Centrelink in applying a limitation period to a debt against which the limitation period has run under that provision. The AAT held that, on any view of the law, the debt remains an ‘asset’ within the meaning of the Act and one ‘that under s.1122 falls’ to be valued by the extent to which it remains unpaid at the relevant date.

The AAT therefore found that, at the date she claimed age pension, Sommer had an ‘asset’ in the form of a debt of more than $1,000,000owed to her by the companies. The expiration at that date of the limitation period of six years specified in section 10 of the Limitation act did not destroy that debt or any part of it. The debt continued to exist and had a value for the purposes of the Act equal to the amount that remained unpaid at that date.

Formal decision

The AAT affirmed the decision under review.

[S.O.]