Contract of loan

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A contract of loan is an expression — a term of legislative art —used in distinction to “simple contract” in Section 6 of the Limitation Act 1980. It isn’t entirely clear what it means, but this is our best guess:

Under the Limitation Act 1980 a “Simple contract” is one that is neither a “specialty” nor an insurance contract nor a “contract of loan” which has no fixed repayment date, where repayment is not conditional on a demand, [warning:strap yourselves in for this next bit]

“except where, in connection with taking the loan, the debtor enters into any collateral obligation to pay the amount of the debt or any part of it (as, for example, by delivering a promissory note as security for the debt) on terms which would exclude the application of this section to the contract of loan if they applied directly to repayment of the debt.”

We quote that last bit in full because, for a short extract, it is bloody hard to decipher. There are no explanatory notes to the Limitation Act 1980, but for help we have that Law Commission bunker buster which says:

“Section 6 does not apply where the debtor enters into a collateral obligation to pay the amount of the debt or any part of it on a fixed or determinable date or conditional on a demand for repayment (or other condition).”

So if the promissory note itself is a demand loan, but it is pledged as collateral for another debt which isn’t, then it counts as having a payment date. That’s the best I can do.

Note: “repayment on a stated maturity date, conditional upon demand by the creditor”, sounds a lot like the process for redeeming a bond — at least when held in physical, definitive form. Thus, definitive debt securities are not simple contracts.

Whether this is true of electronically cleared debt securities — that is, ahhh — all of them, these days — is a an interesting question, as these are paid out automatically to account holders in clearing systems.