Federal Court Strikes Down Illegal Moneylending Agreement

Introduction

On 19.6.2023, the Federal Court in Triple Zest Trading & Suppliers & Ors v Applied Business Technologies Sdn Bhd [2023] 1 LNS 2061 ruled that an unlicensed moneylender could not recover both the principal loan and the interest under an illegal moneylending agreement.

Background Facts

There was a loan agreement between the two companies for a sum of RM800,000.

The consideration for this loan agreement was described by parties as an “agreed profit”, to the tune of RM800,000.

In total, the borrower shall repay a sum of RM1,600,000 to the lender (double the principal sum).

However, the borrower defaulted, and the lender sued for repayment.

The High Court allowed the full claim sum and held that it was a commercial agreement between the parties.

The Court of Appeal reversed the High Court’s decision and held that it was a friendly loan agreement. However, the lender was not entitled to interest on the loan and hence the “agreed profit” was not recoverable. My write-up for the Court of Appeal’s decision can be found here.

The Federal Court overruled the Court of Appeal’s decision and held that the lender could not recover both the principal and the interest.

Reasonings of the Federal Court

1. The lender was undoubtedly carrying on the business of moneylending.

The facts clearly show that the loan of RM800,000 was lent at an interest of RM800,000. It was a sum that was “in excess of the principal paid or payable to the moneylender”, according to section 2 of the Moneylenders Act 1951.

2. Illegal moneylending is a serious offence

Under section 5(2) of the Moneylenders Act 1951, a person convicted of illegal moneylending shall be liable to a fine of not less than RM200,000 and not more than RM1 million, or to imprisonment for a term not exceeding 5 years, or to both fine and imprisonment (in the case of a second or subsequent offences).

3. Public policy dictates that illegal moneylending agreements should be struck down.

If the Court were to lend a helping hand to an unlicensed moneylender charging exorbitant interest, it would encourage the proliferation of loan sharks or “Ah Long”. The trickle-down effect of the Court of Appeal’s decision was that it legitimised illegal moneylending, since the unlicensed moneylender would only lose the interest on the loan, but not the principal.

4. The loan agreement is void for illegality

The loan agreement contravened sections 24(a), (b), and (e) of the Contracts Act 1950. The Court will not help parties to unwind an illegal agreement. In fact, it is in the public’s interest that unlicensed moneylenders should be deprived of the principal loan and all other benefits under the loan agreement.

5. The burden is on the lender to rebut the statutory presumption.

Under Section 10OA of the Moneylenders Act 1951, a single loan at interest raises the presumption that the person is carrying on the business of moneylending. The lender did not adduce any evidence to show that the RM800,000 was not lent at interest. Just because there was no evidence adduced by either party, did not discharge the lender’s burden of proving that it was not carrying on the business of moneylending.

Conclusion

Loan agreements must not include any interest. This is because a single loan at interest will invoke the statutory presumption that the lender is carrying the business of unlicensed moneylending. If the lender cannot show otherwise, the entire loan agreement is void, and the principal loan cannot be claimed.