Illegal Moneylending or Friendly Loan - Are You in Business?

The Federal Court overruled this decision and held that the loan being an unlicensed moneylending transaction, the lender could not recover both the principal loan and the interests. Please see the latest write-up on the subject here.

A friendly loan in itself is not illegal. It is only illegal when it is a loan with interest by an unlicensed moneylender. Under the Moneylenders’ Act 1951 (“the Act“), a moneylender is a person who engages in the business of moneylending. Hence, if a person is not in the moneylending business, the loan given is not illegal but interest cannot be charged. This is commonly known as a friendly loan.

But what if it is a friendly loan for an “agreed profit”? Is it then a commercial agreement enforceable in Court? The Court of Appeal in Triple Zest Trading & Suplies Sdn Bhd & Ors v Applied Business technologies Sdn Bhd And Another Appeal [2023] MLJU 110 decided that “agreed profit” is no different from interest. It is prohibited under the law.

Background Facts

The Plaintiff, Company A, entered into a loan agreement with the 1st Defendant, Company B.

The loan agreement was for a sum of RM800,000.00. The consideration for this loan agreement, as the parties put it, was an “agreed profit” of another RM800,000.00. As a result, the borrower upon cessation of the loan period shall repay a total sum of RM1,600,000.00 to the lender.

The High Court allowed the full claim sum and held that it was a commercial agreement. The Court of Appeal decided otherwise.

The Law

Under section 2 of the Act, the following definitions are important:-

“moneylender” means any person who carries on or advertises or announces himself or holds himself out in any way as carrying on the business of moneylending, whether or not he carries on any other business; and

“moneylending” means the lending of money at interest, with or without security, by a moneylender to a borrower.

Under Section 15, a contract by unlicensed moneylender is unenforceable:

“No moneylending agreement in respect of money lent after the coming into force of this Act by an unlicensed moneylender shall be enforceable.“

It is an obvious pick why many borrowers will attempt to dispute a loan agreement. By contending that it is an illegal moneylending agreement, the agreement is unenforceable and void ab initio (Golden Wheel Credit Sdn Bhd v Dato’ Siah Teong Din [2021] 12 MLJ 589).

However, because illegal moneylending occurs covertly, it is extremely difficult to prove it in Court. In view of such hurdle, a borrower will often rely on the presumption under section 10OA of the Act which states:

” Where in any proceedings against any person, it is alleged that such person is a moneylender, the proof of a single loan at interest made by such person shall raise a presumption that such person is carrying on the business of moneylending, until the contrary is proved.”

It is clear from the above provision that a single loan at interest is sufficient to invoke the presumption under Section 100A. The burden then shifts to the lender to rebut the presumption. This can be achieved by, among others, showing that the lender is not in the business of moneylending. To constitute a moneylending business, there must be “continuity of system or repetition of similar transaction”.

Decision of the Court of Appeal

The Court of Appeal held that the Plaintiff was not in the business of moneylending based on the following crucial facts:-

the Plaintiff was an information technology company;
there are testimonies by witnesses which confirmed that it was a single loan transaction;
there was no evidence that the Plaintiff loaned money to others; and
there was no evidence that the Plaintiff was engaged in the business of moneylending.

Hence, the Court of Appeal held that the agreement was a friendly loan agreement. However, interest was not allowed to be charged on the friendly loan. The Plaintiff’s claim for agreed profit was therefore rejected.

Conclusion

A friendly loan is allowed under the law, but interest is prohibited. One may dress the agreement with fanciful names or terms, but as long as the repayment sum exceeds the principal loan, that will constitute interest.