Recent developments from the Federal Court have changed how friendly loans work in Malaysia.
Friendly loans are the most common form of loans in Malaysia. These are usually financial loans between friends, family members, or business associates. They are usually made without the goal of maximizing profit, but rather to just “help out” the borrowing party. In fact, the Court of Appeal in Tan Aik Teck v Tang Soon Chye [2007] 6 MLJ 97 opined that as long the lending party can prove that the money was given to the borrowing party on a loan basis, that is enough to establish the existence of a friendly loan. However, lending parties are usually hesitant to charge interest rates on friendly loans. While it is true that you cannot advertise yourself as being in the business of moneylending if you are not a licensed moneylender, you can still give out friendly loans. It only becomes illegal when your “friendly loan” is construed to actually be illegal moneylending. Charging an interest rate on a friendly loan will raise the presumption in Section 10OA of the Moneylenders Act 1951 (this is the presumption that if you give out a single loan with interest, you are presumed to be in the business of moneylending, until the contrary is proven). And of course, if you are construed to be a moneylender with no license, your friendly loan is now an illegal money transaction, and you could be in trouble for breaching Section 5 (2) of the Moneylenders Act 1951.
However, the High Court decision In Menta Construction v SPM Property & Management Sdn Bhd [2017] MLJU 526 allows a small interest to be imposed, but it cannot be too exorbitant (i.e. surpassing the rates imposed in an ordinary bank loan). In Menta, the Court established a simple interest rate of 5% per annum to be appropriate for friendly loans.
On 19 June 2023, the Federal Court decided in the case of Triple Zest Trading & Suppliers Sdn Bhd, that the disputed “friendly loan” was actually illegal moneylending. In this case, the interest imposed was an extremely high rate of 100%, payable in just 30 days, which was deemed by the courts to be far too much for a friendly loan.
Although the lending party was not a company that was in the business of moneylending, the hugely excessive rate of interest suggests that the loan agreement was not a simple friendly loan but was in fact an illegal money transaction disguised as a friendly loan.
According to the written judgement dated 17 October 2023, the three-member bench chaired by Chief Judge of Sabah and Sarawak Abdul Rahman Sebli held that since the transaction was tantamount to illegal moneylending, both the exorbitant interest sum as well as the principal loan sum need not be paid to the lending party as it was not in possession of a license to lend money under the Moneylenders Act.
The Federal Court also decided that the Court of Appeal had erred in allowing for the principal sum to be claimed, as it “legitimizes illegal moneylending by allowing illegal moneylenders to recover the principal loan”. Instead, it was held that the appellants are not even liable to pay back the principal sum as the transaction was illegal in the first place.
This decision by the Federal Court has set in stone the rule against charging interests on friendly loans/ This will prevent any future absurdities whereby illegal moneylenders (i.e. loansharks) could try to get the courts to enforce the repayment of debts incurred by their unlicensed moneylending victims, which they may pass off as merely “friendly loans”.
This article was written by Caleb Goh from Marcus Tan & Co’s Litigation Department