This article first appeared in Consult the Malaysian Legal Experts, the Edge, 11 January 2016.

This article first appeared in Consult the Experts, the Edge, 11 January 2016.

Q: Six months ago, a friend asked me for a loan of RM10,000, which he promised to pay back in a month. It has been six months now, and he has provided various excuses for why he needs more time. He has also borrowed from other friends but has not paid them back. I am getting anxious. Is there anything I can do from a legal standpoint? There was no written agreement of any sort.  

In the future, what should I do before lending money to friends or family? How can I legally safeguard myself from getting into a similar situation?

A: Money lent to family or friends on an informal basis is commonly referred to as a “friendly loan”.   It is possible to commence legal action against a borrower who fails to repay a friendly loan. Legal action must be commenced within 6 years from the date the money becomes payable.

The good news is that not having a formal written agreement for the loan is not fatal to your case. That being said, as the lender has the burden of proving that there was a friendly loan, you will need to have enough evidence to convince the court that (a) you had given the money to your friend and your friend had received the money; and (b) that the money was given as a friendly loan to be repaid, and not as a gift or for some other purpose.

Difficulties usually arise because the nature of the friendly loan means the terms of the loan are unlikely to be documented in any comprehensive manner, if at all.  Further, as such loans are usually given to family members or close friends, there is a general reluctance to have anything in writing for fear that it would offend the recipient or imply that they are untrustworthy.

Here are some guidelines to those who are thinking of lending money to friends or family:

  1. Document your loan. While you do not need to prepare a formal loan agreement for your friendly loan, it is still prudent for you to have a document that will set out the basic terms of the loan such as the amount being lent, the intended date of repayment and/or the proposed repayment schedule.  Even though it may seem awkward to propose this, this is a necessary and important step to safeguard your rights. A borrower who is sincere about repaying the loan should not have any objections to having the terms of the loan recorded in writing.
  1. Follow up. If the loan hasn’t been repaid when it falls due, ask for repayment in writing and do it promptly. Requests for payment can be made firmly but politely. These requests (and the borrower’s responses) can also be used as evidence if legal action is later commenced. If the borrower is unable to repay the money in full as a lump sum, you may want to consider accepting instalment payments. If you do reach an agreement on instalment payments, remember to document the repayment schedule and have the borrower acknowledge and sign off on the document.
  1. Keep a file. Keep copies of all documents and information relating to the friendly loan, including any bank transfer slips and correspondence with the borrower so they can be easily retrieved when the time comes. Informal correspondence such as SMS, instant messages and e-mails can also be used as corroborative evidence in legal proceedings to establish the loan and repayment terms, so don’t be in a rush to clear your phone’s memory.

A friendly loan can turn unfriendly fairly quickly. Taking the correct precautions, even in acts of kindness, can go a long way towards safeguarding your rights.

***

ABOUT THE AUTHOR. Donovan Cheah is a partner at Donovan & Ho. He is an advocate and solicitor of the High Court of Malaya, and his writings have been featured in publications like The Star, the American Chamber of Commerce updates, and Asialaw.

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