Debt recovery in Malaysia

Too much money? Even so, think carefully before offering a friendly loan

With the current financial uncertainties in our country, it is becoming more common to hear friends and family members asking for “friendly loans”, be it to pay for education expenses, housing or car repayments, credit card debts, or day-to-day living expenses.

What would you do? Would you lend a hand without hesitation? Or would you fold your arms because you are worried that the money you loaned will never be repaid?

Well, it would certainly seem unkind and cruel to leave someone who is in need “out in the cold” when you know you have some spare cash to lend to them, especially when the person in need is your loved ones. Having said that, it is not uncommon to hear stories where a friendly loan turns ugly over non-payment.

If you are already caught in this “ugly” situation of non-payment, please be assured that the law does give you a right to recover the friendly loan from your debtor. The tricky part is whether you will have good chances of success to fully recover the friendly loan. Due to the nature of a friendly loan (which is usually given informally, out of goodwill and not in writing), it is most likely that you will not have written terms and conditions like a normal contract resulting in difficulties to establish and prove your case in court.

How can you prevent yourself from having a situation where you cannot recover the money you loaned to a person out of goodwill? Below are some useful guidelines:-

  1. Write a promissory note or document your friendly loan

A promissory note is a written promise to pay money to someone. This is one of the best documentary evidence to prove that you have loaned money to someone. In this promissory note, you should state the following:

  • the amount of debt
  • interest (if any)
  • date of repayment and/or repayment schedule

Some people are reluctant to put anything in writing for fear of “offending” the recipient. That being said, documentation of the friendly loan does not have to be in any formal format, and at the end of the day, any document is better than none.

Informal correspondence such as e-mails and texts to confirm the loan and repayment terms can also be used as evidence in legal proceedings.

Documentary evidence is especially important where the friendly loan is made by way of cash, since outside of an admission it is difficult to prove that the recipient received the cash loan (unlike say, a direct deposit to his bank account or a cheque drawn in his name).

  1. Monley lending business?

It is a misconception that granting a friendly loan would render it to be an act of money lending in which would require license under the Moneylenders Act 1951. The law does not prohibit you from giving a friendly loan and you do not need a license to give a friendly loan. It is up to the Court to see whether the primary principal object of the lender’s business was one of money lending (see Ngui Mui Khin & Anor v. Gillespie Bros. & Co. Ltd. [1980] 2 MLJ 9). Having said that, there is a decided case which states that lenders are not allowed to charge interest on friendly loans.

  1. Limitation Period?

The issue of limitation often arises in a friendly loan scenario. The limitation period for a recovery of loan is 6 years from the date of repayment. In other words, you have 6 years to start a legal action against your debtor from the date of repayment, failing which you will lose your right to recover the money. In the event there is no fixed date for repayment of the loan, limitation runs from the date of advance (see Kam Seng Realty Sdn Bhd v Dato Tai Fatt Yew & Anor [2012] 7 MLJ 825). Therefore, it is crucial to have clear repayment terms in a friendly loan.

The risks involved in granting friendly loans are high and should not be taken lightly. Be prudent always, even in acts of kindness.

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About the author: Joanne Ong is an associate in the dispute resolution practice group of  Donovan & Ho.  She graduated with a LLB (Hons) from the University of Manchester and is an advocate and solicitor of the High Court of Malaya. She has worked worked on a wide range of dispute matters involving debt recovery, conspiracy, fraud, land, bankruptcy, insolvency and defamation.

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