Friendly loans are common and are generally enforceable in Court. Illegal money lending, however, is not. The Court will not enforce illegal moneylending agreements, and could even deny the lender the right to recover the principal sum. The distinction between “friendly loan” and “illegal money lending” lies in the nature of the loan.
The Federal Court took a strong stance on what constitutes illegal money lending in Triple Zest Trading & Suppliers & Ors [2023] 6 MLJ 818. The ruling emphasized that while names or labels may vary, the essence of illegal money lending remains unchanged. To quote the Federal Court, “just as a rose by any other name would smell as sweet, a corpse flower would still be foul regardless of what it is called”.
This decision underscores that the fundamental nature of illegal lending practices cannot be altered or masked by different terms.
Brief Facts
- The First Appellant borrowed RM800,000 from the Respondent. The Respondent agreed to lend this amount on the condition that it would be repaid with an additional RM800,000 as “agreed profit” within a month.
- Aside from the loan agreement, the First Appellant provided the Respondent with two title deeds for two parcels of land, four undated cheques totalling RM1.6milion and personal guarantees from the Second and Third Appellants.
- When there was a default, the Respondent sued to recover RM1.6million.
- The High Court allowed the Respondent’s claim, finding that the loan with an “agreed profit” of RM800,000 was not illegal moneylending because there was no evidence that the Respondent was a moneylender as defined by the Moneylenders Act 1952.
Section 2 Moneylenders Act 1952
“moneylender” means any person who carries on or advertise 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.
- The High Court cited the idiom, one swallow does not make a summer, implying that a single instance of a loan with profit does not necessarily indicate a pattern of money lending.
- On appeal, the Court of Appeal partially affirmed the decision, ruling that the First Appellant only needed to repay the principal sum of RM800,000. The Court decided, amongst others, that in the case of a friendly loan, no interest should be charged.
Findings of the Federal Court
On further appeal, the Federal Court rules that the loan agreement was an illegal moneylending transaction. Consequently, the law would not assist the Respondent in recovering losses from such illegal contract. The remedy of restitution, which would put parties back as if the agreement had never happened, is not available to an illegal moneylender.
The key findings can be summarized as follows:
- Allowing someone who charges exorbitant interest to reclaim the principal amount would encourage illegal money lending. If borrowers fail to repay, these lenders would still recover the principal amount through the court, making it a risk-free venture for illegal moneylenders. This is a mockery to the Moneylenders Act 1952 and the Financial Services Act 2013, as it permits unlicensed moneylenders to operate under the guise of “agreed profit” instead of regulated interest rates.
- This approach also contradicts the principle that a loss lies where it falls ie: a party that suffers loss due to an illegal contract, cannot sue the other contracting party to recover losses.
- By agreeing to lend RM800,000 with an additional RM800,000 as “agreed profit”, the Respondent was essentially engaging in moneylending as defined by the Moneylenders Act 1951. This is because it involved lending money at interest in excess of the principal.
Section 2 Moneylenders Act 1952
“interest” does not include any sum lawfully charged in accordance with this Act by a moneylender for or on account of stamp duties, fees payable by law and legal costs but, save as aforesaid, includes any amount by whatsoever name called in excess of the principal paid or payable to a moneylender in consideration of or otherwise in respect of a loan.The definition of “interest” must be read into the relevant terms of the loan agreement in determining if the Respondent was or was not carrying on the business of “moneylending”.
- Furthermore, under Section 10OA Moneylenders Act 1951, if it is alleged that a person is a moneylender, the proof of a single loan at interest shall raise a presumption that such person is carrying on the business of moneylending until the contrary is proved.
- Although “one swallow does not make a summer”, this presumption once raised can only be overturned if the Respondent proved, on a balance of probabilities, that it was not engaging in moneylending by lending money at interest, with or without security.
- The evidence showed clearly that the RM800,000 loan had an exorbitant interest rate of 100%, cleverly labelled as “agreed profit” by the Respondent.
Key Takeaways
The Federal Court’s ruling confirms that loans with exorbitant interest rates, labelled as “agreed profit” or otherwise, are considered illegal under the Moneylenders Act 1951. Under the Act, any amount over the principal paid to a moneylender qualifies as interest and a single instance of lending money at interest creates a presumption of moneylending, which can only be disproven by evidence showing compliance with the Act.
The Court will not assist in recovery of even the principal amount in such scenario.
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This article was written by Th’ng Yan Nie (Partner) from Donovan & Ho’s dispute resolution practice.
Donovan & Ho is a law firm in Malaysia. Our dispute resolution provides advice and legal representation in the civil and industrial courts. We also represent clients in both domestic and international arbitration, as well as other forms of alternative dispute resolution. Our experienced lawyers are also able to assist in commercial and civil disputes (such as debt recovery, shareholders’ or directors’ disputes, breach of contract and claims for injunctive relief), constructive disputes (arbitration and/or adjudication proceedings, disputes relating to delays, liquidated damages, defects and rectification work) and employment disputes (unfair dismissal claims, judicial review proceedings, and employment-related civil claims). Have a question? Please contact us.
