Protecting Your Interests in Friendly Loan Agreements (Part 1)

A friendly loan agreement involves the lending of money between two or more parties based on mutual trust.

If you are thinking of lending money to a friend or an acquaintance through a friendly loan agreement, read on for some tips on how to safeguard your legal interests. 

Tip 1: Reduce the Friendly Loan Agreement in Writing 

It is highly advisable to reduce your friendly loan agreement in writing and have it signed by all parties to prevent disputes later. Here are some key details to consider including in your agreement:  

1. Identification details of the lender and borrower. 
2. Value of the loan that is given.
3. Method through which the loan was remitted to the borrower i.e. via cash, cheque or bank transfer. 
4. Interest rate (if any) for repayment of the loan.
5. Agreed payment schedule or final deadline for payment of the loan.
6. Information on collateral security provided to secure the loan such as through shares, properties, or personal/corporate guarantees (if any). 
7. How the collateral security (if any) would be utilized in the event of any default on the loan. 

While having a signed agreement in writing is good practice, it should be noted that a friendly loan agreement that is made orally is equally binding. This is so long as the lender can prove that i) a sum of money had been loaned to the borrower and that ii) the borrower had agreed to repay the money within a certain time period. In this regard, it is helpful for the lender to at least have an exchange of Whatsapp messages or emails to evidence the friendly loan, even if no formal agreement is entered into in writing. 

Tip 2: Keep a Proper Documentation of Supporting Documents  

Keep the following documents in a folder which you can locate easily over time: 

1. Duly signed and stamped friendly loan agreement or other correspondences proving the friendly loan. 
2. Copies of bank statements or cheques proving that the loan was made.
3. Proper acknowledgment of receipt if the loan was made by cash.
4. Proof of collateral security given.  
5. Correspondences to follow up on the payment of the loan (if any). 

Tip 3: Ensure that Interest Imposed is Not Excessive 

It is possible to impose some interest on a friendly loan agreement. However, the interest imposed must not be excessive, exorbitant and/or unconscionable. This is to ensure that the lender does not take advantage of a borrower by capitalizing on the desperation of the borrower. 

The courts may strike down the interest element if it is excessive. In Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd & Anor [2017] MLJU 526, the High Court struck down the contractual term stipulating interest at 8.8% per annum and replaced it with interest at 5% per annum instead. 

Courts generally do not envisage any chargeable interest on a friendly loan. Practically speaking, however, a simple interest rate imposed on a friendly loan agreement that is the same or lower than what financial institutions usually charge should still be acceptable to the Court. 

Tip 4: Avoid breaching the Moneylenders Act 1951  

The distinction between giving a friendly loan and carrying on a moneylending business is important because Section 5 of the Moneylenders Act 1951 (“MLA 1951”) provides that no one shall carry on the business of moneylending unless he is licensed under the Act. An unlicensed moneylender can be liable to a fine between RM250,000.00 to RM1,000,000.00, or to imprisonment for a term not exceeding five years or to both.

“Moneylender” is defined under Section 2 as “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.”

Indeed, pursuant to Section 10OA of MLA 1951, a single loan with interest is sufficient to raise the presumption of moneylending. The burden then shifts to the lender to prove the contrary, failing which the lender may be found to have acted as an unlicensed moneylender. See the Court of Appeal decision of Mahmood bin Ooyub v Li Chee Loong and Another Appeal [2020] 6 MLJ 755. 

Here are some of the factors that the court considers in determining if the presumption under section 10OA of MLA 1951 is rebutted: 

1. Relationship between the lender and the borrower - are the parties friends/relatives or complete strangers? 
2. History of moneylending transactions in the past - is it a one-off transaction or are there multiple similar transactions in the past?
3. The interest rate that is imposed – does the lender frequently impose an exorbitant interest rate on loans that are given?
4. Profit made by the lender – does the lender regularly make a profit from money lending?

It should be noted that following the Court of Appeal decision in Tang Lee Hiok & Ors v Yeow Guang Cheng [2022] 5 MLJ 584 which was affirmed by the Federal Court, restitution pursuant to section 66 of the Contracts Act 1950 is not applicable in cases relating to the violation of the MLA 1951. Section 66 of the Contracts Act 1950 provides that: 

“When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.”

Section 66 would not apply in cases where the MLA 1951 is found to have been violated because to do so would allow unlicensed moneylenders to benefit from a transaction “devised to camouflage their nefarious intention and that can only embolden unlicensed moneylenders.” (excerpt taken from the Court of Appeal decision) The implication of the decision is that if a lender is now found to have engaged in an illegal moneylending transaction as determined by the court, the lender will not be able to recover the loan sum from the borrower. The same proposition was echoed in the recent Federal Court decision of Triple Zest Trading & Suppliers Sdn Bhd v Applied Business Technologies Sdn Bhd (02(f)-16-02/2022(A)) delivered on 19^th June 2023.  

Conclusion 

There you have it. We hope that the 4 tips above have helped you in some ways. In Part 2 of the article, we will share more information on the collateral security to support a friendly loan and ways to recover your capital from a friendly loan. 

As usual, do feel free to contact the author if you have any queries.