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  • Writer's pictureRajvin Singh Gill

Imposition of Interests in Friendly Loan Transactions - Revisited

A friendly loan transaction is just this - lending monies to another on a 'friendly' basis (typically a one-off transaction - yes this is allowed under Malaysian laws) as opposed to doing so as a business of licensed moneylending.

In view of recent case laws on this subject the pertinent questions are: -

(i) Are friendly loan transactions still legally permissible under Malaysian Laws?; and

(ii) Is the imposition of interests still legally permissible in a friendly loan transaction?

Triple Zest Case

It is apt that we examine the recent Federal Court case of Triple Zest Trading & Suppliers Sdn Bhd v Applied Business Technologies Sdn Bhd (02(f)-16-02/2022(A)) on 19 June 2023 (“Triple Zest Case”) centered on a dispute involving Applied Business Technologies Sdn. Bhd., businesswoman Junaidah Leman, her son Fairuz Roslan, and their company, Triple Zest Trading & Suppliers Sdn Bhd.

In this case, Junaidah Leman, her son, and Triple Zest Trading & Suppliers sought a loan from Applied Business Technologies to support their oil trade business and the construction of a petrol station. Two parcels of land were offered as collateral, and the funds were transferred to a Singaporean company as directed by an intermediary. Subsequently, Applied Business Technologies initiated legal action, claiming RM1.6 million, encompassing the principal loan amount and additional "agreed profits."

Initially, in 2020, the High Court in Ipoh ruled in favor of Applied Business Technologies. However, in the following year, the Court of Appeal partially allowed the appeal, directing the repayment of the principal sum.

The pivotal aspect of the Court of Appeal's decision revolved around distinguishing between moneylending businesses and friendly loans. The Court of Appeal determined that, in this instance, as Applied Business Technologies lacked a moneylending license, the loan transaction was categorized as an informal or friendly loan. The Court held that, unlike licensed moneylending transactions, friendly loans did not permit the imposition of interest. Consequently, the Court of Appeal concluded that Applied Business Technologies was entitled to recover only the principal sum of the loan, excluding the charged interest, which was deemed excessively high.

Several factors contributed to this decision, including Applied Business Technologies being an information technology company not engaged in moneylending, witness testimonies affirming it was a singular loan transaction, and the absence of evidence indicating its involvement in moneylending as a business activity. Consequently, the Court of Appeal classified the agreement as a friendly loan but disallowed the charging of interest, thereby rejecting Applied Business Technologies' claim for the "agreed profit."

Unhappy with the verdict, the businesswoman, her son, and Triple Zest Trading & Suppliers sought leave from the Federal Court to appeal against the decision handed down by the Court of Appeal.

During the appeal proceedings, the Federal Court was tasked with examining: (i) the legality of stipulating a 100% interest rate to be paid within 30 days; (ii) the permissibility of an individual not officially classified as a moneylender lending money with interest; and (iii) and the Court's authority to mandate the repayment of solely the principal sum in the event of illegality.

The lawyers for the appellants contended that the loan agreement was unlawful due to Applied Business Technologies lacking a moneylending license under the Moneylenders Act 1951 (MLA). Additionally, he argued that the 100% interest rate payable within 30 days exceeded the MLA's prescribed limits, which are 12% per annum for secured loans and 18% per annum for unsecured loans. The appellants' lawyer asserted that the RM800,000 claimed as "agreed profits" essentially constituted interest masked as profits. He emphasized that "the court should not aid illegal moneylenders in recovering the principal amount, as doing so would create a conducive environment for their proliferation."

The Federal Court upheld the appellants' arguments, ruling that Applied Business Technologies, being an unlicensed moneylender, could not seek recovery of the RM1.6 million loan from the defendants, encompassing both the principal sum and "agreed profits" or interest. This was due to the absence of a moneylending license, rendering the loan agreement illegal.

It is important to highlight that the decision of the Court of Appeal in Tang Lee Hiok & Ors v Yeow Guang Cheng [2022] 5 MLJ 584, which was upheld by the Federal Court, established that the concept of restitution under Section 66 of the Contracts Act 1950 ("CA") does not extend to cases involving violations of the MLA. Section 66 of the CA specifies that in instances where an agreement is determined to be void or a contract becomes void, any advantage gained under the agreement or contract must be returned or compensated to the party who originally provided it. However, this provision is not applicable in situations where the MLA has been breached, aiming to prevent unlicensed moneylenders from benefiting from transactions crafted to conceal their illicit intentions, as clarified in Tang Lee Hiok.

Consequently, if a lender is found to have participated in an illegal moneylending transaction by the Court, they will be precluded from recovering the loan amount from the borrower. This principle was further underscored by the Federal Court in the Triple Zest Case.

Analysis of Triple Zest

The significance of this ruling is apparent as it seems to diverge from other judgments related to unlicensed moneylending. A few months before Triple Zest, the High Court in Manmohan Samra v Sandave Singh a/l Harbhajan Singh [2023] MLJU 132 allowed the imposition of an 18% per annum interest rate on a "friendly loan" or an "investment loan." This decision was based on the lack of evidence indicating that the lender in that specific case was involved in a "main business activity related to money lending" and, therefore, was not "carrying on the business of moneylending" that requires a license under the Moneylenders Act (MLA).

Even in cases where the agreement was deemed an unlicensed moneylending agreement, as seen in Poh Kee dan satu lagi v Chim Kim Yang dan lain-lain [2022] MLJU 752, or when the interest calculation method was unclear, as in the case of Chong Poh Chee v Melinda Ramli [2022] MLJU 2660, the Courts had previously directed the repayment of at least the principal sum. However, the Federal Court's decision in the Triple Zest Case differs in that it does not mandate the return of the principal amount.

For unlicensed moneylenders who may be anxious about the implications of this ruling on their lending practices, there are crucial considerations to bear in mind. It is essential to underscore that friendly loans can still be extended, but the interest rates should be reasonable to avoid potential legal challenges. By ensuring that the interest rate is not exorbitant, lenders could enhance their chances of recovering the interest in case of a dispute.

It is essential to recognize that this ruling applies specifically to the facts and circumstances of the Triple Zest Case and should not be treated as a universal judgment for all unlicensed moneylenders.

Previous case law indicates that each case will be assessed individually, taking into account factors such as the interest rate charged, the continuity, system, or repetition of similar transactions, and the presence of guarantees or other forms of security.

Companies approached to consider providing loans may find it advantageous to seek legal advice to determine whether alternative arrangements would be more suitable.

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