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One day, Arturo, your childhood friend of 15 years, informs you that he is in some serious financial trouble and needs about RM200,000.00.
Being a good friend, you decide to help a brother out. You empty all of your life savings and even go to the extent of obtaining an overdraft facility from a bank. Arturo is immensely grateful and assures you that he will return the money in two months.
Two months pass so you meet Arturo to ask for the money owed. Arturo pulls a fast one and denies such a transaction. He tells you that there is no agreement signed so you have no legal proof. Also, the transaction is illegal and not recognized by law as you are not an authorized moneylender.
Is Arturo, right? Can you not recover your money?
Is a Friendly Loan recognized by the law?
To put it short, a friendly loan is the lending of money between two persons based on mutual trust.
In practice, a friendly loan is often informal and not documented in writing. This however does not invalidate it as a contract. The law recognizes friendly loans as a valid contractual arrangement and as such it is enforceable in law. The rationale of this outcome is based on the doctrine of unjust enrichment and restitution; meaning the Defendant has received monies from the Plaintiff unjustly and as such must return the same.
A common legal issue faced by Courts is determining if the Friendly Loan equates to a Moneylending transaction as provided in the Moneylenders Act 1951 (“the Act”). This distinction is important as there are certain mandatory guidelines provided for in the Act such as the requirement of a valid licence and rules on interests which if breached can make the loan null and void.
Gopal Sri Ram JCA (as he then was) succinctly stated in Pan Global Equities Sdn Bhd & Anor v. Taisho Company Sdn Bhd [2005] 3 CLJ 734 (COA) that the spirit and intendment of the Act is to protect individuals from the jaws of unlicensed lenders. Whether a transaction is designed within the perimeters of the Act depends on the facts of each case. The test is what is the true nature of the relationship of the parties?
Section 2 of the Act defines a moneylender 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”.
The Privy Council in Chow Yoong Hong v. Choong Fah Rubber Manufactory [1962] MLJ 74 (PC) explained as follows about moneylending businesses:
To lend money is not the same thing as to carry on the business of moneylending. In order to prove that a man is a moneylender within the meaning of the Ordinance, it is necessary to show some degree of system and continuity in his moneylending transactions.
In Muhibbah Teguh Sdn Bhd v. Yaacob Mat Yim [2005] 4 CLJ 853 (HC), 2 elements needs to be established before a loan can fall under the purview of the Act:
The loan was a moneylending transaction; and
The Plaintiff was carrying the business of moneylender at the material time.
As such, a simple scenario where money was lent to assist a friend who was in need of fund such as the one with Arturo would not constitute a Moneylending transaction but merely a Friendly Loan.
A Guide to giving out a Friendly Loan
Friends are friends. But business is business and Money is Money!
Whilst friendships and relationships are important, it is necessary to safeguard your own right in case of legal need.
The burden of proof in civil cases rests upon the Plaintiff (Section 101,103, Evidence Act 1950), meaning in cases of Friendly Loans, there are two elements the Plaintiff has to prove:
Whether the Defendant received the money?
Whether the money was given as a Friendly loan?
In the case of Homewest Sdn Bhd v. Lee Lai Heng [2018] 1 LNS 1499 (HC), the Plaintiff proved that the Defendant received monies paid by cash and by cheques. The Defendant admitted receiving but denied that the money was a friendly loan, but instead claimed as an investment.
To prevent a fiasco as such, here are some steps you can take to ensure your rights as lender are better protected.
1. Have a written Friendly Loan agreement
This step is pretty self-explanatory but is also the most vital step of all. A written agreement signed by both the lender and the borrower can severely increase your chances in Court in the event of a default.
A simple contract outlining the amount borrowed, the interest to be paid (if any) and the timeline for repayment is all you’ll need. In P’ng Hun Sun v. Dato’ Yip Yee Foo [2010] 1 LNS 1974 (HC), Tengku Maimun Tuan Mat J (as she then was) mentions the importance of proper instrument and/or contract in proving a friendly loan.
2. Keep a record of the proof of transfer
It is important to keep a copy of the transactions of transfer of money to the borrower. This could look like copies of cheques issues, bank transfer slips, acknowledgement letters for cash received.
In Tan Aik Teck v. Tang Soon Chye, [2007] 5 CLJ 441 (COA), the Court of Appeal held as follows:
The plaintiff admitted that there was no loan agreement in respect of the loan given to the defendant. The loan could only be proved by the two cheques which were paid into the defendant’s account and also the admission by the defendant that he had put the money into his account. Since the defendant had admitted that he had received the two cheques and had credited them into his account, the plaintiff had discharged his burden that the money was a loan unless proven otherwise by the defendant.
In Lim Choon Hau v. Simpson Wong [2019] 1 LNS 217 (HC), the Court accepted WhatsApp evidence as the direct evidence of the defendants receiving the Money as friendly loan from the Plaintiff.
In the Federal Court in the case of Yam Kong Seng & Anor v. Yee Weng Kai [2014] 6 CLJ 285 (FC), a text message (SMS) was admitted as evidence that the defendant received monies for the purposes of a loan from the plaintiff.
3. Have a clear repayment term
This part is crucial because you have 6 years to start a suit against the borrower from the date of repayment, else you will lose your right to recover the loan sum.
In Kam Seng Realty Sdn Bhd v Dato Tai Fatt Yew & Anor [2012] 7 MLJ 825 (HC) it was held that in the absence of a proper term of repayment, the 6 years runs from the date the loan is given.
4. Be cautious with any provisions on interest.
In Tan Aik Teck (supra), it was held that as a general rule, there ought to be no interest charged on a friendly loan as to maintain its distinction from a “moneylending transaction”. Nonetheless, as held in Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd [2017] MLJU 526 (HC), courts may permit a “justifiable and reasonable interest rate” so long as it is not exorbitant, excessive, and unconscionable.
In that case, Lee Swee Seng J (as he was then) rejected an 8.8% per annum interest and replaced it with a 5% per annum interest instead.
Conclusion
In short, helping a friend in need is truly a noble gesture but that too has to come with some safety nets to protect you in the event things turn sour.
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