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KYB Case Update: Lenders Beware

LENDERS BEWARE


the loss lies where it falls where an agreement is found to be illegal


Introduction


Whether sought out of urgent financial necessity or to bypass financial institutions and their interest rates (or for any other purpose), a “friendly loan” has often been perceived as a means to quick access to funds.


However, the nature of friendly loans in Malaysia may now take on a new and indefinite shape following the latest decision of the Federal Court in Federal Court Civil Appeal No.: 02(f)-16-02/2022 (A) Triple Zest Trading & Suppliers & Ors v. Applied Business Technologies Sdn. Bhd. (“the Suit”) where the Federal Court deemed a friendly loan agreement illegal, void and unenforceable by virtue of Section 24 of the Contracts Act 1950 and the Moneylenders Act 1951. The lender in this case now sits, bearing the loss of the principal loan sum and unable to recoup interest promised under the friendly loan agreement as the façade of the friendly loan was lifted.


This case update aims to discuss this Federal Court decision as reported in Triple Zest Trading & Suppliers Sdn. Bhd. & Ors. v. Applied Business Technologies Sdn. Bhd. [2023] MLRAU 237.


The Facts


The Loan Agreement


Triple Zest Trading & Suppliers Sdn. Bhd. (“the Borrower”) required funds to finance its business and approached Applied Business Technologies Sdn. Bhd. (“the Lender”) to borrow a sum of RM800,000.00 (“Principal Loan”). On top of this Principal Loan, the Borrower was liable to pay another RM800,000.00, sum of which was defined as “Agreed Profit”. Upon signing the loan agreement, the Lender received, as collateral:- (i) the title deeds to two (2) parcels of land (“Lands”); (ii) four (4) undated cheques for a sum of RM400,000.00 each; and (iii) personal guarantees executed by the Directors of the Borrower (i.e. the 2nd and 3rd Appellant in the Suit). It is important to also note that the Lands are co-owned by the 2nd Appellant and her daughter (who was a party to the High Court proceedings).


At the end of this transaction, the Lender expected to receive RM1,600,000.00, and had expected it soon, as the loan agreement’s lifespan was short, lasting for only thirty (30) days whereafter the sum of RM1,600,000.00 (being the Principal Loan and the Agreed Profit) shall become immediately due.


(hereafter, this transaction shall be referred to as “the Loan Agreement”).


High Court Proceedings


The Borrower defaulted and the Lender sued for, inter alia:- (i) an order that the Lands be transferred to the Lender; or alternatively; (ii) for the repayment of the RM1,600,000.00 by auctioning off the Lands to recover the total due under the Loan Agreement (“the Lender’s Claim”).


In their defence, the Borrower claimed that:- (i) they never consented to paying the Agreed Profit; (ii) the entire transaction was an illegal moneylending transaction; (iii) the Lender had “exercised undue influence” on the Directors of the Borrower when executing the personal guarantees; and that (iv) the 2nd Appellant’s daughter had nothing to do with the Loan Agreement and never pledged the Lands to the Lender as security for the same.


However, the High Court found in favour of the Lender, deeming the Loan Agreement a “friendly loan” because:- (i) there was no evidence to show that the Lender carried on the business of moneylending; (ii) the Borrower agreed to repay the Principal Loan along with the Agreed Profit; and that (iii) the Lender had not exercised any undue influence over the Directors of the Borrower when executing the Loan Agreement or the personal guarantees. The High Court did, however, find that the Lender had no cause of action against the 2nd Appellant’s daughter who had nothing to do with the Loan Agreement and therefore, the Lands she co-owned could not be transferred to the Lender.


It is vital to note at this juncture that the High Court, in deciding that the Loan Agreement was valid and binding, based its decision on, amongst other things, the definition of “moneylender” under Section 2 of the Moneylenders Act 1951 which led the High Court Judge to conclude that they are not moneylenders as there was no evidence that the Lender had held themselves to carry on, advertise or announce themselves as carrying on the business of moneylending. Further thereto, the High Court also held that the Loan Agreement entered into with the Borrower was a “one-off affair”.


This position is contrary to the rebuttable presumption under Section 10OA of the Moneylenders Act 1951 – that a person is presumed to be a moneylender carrying on the business of moneylending if there exists, proof of a single loan at interest made by such persons until the contrary is proven (“the Rebuttable Presumption”) – further discussed below.


The High Court Judgment is reported in Applied Business Technologies Sdn. Bhd. v. Triples Zest Trading & Suppliers Bhd. & Ors. [2020] MLRHU 1476.


The Court of Appeal


The Borrower appealed against the whole of the High Court decision, while the Lender appealed against part of it maintaining that it should be entitled to the reliefs in the Lender’s Claim. Here, the Borrower raised a point on the Rebuttable Presumption and that the Lender’s failure to prove that it is not a moneylender was fatal to its case.


On this point, the Court of Appeal decided that the presumption was rebutted because (i) the Lender showed that it was in the business of information technology and not moneylending; (ii) there was no evidence or insufficient proof that the Lender was engaged in a moneylending business; and (iii) there was no evidence that the Lender had loaned money to other borrowers in the past. The Court of Appeal likewise considered the transaction a ‘friendly loan’ and held, that friendly loans should not have chargeable interest. As such, the Court of Appeal allowed the Borrowers’ appeals in part and awarded judgment in the reduced sum of RM800,000.00 (excluding the Agreed Profit). The Lender’s appeal was dismissed.


The Court of Appeal Judgment is reported in Triple Zest Trading & Suppliers Sdn. Bhd. & Ors. v. Applied Business Technologies Sdn. Bhd. and another appeal [2023] 2 MLJ 374.


The Federal Court Judgment


The thrust of the Borrower’s case before the Federal Court was that they are not liable to repay any sum of money to the Lender because the whole agreement is void for being an illegal moneylending transaction. So beginning at the undisputed narratives, the Federal Court took note of the following:- (i) the Lender is not a licensed moneylender nor in the business of moneylending; (ii) the Borrower required funds for its business and approached the Lender culminating to the execution of the Loan Agreement and its terms; and (iii) the Borrower defaulted on the Loan Agreement.


Features of an Illegal Moneylending Transaction


When read together, the definitions of “moneylending” and “moneylending agreement” under Section 2 of the Moneylenders Act 1951 state that, when an agreement purports to lend money at interest, with or without security, the written agreement is a moneylending agreement. “Interest”, likewise defined under the same section, “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”.


Applying the above to the facts, the Federal Court found that the Agreed Profit carried, in truth, a 100% interest rate on the Principal Loan, rendering the Loan Agreement void for illegality pursuant to Section 24 of the Contract Act 1950 under subsection (a), (b) and (e). This means that, the Loan Agreement is:- (i) forbidden by law to remain enforceable, (ii) would defeat the spirit and intent of the Moneylenders Act 1951 and the Financial Services Act 2013; and (iii) is immoral or against public policy to uphold. Whatever the guise, if a term purports to charge an interest on a sum lent, the transaction is deemed moneylending and illegal.


Note also, that by virtue of Section 15 of the Moneylenders Act 1951, the Loan Agreement is likewise unenforceable because the Lender (an unlicensed moneylender) is lending money with interest. To this, Abdul Rahman Sebli CJSS remarked, “If a rose by any other name would smell as sweet, a corpse flower by any other name would smell as foul.”

No Restitution for the Unlicensed Moneylender


As the Loan Agreement was deemed void and illegal, the Lender (an unlicensed moneylender) is not entitled to restitution. The Lender must therefore bear the loss of the Principal Loan and cannot claim the Agreed Profit.


In the Federal Court’s opinion, the effect of the lower courts’ decisions would be to aid unlicensed moneylenders in recovering the principal loan sum with interest (if the High Court decision was left to stand) or just recover the principal loan sum without interest (if the Court of Appeal decision was left to stand). To deter transactions of a similar nature from reoccurring, the effect of this Federal Court Judgment widens the scope on who a moneylender is and what type of moneylending agreements/transactions could be deemed illegal and void i.e. that any person charging an interest on a sum of money lent is a moneylender, and without license to do the same has done so in contravention of Section 24 of the Contracts Act 1950 and the Moneylenders Act 1951. The agreement/transaction is illegal, void and unenforceable. Friendly loans therefore, following the decision of the Federal Court, may be limited to loans that are borrowed without interest.


The Proper Application of the Rebuttable Presumption


A rebuttable presumption is a legal principle which presumes something to be true unless proven otherwise. In correcting the Court of Appeal, the Federal Court explained that the burden of rebutting the Rebuttable Presumption fell on the Lender. The Lender had to prove, on the balance of probabilities, that it had not engaged in the act of lending money at interest to the Borrower. Simply forwarding evidence that it was not in the business of moneylending did not suffice.


Key Takeaways:-


With reference to the five (5) questions of law answered by the Federal Court, the key takeaways may be summarised as follows:-


  • a loan agreement which charges an interest at the rate of one hundred percent (100%) within a period of thirty (30) days is not legal under the law;


  • in a situation such as the above, the Court ought not to assist the moneylender to recover the principal amount lent;


  • although a person does not carry on or advertise or announce himself or hold himself out as carrying on the business of moneylending, he may still be defined as a moneylender where he lends money at an interest rate of hundred percent (100%) per month (or at all);


  • the Moneylenders Act 1951 does not only regulate moneylenders but may also apply to any situation where a loan is given with interest charged; and


  • a person who is not defined as a moneylender cannot lend money at any interest rate.


In our view, this decision of the Federal Court will substantially impact the manner in which moneylending claims are commenced, opposed and determined by the Courts. It is left to be seen how the Courts apply this decision and, where necessary, distinguish it. Following this decision, lenders and borrowers alike ought to seek legal advice on the extent of their rights and, more importantly, how to avoid compromising these rights.


This article is co-authored by Edward Kuruvilla and Andrea Boo, both of Messrs. Kuruvilla, Yeoh & Benjamin.


Fore more information, please contact Edward Kuruvilla at edward@kyblegal.com or Andrea Boo at andrea@kyblegal.com.


This article is intended to provide general information in summary form on legal topics, current at the time of first publication. The contents should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Formal legal advise should be sought in particular matters.

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