FAQ on Friendly Loan Agreement (Part One)
What is Friendly Loan Agreement?
A friendly loan is a loan between two persons based on trust and it needs to be repaid within certain period of time as scheduled payment. The law recognizes it as being a valid contract, thus enforceable under the law.
Is this agreement legal?
Yes, it is legal under the Malaysian law as long as the terms and conditions are carefully drafted and would not render it to be an act of money lending in which would require license under the Moneylenders Act 1951.
Does the loan require any license from the lender?
No, the lender does not require to be licensed under the Moneylenders Act 1951.
How do I ensure the loan is legal?
the Court will consider the transaction to be legitimate Friendly Loan Agreement that is legally valid and enforceable if it consist of the following conditions: -
· one-time loan
· with a reasonable interest rate
· between individuals who are friends or relatives.
· must not be in furtherance of unlawful purposes.
Can interest be charged in this agreement?
Yes, it is chargeable as long as the interest charged is reasonable. In Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd & Anor [2017] MLJU 526, High Court recognised that it had the power to, “strike down the interest element in a friendly loan transaction if the interest is exorbitant, excessive and unconscionable”.
What should I include in this agreement?
The friendly loan agreement should include comprehensive information as prudent terms and conditions, among others: -
- Details of the borrower
- Details of the lender
- Total value of the loan
- Mode of Settlement or Repayment by the borrower
- Interest rate (if any)
- Late payment interest rate (if any)
- Deadline for final loan repayment
- Note of collateral security (if any)
How do I secure the loan?
· Enlist a guarantor for the loan
· Secure the loan against land/property
· Secure the loan against the value of shares in a business
FAQ on Friendly Loan Agreement (Part Two)
How do I secure the loan against a guarantor?
Require the borrower to bring in a third party to act as a guarantor to the loaned sum. In the event the borrower defaults on the payment, the lender can call on the guarantee to recover the remaining loan sum. The guarantor can be a company or an individual. If both the borrower and the guarantor fail to repay the loan, the borrower can bring legal actions against both the borrower and guarantor to recover the loan. Even though the lender has a right to sue both the borrower and guarantor, the recoverable amount will still be only the outstanding loan.
What is the meaning of Secure the loan against land or property?
Require the borrower to deposit the original land title (IDT) with the Lender or the Lender's lawyer. the lender should register a “Lien-Holder’s Caveat” with the Land Office (the original land title is required to do this). The “Lien-Holder’s Caveat” does not give the lender any proprietary rights over the land – merely an equitable right. The lender becomes a secured creditor only. If the borrower defaults, the lender sues the borrower for the outstanding sum and gets a judgment. After obtaining judgment, and with the Lien-Holders Caveat in place, the lender can make an application to Court for an Order for Sale. The property will then be sold, and the lender is entitled to take the outstanding balance of the loan from the proceeds of the sale. And any balance from the sale will go back to the borrower.
What is mean by secure the loan against the value of shares in a business?
The agreement shall include clauses to state that if the borrower defaults, the lender is allowed to either absolutely transfer the shares to the lender or sell the shares and recover the outstanding loan sum from the sale of the shares, and any balance to be returned to the borrower.
Do I have to stamp this agreement?
An agreement shall be stamped pursuant to Section 52 of Stamp Act 1949 in order to be admissible as evidence in the Malaysian Courts. An agreement may be stamped within 30 days of its execution if executed within Malaysia or within 30 days after it has been first received in Malaysia, if it has been executed outside Malaysia. An agreement is still valid under the law even if it is stamped late provided that the party who relies on this document in the court pay the stamp duty and penalty to the Inland Revenue Board of Malaysia (see the Federal Court case of Malayan Banking Berhad v Agencies Service Bureau Sdn Bhd [1982] 1 MLJ 198).
What happen if this agreement not stamped within stipulated time?
According to Stamp Act 1949, the following penalty shall be imposed to unstamped agreement:
If it is not stamped within the period stipulated, a penalty of:
(a) RM25.00 or 5% of the deficient duty, whichever is the greater, if stamped within 3 months after the time for stamping;
(b) RM50.00 or 10% of the deficient duty, whichever is the greater, if stamped after 3 months but not later than 6 months after the time for stamping;
(c) RM100.00 or 20% of the deficient duty, whichever is the greater, if stamped after 6 months from the time for stamping;
may be imposed.
(the above rates are effective from 1/1/2003)
What is Lien-Holder Caveat?
Lien-holder caveat is a statutory lien entered by the Lender with whom the issue document of title to any land has been deposited as security for a loan. It is effective upon registration at the relevant land registry and shall continue in force until it is removed or the debt is settled or the Lender obtained a court order for sale of the property (Section 330(5) of the National Land Code 1965).
The criteria for creating a lien-holder caveat are as follows:
(a) The registered proprietor (the Borrower) must deposit the original title of the Property with the Lender;
(b) The registered proprietor must intend to create a lien-holder caveat; and
(c) The Lender must register the lien-holder caveat together with the original title, all relevant forms and documents and prescribed fee at the land registry. The effect of the lien-holder caveat is that it freezes any dealings to the land concerned. However, it only vests the Lender with equitable interest and not proprietary right in the land. In the event of default of the Borrower, the Lender shall proceed to the court to obtain a judgement against the Borrower (Section 281(2) of the National Land Code 1965). Thereafter, the Lender is entitled to apply for a court order for sale of the property (Section 253 to 269 of the National Land Code 1965 and Order 42 of the Rules of Court 2012).
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About the author:
Faiz Adib Asyraff u& Izzuddin
Advocates & Solicitors, Syarie Counsel
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