oleh Muhammad Faiz bin Hasan
What is a Friendly Loan Agreement?
A friendly loan is a loan between two persons based on trust that must be repaid within a certain period of time as scheduled. The law recognises it as a valid contract, and it is therefore enforceable under the law.
Is this agreement legal?
Yes, it is legal under Malaysian law as long as the terms and conditions are carefully drafted so that the transaction does not amount to an act of moneylending, which would otherwise require a licence under the Moneylenders Act 1951.
Does the loan require any licence from the lender?
No. The lender is not required to be licensed under the Moneylenders Act 1951.
How do I ensure the loan is legal?
The Court will consider the transaction to be a legitimate Friendly Loan Agreement that is legally valid and enforceable if it consists of the following conditions:
- a one-time loan;
- with no interest on the principal sum;
- between individuals who are friends or relatives; and
- not in furtherance of any unlawful purpose.
Can interest be charged in this agreement?
The safest position is no. A genuine friendly loan is a loan of the principal sum without interest. Once interest is imposed, the loan is exposed to the presumption under section 10OA of the Moneylenders Act 1951 that the lender is carrying on the business of moneylending, and the burden shifts to the lender to prove otherwise. The earlier view that a reasonable rate of interest could be charged, and that the court would strike down only an exorbitant rate (see Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd & Anor [2017] MLJU 526), must now be read subject to the Federal Court's decision in Triple Zest Trading & Suppliers Sdn Bhd & Ors v Applied Business Technologies Sdn Bhd [2023] 10 CLJ 187; [2024] 1 MLRA 144, where charging interest described as an "agreed profit" rendered the transaction an illegal moneylending transaction and, the lender being unlicensed, the court declined to assist in recovering even the principal sum. To keep a friendly loan valid and recoverable, lend the principal interest-free and record the terms in writing.
What should I include in this agreement?
A friendly loan agreement should include comprehensive and prudent terms and conditions, among others:
- details of the borrower;
- details of the lender;
- the total value of the loan;
- the mode of settlement or repayment by the borrower;
- the interest rate (if any);
- the late payment interest rate (if any);
- the deadline for final loan repayment; and
- a note of any collateral security (if any).
How do I secure the loan?
There are three common ways to secure a friendly loan:
- enlist a guarantor for the loan;
- secure the loan against land or property; or
- secure the loan against the value of shares in a business.
How do I secure the loan against a guarantor?
Require the borrower to bring in a third party to act as a guarantor for the loaned sum. If the borrower defaults on 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 lender can bring legal action against both to recover the loan. However, even though the lender has a right to sue both, the recoverable amount is still only the outstanding loan.
What does it mean to 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 then 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 – so the lender becomes a secured creditor only. If the borrower defaults, the lender sues for the outstanding sum and obtains judgment. After obtaining judgment, and with the Lien-Holder's Caveat in place, the lender can apply to Court for an Order for Sale. The property is then sold, and the lender is entitled to take the outstanding balance of the loan from the sale proceeds, with any surplus returned to the borrower.
What does it mean to secure the loan against the value of shares in a business?
The agreement should include clauses stating that if the borrower defaults, the lender is allowed either to absolutely transfer the shares to the lender or to sell the shares and recover the outstanding loan sum from the proceeds, with any balance returned to the borrower.
Do I have to stamp this agreement?
An agreement must be stamped pursuant to section 52 of the 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 is first received in Malaysia if executed outside Malaysia. An agreement remains valid even if it is stamped late, provided that the party relying on the document in court pays 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 happens if this agreement is not stamped within the stipulated time?
Under the Stamp Act 1949, the following penalty may be imposed on an unstamped agreement if it is not stamped within the stipulated period:
- RM25.00 or 5% of the deficient duty, whichever is greater, if stamped within 3 months after the time for stamping;
- RM50.00 or 10% of the deficient duty, whichever is greater, if stamped after 3 months but not later than 6 months after the time for stamping; and
- RM100.00 or 20% of the deficient duty, whichever is greater, if stamped after 6 months from the time for stamping.
(The above rates are effective from 1 January 2003.)
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