At first glance, borrowing or lending money appears as a routine financial transaction, a means to overcome temporary financial hurdles to achieve personal milestones. However, in the evolving landscape of informal peer-to-peer lending or other alternative financial arrangements, unsuspecting individuals might find themselves inadvertently cast into the roles of “moneylenders”, with legal ramifications under the Moneylenders Act 1951 (MA 1951). This circumstance was explored in the recent Federal Court decision of Triple Zest Trading & Suppliers Sdn Bhd & Ors v Applied Business Technologies Sdn Bhd [2023] 6 MLJ 818.
Brief Facts
This case revolves around the 1st Appellant, who approached the Respondent for a loan of RM800,000 to fund its business. The parties subsequently entered into a loan agreement involving a rather peculiar arrangement:
1.The loan of RM800,000 has to be repaid with another RM800,000 as “agreed profit”.
2. As part of the collateral, the 1st Appellant deposited title deeds for two parcels of land co-owned by the 2nd Appellant and her child.
3.Four undated cheques, each for the sum of RM400,000.00 in favour of the Respondent.
4.The directors of the 1st Appellant also provided personal guarantees.
The 1st Appellant defaulted and in response, the Respondent initiated legal action against the Appellants, seeking not only the repayment of the full RM1.6 million but also the transfer of the two parcels of land. The High Court held that the full RM1.6 million was payable but the amount was halved by the Court of Appeal. At the final appeal, the Federal Court set aside the previous rulings of the High Court and Court of Appeal and allowed the Appellants’ appeal.
Analysis
The crux of the Triple Zest case hinges on whether the loan agreement was an illegal moneylending agreement.
The Federal Court examined the definition of moneylending under Section 2 of the MA 1951, which characterised it as “lending money at interest, with or without security by the moneylender to the borrower”. The term ‘interest’ is, in turn, defined under Section 2 as the amount above the principal, which was to be paid and/or was payable to the moneylender in consideration of or otherwise in respect of a loan. The loan agreement had explicitly outlined that the agreed profits constituted the “consideration” for the RM800,000 loan. Consequently, in line with Section 2, the agreed profits were, in fact, and as a matter of law, a 100% ‘interest’ rate, regardless of its label. As poetically described by the Federal Court, “If a rose by any other name would smell as sweet, a corpse flower by any other name would smell as foul.”
Additionally, the Federal Court underscored the significance of Section 100A of the MA 1951, which stipulates that in a proceeding against an individual alleged to be a moneylender, “the proof of a single loan at interest” automatically raises a presumption that the person is engaged in the business of moneylending until the contrary is proven.
The Federal Court also emphasised that the burden to disprove the presumption does not rest with the Appellants but squarely on the Respondent where they would have to prove that they were not lending money at any interest. On the facts, the Federal Court noted that not only had the Respondent failed to adduce any evidence to show that the agreed profits were not ‘interest’ but all available evidence indicates, beyond a shadow of a doubt, that the loan agreement was a shrewd attempt to “push profiteering to a new level”.
Further, Section 24 of the Contracts Act 1950 expressly stipulated that an agreement is void if the object or consideration is unlawful. In this case, such ‘consideration’ would be forbidden by law, and it was of such nature that if permitted, it would defeat any law and be regarded as immoral and contrary to public policy. The Federal Court went so far as to draw a parallel between the loan agreement and the audacious claim of the Respondent, likening it to the vivid analogy of “allowing a robber to claim back his cost and expenses in a botched robbery attempt”.
Recognising the paramount importance of deterring unlicensed moneylenders from persisting in illicit financial practices, the Federal Court asserted that they should not play a role in unwinding an illegal agreement from its inception, by restoring parties to their original position. Consequently, given that the Respondent was not a licenced moneylender as per Section 5 of the MA 1951, the loan agreement, which was contrary to Section 24 of the Contracts Act 1950 as explained above, was declared to be null and void. As such, the Respondent’s claims were also dismissed in their entirety.
Conclusion
The Federal Court's ruling in the Triple Zest case delivers a clear and decisive message against unlicensed moneylending activities. This development undoubtedly provides a great deal of comfort for borrowers, but it also serves as a cautionary tale to stakeholders in the business and commercial scene wherein:
1.If an allegation of moneylending is raised, the mere proof of a single loan at interest will automatically trigger the presumption of moneylending, which can only be disproved by the purported lender.
2.If one fails to disprove the aforementioned, the lender would be deemed as an unlicensed moneylender, and consequently, be deprived and/or precluded from any entitlement to repayment whatsoever.
In essence, this also serves as a call for heightened diligence and legal compliance within the business and commercial domain, urging stakeholders to be vigilant in financial transactions and lending practices to avoid falling afoul of these stringent legal standards.
11 December 2023