What is the legal definition of a 'friendly loan'?
The Court of Appeal in 2007 in the case of Tan Aik Teck v Tang Soon Chye has defined what is a friendly loan:
“A friendly loan is a loan between two persons based on trust. They may be an agreement such as an I.O.U. or security pledged to repayment but most important there will be no interest imposed.”
Can We Charge Interest for Friendly Loan?
If we refer to the case above, the definition of 'friendly loan' includes "there will be no interest imposed". So, does this mean we cannot impose interest for a friendly loan?
This is not always the case! If you still insist to in a percentage of interest to the borrower, you may still do so as stipulated in the 2017's case of Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd & Anor. In his case, the Court has decided that, the general rule for a friendly loan is you should not impose an interest. However, as a lender, you still have the right to impose an interest to the borrower provided with the following conditions:
The interest imposed shall not be too high; and
You must show that you are not trying to make any profit from the loan like a moneylending business would.
The court still have the final say whether the interest imposed by you to the borrower should be allowed or may also strike out the interest if the court thinks the interest to exorbitant or unjust.
So, if you want you impose an interest to the borrower, what is the maximum percentage that you should impose?
Well, we would advise for the interest not to be more than 5%. In the case of Menta Construction above, the interest demanded by the lender was 8.8% per annum. However, the court only granted 5% interest to imposed to the lender.
How a Friendly Loan Agreement Should Look Like?
There is no specific requirement or format on how a friendly loan agreement should be drafted or look like. What important is the friendly loan agreement must be properly drafted so that the agreement can be properly executed in court in the event of default in the future.
Among other things that should be included in a friendly loan agreement are:
Details of the Lender and Borrower;
Amount of money loaned to the Borrower;
Method of repayment;
Period of the loan; and
Date of repayment(s).
It is, however, very important for you to consult a lawyer in drafting any type of loan agreement including a friendly loan agreement. An agreement must be properly and clearly drafted to avoid any unnecessary trouble in the future especially in recovering the money back from the borrower.
Default of Payment and When Should We Recover the Money?
In the event where the borrower fails to pay your money back, how long do you have to recover such money loaned to him?
Section 6 of the Limitations Act 1953 states that a person has 6 years to take a civil suit against another person from the date action occurred.
If the loan agreement stated the last date of payment, then the period of 6 years shall start from there.
However, if the agreement did not stipulate the date of payment to be made, then the period shall start from the date of the agreement.
If you failed to take action within the 6 years, you basically have waived your right to recover the money!
Learn from our Experience
We have been encountering a lot of cases where the lenders are having difficulties in recovering their money back from their borrowers due to the loan agreements were badly drafted.
Many of these badly drafted loan agreements were drafted by the lenders themselves or they were asking someone they know who has no legal experience to draft their loan agreements. This may seem as a wise act in saving cost (trying to avoid cost of hiring a lawyer to draft the agreement), but eventually, many lenders will have to incur more cost when the agreement they drafted were unable to protect their own interest.
In one of our cases, where a lender let a borrower drafted the loan agreement. The borrower, being someone who might have little legal knowledge, has deceived the lender by manipulating the content of the agreement. Promising the lender all impossible things in the agreement including to offer a percentage of shares in a company, that was not even owned by the borrower. In the end, the loan agreement drafted by the borrower was almost impossible to be executed.
It was very fortunate enough that we managed to convince the court that the loan agreement drafted by the borrower was still a legitimate and lawful agreement. Despite certain issues, we managed to get the order from the court for the borrower to pay the actual amount of money loaned to him and also certain 'interest' that the borrower have promised to pay to the lender.
* This article serves as a general information only, and shall not in any way be treated as a legal advice. If you require any legal advice or further information, please contact us.
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