“Friendly Loan”: Is it Legal and Recognized by Law?

Need to seek legal advice regarding friendly loan?

What is a “friendly loan”?

A “friendly loan”, as noted by the court1, is a loan:

  1. That is opposed to the normal borrowing from a moneylender or financial institution;
  2. Between two persons based on trust (it might not even have a written agreement between a lender and borrower) – in order to secure the repayment of the loan, there may be an agreement such as an IOU or security pledged to repayment;
  3. That can be realized between two complete strangers i.e. the loan does not need to be between friends;
  4. That is to be repaid within a specified time and with no interests charged to the borrower.

Is it legal i.e. recognized by law?

Yes. There are ample cases to support this notion. For example:

  1. In Tan Aik Teck v Tang Soon Chye2, Soon Chye contended that he agreed to grant a friendly loan to Aik Teck. Aik Teck contended otherwise and stated that the monies were received for a totally different purpose and that since they were not friends, the money received could not be perceived to be a friendly loan. The matter was fought all the way up to the Court of Appeal.
    The court sided with Soon Chye and noted that a friendly loan need not be between friends. As long as a lender can prove that the money was given to a borrower on a loan basis (and is not caught under the moneylending principles, which we will discuss in another article), the court will construe the loan as a friendly loan unless the borrower can prove that the money given to him by the lender was not a friendly loan.
  2. In Rostam Bin Abbas v Ali Dad Bin Fazal Elahi3, Rostam sought to recover a sum of monies from Ali for a failure to repay a friendly loan given at Ali’s request. There was actually a signed agreement between the two of them, which Rostam fails to adduce as evidence in court (he could only produce an unsigned and undated copy of the agreement). Ali latched on this and contended that Rostam’s claim was illegal and unenforceable because it was an unlicensed moneylending transaction and that the court should invoke an adverse inference against Rostam for his failure to produce the signed and dated agreement between them.
    The court disagreed, noted that even though an agreement is a material document upon which the case is founded upon, it is not fatal to the lender’s case as long as he is able to convince the court, on the balance of probabilities, that both he and the borrower has entered into an agreement (written or otherwise), the court will accept the lender’s claim unless proven otherwise by the borrower.

A simple guide when a person decides to give out a friendly loan

  1. Prepare a written agreement
    As noted in both cases above, the absence of a written agreement will not stifle a lender’s claim. However, the prudent thing to do (as in with every other agreement) is to prepare a written agreement outlining the terms of the friendly loan clearly4 – this would undoubtedly help with the lender’s claim in court in the event a dispute arises as to whether monies were given out on a friendly loan basis vice versa5.
  2. Keep a record of everything related to the agreement
    As with all written agreements, it is also prudent to keep a record of anything and everything that is related to the agreement, such as transactions record, conversations, additional supplementary documents, etc. As noted above, it would help with the claim in the event there is a dispute.
  3. Ensure that the interest imposed is not excessive
    As noted at the beginning of this article, a friendly loan does not usually come with an interest. In practice, the court usually allows the lender to charge a certain amount of interest against the borrower, so as long as the interest rate is reasonable i.e. not excessive/ exorbitant and unconscionable6.

Need to seek legal advice regarding friendly loan?

1. Tan Aik Teck v Tang Soon Chye [2007] 6 MLJ 97.
2. [2007] 6 MLJ 97.
3. [2014] 1 MLJevi 205.
4. Kam Seng Realty Sdn Bhd v Dato Tai Fatt Yew & Anor [2012] 7 MLJ 825.
5. P’ng Hun Sun v Dato’Yip Yee Foo [2013] 6 MLJ 523.
6. Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd