Friendly loans between companies offer a valuable avenue for financial support. When granting or borrowing a friendly loan, companies must ensure compliance with their internal governance structures and ensure such an action is within the boundaries of legal landscape. This article explores the essential considerations and insights for granting or borrowing friendly loans in Malaysia.
- Compliance with Internal Governance Structure:
Obtaining board approval is a crucial step before initiating any loan transaction, as the board of directors typically holds the authority to approve such decisions. In addition to a board’s approval, it is also important to examine the company’s constitution, memorandum and articles of association as well as shareholders’ agreement to identify any specific requirement such as obtaining shareholders’ consent for loan approval. These internal governance structures serve to safeguard the interests of all stakeholders, including shareholders, by providing a mechanism for checks and balances.
- Crafting A Comprehensive Loan Agreement:
Besides complying the internal approval processes, a well-drafted loan agreement is important to establish clarity and protect the rights of both lenders and borrowers. This agreement typically covers important aspects including the loan amount, interest rates, repayment terms and any additional terms and conditions. In certain cases, companies may request for collateral security as part of the friendly loan arrangement including property, shares, or other valuable possessions that the borrower offers as security against the loan. By documenting these terms in the loan agreement, both lenders and borrowers gain a comprehensive understanding of their rights and responsibilities as well as the consequences of default.
- Understanding the Moneylenders Act 1951:
Companies that provide loans to a non-related company often question whether granting a friendly loan, particularly when interest is charged, infringes the Moneylenders Act 1951 (“Act”).
If companies lend money as part of their regular business activities and meet the definition of a moneylender under the Act, they must obtain a license and comply with the Act. According to Section 2 of the Act, “moneylender” means any person who carries on or advertises or announces himself or holds himself out in any way as carrying on the business of moneylending, whether or not he carries on any other business. Such broad definition would include even those one-off loan transaction with genuine intention to help out family members, friends or business partners, and our courts have expressed their view that surely, this cannot be the intention of the Parliament. Operating a moneylending business without a license is a serious offence, carrying fines from RM 250,000 up to RM 1 million, and potential imprisonment for up to 5 years. However, if companies lend money on a one-off basis, they are likely to fall outside the purview of the Act. The courts have recognised the validity of friendly loan transaction and recognised that interest can be charged in such transaction if it is justifiable and reasonable.
Having said that, it is essential for companies lending money to be cautious. In legal proceedings against these companies, a single loan with interest can raise a presumption that such companies are conducting moneylending activities. The burden of proof is shifted to the lender to prove against such presumption, in order to clear his name from being deemed as a moneylender under the definition of the Act. This presumption can be rebuttable by examining the specific facts and circumstances of each case. Factors such as the companies’ actual business activities and the frequency of lending money play a significant role in rebutting the presumption and demonstrating the non-moneylending nature of the transaction.
Conclusion:
By understanding the legal landscape, adhering to internal governance structures, and drafting well-documented loan agreement, companies can engage in friendly loans that comply with the law, protect the interests of all parties involved, and foster trust in their financial transactions.
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About the author:
This article was written by Wong Shen Ming, Corporate Associate – law firm in Kuala Lumpur, Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.
