What happens to the money received by the borrower pursuant to a moneylending scheme?
- Gavin Jayapal
- Mar 25
- 13 min read
What happens to the money received by the borrower pursuant to a moneylending scheme?
To answer this question, one must separate moneylending into 2 categories: .
a. Legal moneylending (generally, licensed moneylending); and
b. Illegal moneylending (colloquially, Ah Long).
ILLEGAL MONEYLENDING
Illegal moneylending is the bane of society. I have written about this rather extensively. Please look at:
a. MA Joseph Capital (CA);
b. Triple Zest (FC).
You may also look at “Introducer’s Fees” and the need for there to be a link between the illegality and the contract (Part 1, Part 2 and Part 3).
When one is involved in illegal moneylending, one can expect short shrift from the Court. The Court will never lend its aid to an illegal moneylender and if a finding is made, the money will stay with the borrower.
An illustration of this may be seen in JR Joint Resources v Nor Sharkhan [2021] MLJU 1652. In what is (most probably) an aptly-named case, the HC held that various agreements were null and void for being contrary to public policy.
The HC held that shares that had been unlawfully transferred on, inter alia, duress and coercion. The HC observed as follows:
[221] In cases where the plaintiff enters into the illegal transaction by innocent mistake or where the plaintiff was induced to enter into the illegal transaction by fraud, undue influence or duress so as to render the plaintiff an innocent party, the law may set about reversing the consequences, financial or proprietary, of the transaction so far as the parties have given effect to them. However, if a plaintiff has knowingly paid over money or handed over a property in pursuance of an illegal contract, the Court will simply decline to have anything to do with it. The first approach seeks to regulate the consequences of the illegal transaction, so as to put the parties so far as possible in the position they would have been in had the transaction never occurred. Public policy favours granting reliefs to the innocent plaintiff as they were not a party to the wrongdoing. The second simply withholds all legal remedies and generally leaves the loss to lie where it falls [See: Singma Sawmill Co Sdn Bhd v Asian Holdings (Industrialised Buildings) Sdn Bhd [1980] 1 MLJ 21 (FC)].
[222] According to learned counsel for the Defendant, it is the second approach that applies to this case. The loss must lie where it falls.
[223] Again, with respect, this contention however is based on the assumption that there is no evidence of undue influence, coercion or duress so as to render the Plaintiffs an innocent party. This is not the case based on my finding of the facts.
[224] In any case the new approach to the doctrine of illegality is that stated by the UK Supreme Court in Patel v. Mirza [2016] AC 467; [2016] UKSC 42 where Lord Toulson laid down the three considerations to be applied when allowing a party to a contract tainted by illegality to recover monies paid under the law of unjust enrichment. The trio of considerations referred to is set out at para [101] in the judgment of Lord Toulson:
‘I would say that one cannot judge whether allowing a claim which is in some way tainted by illegality would be contrary to the public interest, because it would be harmful to the integrity of the legal system, without a) considering the underlying purpose of the prohibition which has been transgressed, b) considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and c) keeping in mind the possibility of overkill unless the law is applied with a due sense of proportionality. We are, after all, in the area of public policy. That trio of necessary considerations can be found in the case law.’
[225] This trio of considerations has been accepted by the Federal Court as applicable in Malaysia in Liputan Simfoni Sdn Bhd v Pembangunan Orkid Desa Sdn Bhd [2019] 4 MLJ 141 at [115], [118], FC.
An illegal moneylender will never get any recompense/assistance from the Court. The borrower will enjoy the monies received and the principal sum will not be recoverable.
Grappling with trust obligations
If, however, there is a contrast between trust obligations and illegality, one would best look to Lau Kok Loon v Low Yee Meng [2023] MLJU 1366. Although not specifically considering moneylending, the HC tussled with a thorny legal issue. The facts read as follows:
a. P owned shares in a company;
b. P was at risk of bankruptcy;
c. P transferred his shares in the company to D (his nephew);
d. Once the bankruptcy had been annulled (an important distinction, as opposed to discharge of bankruptcy), P sought to have the shares transferred back to him;
e. P sued for a return of the shares.
On the evidence, it was discovered that the transfer of shares did not affect the creditors. The annulment of bankruptcy was also important. The HC held:
[182] In this case, as contended by the Plaintiff, the evidence suggests that the non-disclosure of the Plaintiffs shares in Semenyih Jaya had no bearing on AMMB’s decision to settle the outstanding sums for a lesser amount. This, coupled with the effect of an annulment as enunciated by the Federal Court in Sardar Mohd Roshan Khan v. Perwira Affin Bank Bhd [2010] 2 CLJ 661 (i.e that the annulment meant that the adjudicating order and receiving order would be treated as if they were never made) meant that the purpose for which the provisions stipulated in Section 109 (1) of the Insolvency Act) and in Section 422 of the Penal Code aimed to prohibit, would not be thumbed or thwarted if the Plaintiff’s claim for the shares based on the resulting trust is allowed by this Court.
[185] Stripped of all its legalese, the doctrine of trust is rooted very much in the concept of honour and expectation held by one person that another will behave in a right way with regard to a specific matter. Such honour and expectation are all the stronger among kinship and close friends. There is a compelling public policy to ensure that persons who are entrusted to hold property for the benefit of others are not encouraged and permitted to behave inappropriately resulting in them being unjustly enriched at the expense of another in the process. Societies, especially Asian societies, placed a huge premium on trust and honour and to encourage a breakdown in such values can lead to a disruption of harmony among immediate family and relatives.
[186] The proportionality principle also favours the Court granting the Plaintiff’s claims against the Defendant. There is no evidence that the Defendant had paid any monies towards the Semenyih Jaya shares that are registered in his name. On the other hand, the evidence shows that it was the Plaintiff who had contributed to the purchase consideration for the Semenyih Land which now forms the sole and substantial asset of Semenyih Jaya. To have the Defendant retaining the Plaintiff’s shares in Semenyih Jaya at the Plaintiff’s expense is to confer on the Defendant a wholly disproportionate windfall.
The Court allowed P’s claim. I am of the opinion that the annulment of the bankruptcy played a big part in the HC reaching its decision.
What about legal (licensed) moneylending?
LEGAL (LICENSED) MONEYLENDING
To discuss and consider licensed moneylending, one must look at what the moneylender sought to achieve. 2 cases are considered.
In Golden Wheel Credit v Dato Siah Teong Din [2026] 1 MLJ 468, P was a legal moneylender. It advanced monies to D but used the wrong forms.
The CA drew a careful distinction between void agreements and illegal agreements. In ordering restitution of the principal sums pursuant to S. 66 CA 1950, Faizah JCA outlined as follows:
[27] The learned judge held that the moneylending agreements are illegal due to non-compliance of the MLA 1951, although the Act itself does not expressly state so. Sections 10P, 16, and 17A of the MLA 1951 expressly state that non-compliance of the said sections results in the moneylending agreement being void, without effect, and unenforceable, and renders the licensee liable for an offence. However, these provisions do not state that such non-compliance renders the moneylending agreements or transactions illegal.
[32] In this present case, the object of the loans under the moneylending agreements was not forbidden by law or fraudulent. Neither was it immoral or against public policy. The object of the loans was for the payment of the sums owed by Instant Bonus to Econpile, who was its main contractor, for the Robson Hill Residency project.
[33] As for the consideration of the moneylending agreements ie the interest charged, although the rate of interest charged for the loans was in error, the said rate was not excessive or extortionate — it was at 18%pa: the limit for unsecured loans under the MLA 1951. The error in the interest rate charged makes the moneylending agreement void, of no effect and unenforceable pursuant to s 17A(3) of the MLA 1951 and the appellant guilty of an offence under the Act. It does not make the agreements illegal.
The CA went on to hold that whilst interest was not recoverable, the principal sums would be recoverable under S. 66 CA 1950:
[35] The moneylending agreements are void ab initio and unenforceable. Consequently, the appellant is not entitled to contractually enforce the said agreements for recovery of the unpaid principal. The issue that arises is whether the appellant may recover restitution of the unpaid principal.
[36] The High Court in Amanah Raya Capital held that where the moneylending agreement is void ab initio for the use of the wrong prescribed form, s 66 of the CA 1950 allows the plaintiff to restitution for the monies it loaned to the defendant in that case. This is consistent with illustration (a) of s 66 of the CA 1950.
[37] In this present case, the use of the wrong prescribed form, the charging of interest for an unsecured loan and the failure to give the respondent a stamped copy of the moneylending agreements, rendered the said agreements void ab initio and unenforceable. Based on Amanah Raya Capital, because the moneylending agreements are void ab initio for non-compliance with the MLA 1951, the person who had received advantage under the agreements is bound to compensate or provide restitution to the person from whom he received the advantage.
[38] Section 66 of the CA 1950 provides where an agreement is discovered to be void, any person who has received any advantage under the agreement is bound to restore it, or make compensation for it, to the person from whom he received it.
[58] In this present case, the moneylending agreements in question were transparently structured as agreements to lend money by a licensed moneylender, without any attempt to disguise their true nature. They were not hiding behind a false front.
[60] Accordingly, we conclude that, in view of these considerations, the application of proportionality to the matrix of facts supports granting the appellant a s 66 remedy. In this context, refusing a s 66 remedy would not constitute a proportionate response, particularly given that the moneylending agreements, though void, are not illegal.
[63] We order the respondent to pay the appellant the sum of RM3,383,500.
What if a licensed moneylender attempts to circumvent and abuse the process to make an unlawful gain?
This issue was determined by the HC in Finnex Capital v Pusat Dialisis Nur Kasih [2026] 7 MLJ 149. Here, Ong Chee Kwan J (presiding JCA) was tasked with determining whether a licensed moneylender had charged interest above the permitted rate. The HC was also tasked with determining whether the employment of an agent (specifically prohibited by S. 27A of the MLA) had been breached.
The HC observed that despite a purported “legal” agreement, a closer analysis of the facts demonstrated that there were 2 illegal oral agreements, wherein larger sums of interest were charged:
[28] In this regard, this court finds that the plaintiff had, notwithstanding the express terms of the loan agreement dated 6 May 2022, indeed contravened s 17A(1) of the MLA. This is because in truth, the loan agreement was governed by the terms of the first oral agreement and the second oral agreement and not under the loan agreement dated 6 May 2022.
[29] Firstly, there is the collection of the post-dated cheques of RM122,500 each for the months of May 2022 to November 2022. The said sum of RM122,500 is equals to 3.5% interest per month on the loan sum of RM3.5m which clearly exceeds the maximum 18%pa permitted in s 17A(1) of the MLA. In fact, it amounts to a whopping 42%pa.
[30] Secondly, there is a further collection of the post-dated cheques of RM70,000 each for the months of December 2022 to April 2023. This amounts to 2% per month which is equivalent to 24%pa, which again exceeds the maximum 18%pa permitted. PW1, during his testimony expressly acknowledged the imposition of the 2% per month interest rate:
[31] The plaintiff’s reliance on the terms of the loan agreement dated 6 May 2022 stipulating the interest as 18%pa is untenable given the fact that between the plaintiff and the defendant, they had regulated their relationship based on the first oral agreement and the second oral agreement instead of the terms set out in the loan agreement dated 6 May 2022. The explanation by PW1 that the payments made by the defendant from each of the post-dated cheques were utilised partly for the interest payment of 18%pa and partly for the principal loan sum is untenable and in fact against the weight of the evidence. This is because the defendant had issued a post-dated cheque for the final bullet payment of RM3.5m consistent with the terms of the first oral agreement and the second oral agreement. If indeed as testified by PW1, part of the payments under the earlier post-dated cheques were towards repayment of the capital loan sum, the post-dated cheque for the final bullet payment would not have been for the total loan sum of RM3.5m.
[36] Accordingly, to my mind, the defendant has established on the balance of probabilities that the monthly payments of RM122,500 and thereafter RM70,000 were indeed interest payments and basing on the aforesaid, the rate of interest charged by the plaintiff in respect of the loan sum of RM3.5m were at 42%pa and at 24%pa, respectively which contravened s 17A(1) of the MLA.
[42] Accordingly, it is the judgment of this court that the plaintiff’s ledger account was nothing more than a sham and for this reason, this court will not give any weight to the entries at all purporting to be a reflection of the arrangement between the plaintiff and the defendant based on the terms of the loan agreement dated 6 May 2022.
The Court also noted that one “Gallen Lee” had acted as agent for the moneylender:
[51] The aforesaid, to my mind, shows that Gallen Lee and or FG Capital was at all times acting as ‘agent or canvasser’ for the plaintiff and or at the very least had received directly or indirectly valuable consideration by way of commission or otherwise for introducing or undertaking to introduce to the plaintiff the defendant to borrow money.
[52] In fact, the plaintiff did not deny that Gallen Lee was its agent when the defendant had described him as such. This is clear from the WhatsApp message on 20 September 2023 at 12:46:26:
Md Nizam: Due to your agent mr Gallan we are lost quite lot of money ...
[53] Looking into all the facts above, this would clearly show that Gallen Lee had been canvassing the plaintiff’s business to borrowers who are looking for loan and this is in clear contravention of s 27A(1) of the MLA and therefore rendering the loan agreement, be it under the loan agreement dated 6 May 2022, the first oral agreement and or the second oral agreement to be void and unenforceable against the defendant.
[54] By reason of the aforesaid, it is the judgment of this court that the plaintiff’s claims against the defendant is dismissed.
The Court further expressed its disquiet (i.e., what the heck is the Bar Council doing?!) at the conduct of solicitors implicated in the transaction:
[62] Before concluding, this court feels compelled to express its disquiet over certain aspects of the manner in which the loan transaction was structured and presented. The documentation and the channelling of the monies from the solicitors’ firm to the plaintiff suggest more than a mere oversight — they give rise to the troubling inference that the solicitors acting for the plaintiff may have played an active role in crafting a scheme designed to obscure the true rate of interest and in so doing, to evade the clear provisions of the MLA.
[63] Whilst no conclusive finding is made in this regard and nor was this issue squarely before this court, the appearance of legal practitioners facilitating arrangements that border on regulatory evasion undermines both the letter and the spirit of the law. Officers of the court bear a professional and ethical duty not only to their client but to the administration of justice. Where legal advice is used as a shield to legitimise transactions that would otherwise fall afoul of statutory regulation, the integrity of the legal profession is called into question.
[64] It is hoped that this case serves as a reminder that the court will not hesitate to look behind the form of transaction to examine the substance and that any attempt, however sophisticated, to mask non-compliance will not be countenanced.
CONCLUSION
In short, if an arrangement is an illegal moneylending arrangement, one can never recover the monies lent. The only exception would be if duress or coercion had been exercised on an innocent borrower (in which case, the borrower may recover the assets “charged”, etc).
For legal moneylending, the Courts will not hesitate to look at the underlying transaction. Where there is a genuine error, the principal is recoverable. Where, however, the parties actively seek to deceive and mask an illegal interest rate, the Court will step-in and refuse relief.
These developments of law are very exciting. They work fantastically towards the aim of eradicating illegal moneylending transactions and strike at the heart of the undertaking. The decisions also work well towards promoting the public policy of discouraging the practice of usury.
GAVIN JAYAPAL
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