A friendly loan is a loan between two persons based on trust and it needs to be repaid. The law recognizes it as being a valid contract, thus enforceable under the law.
In practice, it is not uncommon to encounter such actual facts:-
– A gave a loan to B upon the request of B.
– B then agreed to repay A within a certain period of time. As security, B may give personal post-dated cheques to A.
– However, B then failed to repay or the post-dated cheques were dishonored when presented for payment by A.
In this article, we share with you 3 legal tips to protect yourself so that yours friendly relationship with the borrower will not turn sour in the event of default despite the saying that a friend in need is a friend indeed!
Have proper documentation drawn up
It is pertinent to have the basic terms of a friendly loan set out in a document or an agreement at least, even though it might make your friend (if that the case) feel uncomfortable. But, this is necessary to safeguard your own right in case of need.
As seen in the principal case of Tan Aik Teck v Tang Soon Chye  6 MLJ 97, it was decided by the Court of Appeal, that a friendly loan is a loan between two persons based on trust. However, there should be an agreement such as an I.O.U. or security pledged to repayment between the two persons.
Justice Mohamad Ariff, as he then was, in the case of Kam Seng Realty Sdn Bhd v Dato Tai Fatt Yew & Anor  7 MLJ 825 did mention that the court needs credible evidence as well as necessary documentary support to prove the existence of friendly loan between parties.
Do not charge exorbitant and excessive interest
As a general rule, the Court prefer the stance that no interest will be allowed to be charged on a friendly loan in order to ensure that no lender takes advantage of a borrower in need and capitalize of the desperation of the borrower.
Notwithstanding that, a lender can still charge interest but must prove that he or she is not profiting like what money-lending business would; and should not wait until the interest is compounded into a hefty sum before initiating an action in Court.
Otherwise, the Court may strike down such interest element in a friendly loan transaction if the interest is exorbitant, excessive and unconscionable. This principle was held in the High Court case of Menta Construction Sdn Bhd v SPM Property & Management Sdn Bhd & Anor  MLJU 526.
Do have a fixed period for repayment
This is for the purpose of expediting the recovery process and increase the lender’s chance of getting back the money should the borrower defaulted in repayment. This is because in the event of the borrower’s default after such fixed period for repayment, the lender will then have 6 years’ limitation period to pursue the debt. It must be aware that once limitation period had expired, the lender will be time-barred or prohibited from initiating any legal action against the borrower.
However, in the event that there is no fixed period for repayment, the limitation period will be 6 years from the date of the loan given by the lender, as held in the case of Kam Seng Realty Sdn Bhd v Dato Tai Fatt Yew & Anor  7 MLJ 825 mentioned earlier.
A fixed period for repayment is no doubt best substantiated by a friendly loan agreement. It forms a clear proof for the purpose of application for summary judgment by the lender without having to prove the case at a lengthy trial, thus saving the time and cost of legal proceedings.
About the Author:
This article is written by Chia Swee Yik, Partner of this Firm (assisted by our paralegal, Ooi Zhuang Hong) who has provided practical advice on debt recovery.
Feel free to contact us using the form below if you have any queries.