Moneylender – Illegality
Facts
A director (“Director”) of a property development company (“Company”) turned to a licensed moneylender (“Lender”) to finance a residency project.
Two loans were signed in 2018 – RM2M + RM1.5M = RM3.5M. But instead of the correct “secured loan” form (Schedule K), the parties mistakenly used the “unsecured loan” form (Schedule J), and interest was charged at 18% (for unsecured) instead of 12% (for secured).
📉 Out of RM3.42M disbursed (after deducting RM76,500 “transaction costs”), only RM40,000 was ever repaid. By 2019, the Company was wound up. The Lender then sued the Director for the unpaid principal of RM3.38M (“Unpaid Principal”).
High Court’s decision
The Judge dismissed the claim on the grounds that:
❌ The moneylending agreements and transactions were illegal due to non-compliance with the Moneylender Act 1951 (“MLA”).
❌ Therefore, restitution under s.66 and 71 of the Contracts Act 1950 (“CA”) is not available.
Court of Appeal’s decision
Two issues were raised before the Court of Appeal for determination, namely:
(i) whether the moneylending agreements, which are void and unenforceable under the MLA, are also illegal; and
(ii) whether the appellant is entitled to recover restitution of the Unpaid Principal.
The Court of Appeal allowed the appeal and held as follows:
✅ “Void” ≠ “Illegal.” While all illegal agreements are void, not all void agreements are illegal.
✅ The Lender was a licensed moneylender – not an ‘ah long’ in disguise.
✅ The loans weren’t immoral, fraudulent, or against public policy – they were transparently for settling debts with the main contractor.
✅ Using the wrong form + charging the wrong rate makes the contracts void & unenforceable, but not illegal.
✅ Section 66 Contracts Act kicks in: if you’ve received money under a void agreement, you must restore it.
📌 Outcome: The Court of Appeal ordered the Director to repay RM3,383,500.00 + 5% interest until full settlement. Costs of RM50,000 awarded to the Lender.
Key points
📜 A loan agreement may be void under the MLA 1951 for technical missteps.
🚫 But unless it’s truly illegal (like unlicensed moneylending or sham contracts), restitution under s.66 CA 1950 is still available.
⚖️ Fairness demands borrowers cannot keep millions received under a void contract.
👀 Licensed lenders get protection through restitution even if paperwork isn’t perfect – but borrowers can’t use “technical voidness” as a free pass to avoid repayment.