Amidst the COVID-19 pandemic, one might need to take a loan, or even be approached for a loan. Before any loan transactions are entered into, do keep in mind that such loans, if granted by an unlicensed moneylender, are unenforceable.
According to s 14(2) of the Moneylenders Act (MLA):
Where any contract for a loan has been granted by an unlicensed moneylender, or any guarantee or security has been given for such a loan
- The contract for the loan, and the guarantee or security, as the case may be, shall be unenforceable; and
- Any money paid by or on behalf of the unlicensed moneylender under the contract for the loan shall not be recoverable in any court of law.
So, what is an “unlicensed moneylender”? In the recent case of GA Machinery Pte Ltd and another v Yue Xiang Pte Ltd and others (GA Machinery), the Court established a process for identifying unlicensed moneylenders.
Section 2 of the MLA defines a “moneylender” as a person who, whether as a principal or agent, carries on or holds himself out in any way as carrying on the business of moneylending, even if he carries on any other business. However, this definition does not include excluded moneylenders. Therefore, if you think you have entered into a loan with an unlicensed moneylender, and you wish to prevent your lender from enforcing the loan repayment, you will have to prove that:
- The lender is not an “excluded moneylender”, such as people who lend money solely to corporations; and
- The lender is in the business of moneylending.
“Excluded Moneylender”
In determining whether the lender is an “excluded moneylender”, what the transaction has been called is irrelevant. Instead, the substance of the transaction is what the court shall examine. As the Court in GA Machinery has opined, the MLA was intended by Parliament to protect vulnerable individuals who, being unable to borrow money from banks or financial institutions, resorted to unscrupulous unlicensed moneylenders who prey on such vulnerable individuals.
Though the MLA typically would not apply to loans between experienced business persons or entities, the MLA shall be applicable when parties intentionally structure the loan transaction in a way to evade the application of the MLA. For example, when the lender insists on making
the loan to the borrower’s company, and the borrower (being the sole director and shareholder) treats his company as an extension of himself, as was the case in GA Machinery.
“In the business of moneylending”
There are two tests to determine whether a person is in the business of moneylending.
- Whether there is a “certain degree of system and continuity” in the money lending transactions;
- Where there is no system and continuity, whether the alleged moneylender is one who is “willing to lend to all”.
Certain degree of system and continuity
A certain degree of system and continuity might be found if many loans were made, with fixed interest amounts or an organised systematic method of distributing the loans.
Alleged money lender willing to lend to all
However, even if a certain degree of system and continuity is lacking, the lender can still be in the business of money lending if it can be shown that they are willing to lend to all sorts of people.
For example, making a loan to someone you hardly know, when you are aware that they are desperate for money, and have no choice but to agree to your exorbitant interest rates.
Do bear in mind that if you intend to make a loan to someone, even if they are a company, it could be possible that such a loan will be classified as a personal loan in substance, and rendered unenforceable.
Please note that this article does not constitute express or implied legal advice, whether in whole or in part. For your Free First Consultation or if you simply require more information, email us at walter@silvesterlegal.com.
