Interest In Interest? Application Of Interest Not Regulated Under The Moneylenders Act 1951: Summerhay Development Sdn Bhd v Ivory Ascent Sdn Bhd [08(f)-415-09/2022]

• Published date: 20 October 2022
• Subject Matter: Corporate/Commercial Law, Consumer Protection, Litigation, Mediation & Arbitration, Compliance, Corporate and Company Law, Contracts and Commercial Law, Consumer Credit, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
• Law Firm: Shearn Delamore & Co.
• Author: Datin Jeyanthini Kannaperan, Koo Yin Soon and Yvonne Chong Yun Xin

The Firm acted for a corporate licensed Moneylender in an appeal against the High Court decision in Summerhay Development Sdn Bhd v Ivory Ascent Sdn Bhd (2020 1 LNS 1491 and 2020 MLJU 1549) and was successful in overturning the High Court decision in J-02(NCvC)(A)-1095-08/2020. The Court of Appeal's decision was subsequently affirmed by the Federal Court and the borrower's motion for leave to appeal was dismissed by the Federal Court (08(f)-415-09/2021(J)).

Scope of dispute

The question of law revolved around the freedom to contract on interest calculation in an instance of a breach of a moneylending agreement under the under Moneylenders Act 1951 ("MLA"). By way of context, the moneylending agreement, or the Schedule K Agreement¹ is a strictly construed instrument regulated by the MLA such that any deviation can result in an unenforceable agreement (similar to Schedule H of Housing Development (Control and Licensing) Regulations 1989). Parliament's intention was always to create a "simple" fixed term contract on a fixed rate of interest between the moneylender and the borrower within the comprehension of the ordinary man on the street. The statutory contract therefore makes provision on all matters during the tenure of a loan (rate of interest, no compounding, etc).

However, since the MLA was enacted, moneylending agreements are now also deployed by sophisticated lending institutions (credit agencies and similar institutions) who service the need for quick capital by their corporate clients. In these instances, where Schedule K is silent as to the method on which interest is apportioned throughout the lifetime of the contract, such lending institutions, bound by Malaysian Private Entities Reporting Standard ("MPERS"), are required to recognise that interest can only be earned on an outstanding amount remaining (Section 23.29(a) and 11.16 of MPERS²). This means that a "straight line" application of interest cannot be deployed, and more sophisticated methods must be applied such as the Sum of Digits / Rule of 78 Method or more recently, Effective Interest Rate.

Straight-line Interest Calculation

This method attributes equal interest portions to every accounting period. In other words, the total interest sum is divided over the life of the lending by number of periods (be it months, quarters, years or otherwise). For example, where a loan of RM2,000,000.00 is to be paid over 60 months at a rate of 12% per annum, total interest of RM1,200,000.00 is applied...