Recognition of Peer-to-Peer (P2P) Financing By The Court
11 August 2021
Key Contacts:
In the case of Pyo Travel (MY) Sdn Bhd & Anor v Modalku Ventures Sdn Bhd [2020] MLJU 575, the Malaysian High Court affirmed the Sessions Court’s decisions in granting summary judgment in favour of Modalku Ventures Sdn Bhd (‘the Plaintiff’). The Plaintiff was represented by Messrs Skrine.
In the two appeals heard together, Justice Darryl Goon (now Court of Appeal Judge) found that there were no issues to be tried in both the Plaintiff’s suits against the borrowers and their guarantors (‘the Defendants’) for default of financing. The decision is significant as it is the first reported case whereby the Court analysed the legality of peer-to-peer financing, a growing Fintech business model which is gaining popularity in Malaysia.
Key points
- Peer-to-Peer financing is outside the ambit of the Moneylenders Act 1951.
- Modalku Ventures is legally licensed by the Securities Commissions to provide financial facilities.
- The interests charged by Modalku Ventures of between 12.5% to 15% per annum and late payment interest of 0.10% were not illegal, unconscionable nor exorbitant.
- Modalku Ventures has locus standi, or the capacity to bring an action to court, against the borrowers, despite Modalku Ventures acting as ‘Agents’ between named ‘Investors’ and the borrower.
Background
The Plaintiff acting as an ‘Agent’ of a list of investors (‘Investors’) granted financial facilities to the Defendants through its electronic platform. The facilities were secured by an Investment Note Facility Agreement (‘INFA’) executed by the Plaintiff, the Defendants and the Plaintiff’s Investors. The Plaintiff is a Recognized Market Operator registered with the Securities Commission and the electronic platform is governed by the Capital Markets and Services Act 2007.
The Defendants defaulted in payments. The Plaintiff commenced two separate suits at the Sessions Court for RM648,311.26 against the Defendants in the first suit and RM595,221.57 against the Defendants in the second suit. The Sessions Court granted Summary Judgment and the Defendants appealed to the High Court. As the individual guarantors, issues raised and counsel for parties in both suits were the same, the High Court heard both appeals together.
Issues
The issues to be tried raised by the Defendants before the High Court were inter alia, as follows:
- The Plaintiff and the Plaintiff’s Investors were not legally licensed to provide the financing facilities and therefore the facilities provided and the contracts entered into were illegal;
- The interests charged were illegal, unconscionable, and exorbitant;
- No consideration was provided between the Plaintiff and the 2nd Defendant in respect of both the financial facilities provided, and if they were, they were past consideration; and
- The Plaintiff did not have locus standi to initiate legal proceedings for recovery of the moneys in respect of the financial facilities provided.
Decision of the High Court
The High Court held, inter alia, the following:
- The Plaintiff was, and is, legally licensed to provide financing facilities
The Plaintiff is legally licensed to provide financial facilities under the purview of the Capital Market Services Act 2007. As such, the Plaintiff’s financing is exempted from the provisions of the Money Lenders Act 1951 (“MA 1951”), as per Section 2A(1) and Paragraph 12 (now Paragraph 10) of the First Schedule of the MA 1951.
Moreover, the High Court accepted that the Plaintiff was registered with the Securities Commission as a Recognised Market Operator as per section 34 of the CMSA 2007, and therefore legally licensed to provide financing facilities. It follows that the facilities provided and the contracts entered into were at all material times legal.
- The interests charged by the Plaintiff were not illegal, unconscionable nor exorbitant
Darryl Goon J (as he then was) observed that the Defendants have not denied agreeing to the terms of the INFA regarding the interests rate. If at all, the rates of interest chargeable may be alleged to be a penalty under section 75 of the Contracts Act 1950 whereby the Plaintiff can only recover reasonable compensation for the breach of the contract not exceeding the penalty stipulated. However, following the Federal Court decision of Cubic Electronics Sdn Bhd (In Liquidation) v Mars Telecommunications Sdn Bhd [2019] 2 CLJ 723, the burden would be on the Defendants to demonstrate that the interests charged were unreasonable which, in the two appeals, was not done.
- The Plaintiff had locus standi to initiate legal proceedings despite the fact that the Plaintiff acted as ‘Agents’ between the Plaintiff’s Investors and the Defendants
The High Court found that the Plaintiff had
locus standi to initiate legal proceedings against the Defendants, on the basis that the Plaintiff was a party to the INFA in question.
Being a party and privy to the agreements, the Plaintiff had the right to sue on it as may any party to a contract seeking to enforce it. In addition, a clause within the INFA allowed the Plaintiff to commence legal proceedings against the Defendants as an Agent for the Investors for default of repayments.
Therefore, though it was the Plaintiff’s investors and not the Plaintiff itself who had advanced monies to the Defendants via the Plaintiff’s electronic platform, the Plaintiff still had
locus standi to pursue legal proceedings against the Defendants.
Comment
This is a significant decision as it is the first reported decision whereby the terms and conditions governing peer-to-peer lending have been tested in court. It is also a much welcomed decision as peer-to-peer lending gains popularity amongst investors and borrowers in Malaysia as a new way of financing through electronic platform.
If you have any queries, please contact our partner, Ms. Claudia Cheah Pek Yee (cpy@skrine.com), senior associate, Ms Aufa Radzi (aufa.radzi@skrine.com) and associate Mr. Kwang Qi Xiang (qi.xiang@skrine.com).