In a case presided over by Chief Justice Mark Chetcuti, Mr. Justice Christian Falzon Scerri and Madam Justice Josette Demicoli, decided on the 11th of April 2024, the Court of Appeal confirmed a judgment of the First Hall Civil Court which held that a lender could not recover amounts loaned to his borrower as the lending activity was considered to be illicit.
The case concerned a lender who sued his borrower for settlement of loans in the amount of €123,000 which remained unpaid. The lender did not have a license to carry out lending activity under the Financial Institutions Act (Chapter 376 of the Laws of Malta). The emanating issue was whether the lender’s activity was considered to be regulated by the Financial Institutions Act or otherwise.
In its considerations, the Court of Appeal recognised that it is prohibited under the Financial Institutions Act for a financial institution to lend money regularly or habitually, as a business activity, without a license issued by the competent authority. The Court of Appeal confirmed that a “financial institution” in terms of the Financial Institutions Act includes both a natural and legal person. However, that a natural or legal person lends money does not mean that its activity automatically falls within the prerogative of the Financial Institutions Act. In fact, the lender contended that he was not to be considered a financial institution in terms of the Act as he did not lend money “regularly or habitually” as a business activity. The lender argued that the loan which was granted was solely to the borrower and no evidence was brought proving that he had granted any other loans to persons other than the borrower in question. The Court rejected the lender’s argument.
The Court held that the terms “regularly” and “habitually” are synonyms and indicate persistent and constant activity which is repeated a number of times. The Court held that for a loan to be considered a business activity, there is no need for a lender to grant loans to more than one person. Whilst having a number of borrowers is an indication of one’s business activity, a lender who “regularly or habitually” grants loans to the same person should also be considered to be carrying out business activity in terms of the Act. In the case at hand, the Court noted that the loans were granted on a number of occasions over a span of four years and the loan amount was considerably high.
The Court further held that for a person to be a financial institution in terms of the Act, it would need to be shown that the loan was not granted as a favour between persons who are friends or family for personal reasons which a borrower may come to face, but as a business or investment. In the case at hand, the Court noted that there was no familiarity between the lender and the borrower which would explain the considerable amount loaned. On the contrary, the borrower had asked to borrow money from the lender on the first occasion they met and intentionally met up for such reason.
The Court concluded that a person who lends money regularly and habitually to the same person for reasons that are not derived from personal ties, friendship or solidarity, cannot lend that money without a license issued under the Financial Institutions Act. With reference to Articles 987 and 990 of the Civil Code (Chapter 16 of the Laws of Malta), the Court therefore held that any loans granted by such person without a license are based on an illicit cause and any obligation assumed on the basis of an illicit cause is without effect. By consequence, pursuant to Article 991 of the Civil Code, it held that the lender could not base his judicial action on an illegal act and therefore, could not claim back the amounts which he had loaned the borrower.