Can calculation of interest in a judgment be on a compounding interest basis?
SECTION 11 OF THE CIVIL LAW ACT 1956
Section 11 of the Civil Law Act 1956 is frequently relied upon in disputes concerning the award of interest. Section 11 is merely an enabling provision empowering the court to award interest for the period between the date the cause of action arose and the date of judgment. Importantly, the proviso to Section 11 states that it does not authorize interest upon interest under Section 11.
Further, the award of interest in a judgment also stems from Section 25(2) of the Court of Judicature Act 1964, read together with paragraph 7 of its Schedule and Order 42 rule 12 of the Rules of the High Court 1980. All are silent in terms of how calculation of interest is to be done, be it on a simple interest basis or on a compounding interest basis. However, case law tells us that calculation may be on a compounding interest basis.
"MONTHLY REST" OR “DAILY REST” IN A JUDGMENT SERVES AS THE LEGAL MECHANISM FOR "INTEREST UPON INTEREST"
The term “monthly rest” or “daily rest” in a judgment serves as the legal mechanism for “interest upon interest”. This means, when the Judgement is recorded as “calculation of interest at daily rest upon the judgment sum”, the judgment creditor can calculate the outstanding due on compounding interest basis. In the High Court case of Re Woo Yoke San @ Woo Yoke Sam; ex p OCBC Bank (M) Bhd [2006] 5 MLJ 638, it was held that the word ‘daily rest’ is a valid and enforceable measure for calculating the interest on compounding interest:
“[30] The terms of the said judgment clearly allow the JC to claim for compound interest, as ‘monthly rest’ is a banking term for compound interest. His Lordship Justice Chang Min Tat FJ in the Federal Court case of Malayan Banking Bhd v Foo See Moi [1981] 2 MLJ 17 explained the term ‘monthly rest’ as follows:
“… the practice of bankers in debiting interest to an overdrawn current account periodically and thereby increasing the capital sum, which is the effect of the provision for periodical ‘rests’.”
In contrast, the High Court case of Ghazali Bin Hj Ibrahim V Cimb Bank Bhd [2012] 9 MLJ 768 establishes that if the judgment is silent on or does not contain the word ‘rest’, then the mode of calculation allowed is simple interest only:
“ [13] A reading of the terms of the judgment dated 24 October 2008 clearly shows that the judgment creditor was only entitled to charge interest on the principal sums namely:
(a) ‘Di bawah Kemudahan Jaminan Bank’ at the rate of 3.5%pa above the judgment creditor’s base lending rate of 6%pa; and
(b) ‘Di bawah Kemudahan Pendahuluan Pinjaman Jangka Pendek’ at the rate of 2%pa above the judgment creditor’s base lending rate of 6% per annum (with additional interest at the rate of 1%pa after 1 December 2005 till settlement)
On a flat or simple interest basis and not on a compounded interest basis.This is so as the interest payable is to be calculated on a yearly basis with no daily or monthly rests stipulated in the judgment.
“ [14] …A perusal of the details of the calculations set out in the second bankruptcy notice shows that the interest calculated by the judgment creditor was on a compounded interest basis, which is not provided for in the judgment.”
WHEN DOCUMENTATION ALLOW COMPUTATION OF INTEREST ON COMPOUNDING BASIS
The other crucial point is that there must be documentation allowing computation of interest on compounding basis between parties. This will allow a judgment creditor to legally claim for interest on a compounding basis. This is supported by principles established in the case Kok Swee Chin and Yap Yew Cheong [2004] 6 MLJ 276 where the court held that since the loan agreement stipulated the monthly rest interest, the parties were “contractually bound” to those terms.
“[18] With regard to the issue of whether the plaintiff is contractually bound to pay the defendants interest at the rate of 14%pa and default interest at the rate of 18%pa I am of the view that these payments are as agreed by the plaintiff and defendants pursuant to the Loan Agreement. The defendant is entitled to charge default interest at 18%pa as stipulated in cl 5(c) of the Loan Agreement Cum Assignment dated 9 May 1984 between plaintiff and defendant. The case of Terengganu State Economic Development Corporation v Nadefinco Ltd 1 MLJ 365 is the authority whereby the Federal Court had ruled that “if interest is agreed to be of yearly or monthly rests, then interest is chargeable on the outstanding sum to be computed on compound interest basis.”
CONCLUSION
Whether interest can be calculated on a compounding basis depends on a careful interplay between the terms of the judgment, statutory authority and contractual provisions. In practice, careful drafting of the remedies seeked in the statement of claim and the judgment is essential to avoid ambiguity and to protect the rights of both creditors and debtors.
Article By
FARAH NISYA
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