The Labuan Companies (Amendment) Act 2022
20 April 2022
The Labuan Companies (Amendment) Act 2022
’) which amends the Labuan Companies Act 1990
’) was passed by the Dewan Rakyat (House of Representatives) and the Dewan Negara (Senate) of the Malaysian Parliament on 24 and 31 March 2022 respectively. The Amendment Act will come into operation after it has received Royal Assent and been gazetted.
This article highlights some of the significant amendments that will be made to the Principal Act when the Amendment Act comes into operation.
Prohibition on dealings with residents and in Ringgit Malaysia
The restrictions and notification requirements in subsections (4), (5) and (6) of section 7 of the Principal Act relating to dealings by a Labuan company with residents and in Ringgit Malaysia will be repealed as they are no longer applicable.
Electronic filing of documents
The Labuan Financial Services Authority (‘the Authority
’) may, in addition to a Labuan trust company, require any person whom the Authority approves, to subscribe for and file documents by electronic means.
Prohibition against bearer shares and warrants
A new section 46A will be introduced to prohibit a Labuan company (including a foreign Labuan company) from: (a) issuing a bearer share or bearer share warrants; (b) converting a share into a bearer share or bearer share warrants into share warrants; or (c) exchanging a share for a bearer share. Any purported issuance, conversion or exchange and any provision in a Labuan company’s memorandum or articles which purports to enable the company to issue, convert or exchange any of the bearer share, bearer share warrants, share or share warrants in contravention of the foregoing prohibitions is void.
Reduction of capital – enhanced penalty
In relation to a capital reduction by a Labuan company under section 53 of the Principal Act, the penalty that may be imposed against an officer of a Labuan company for wilfully concealing the name of a creditor entitled to object to the reduction, or wilfully misrepresenting the nature or the amount of debt or claim of a creditor, or who aids, abets or is a party to any such concealment or misrepresentation is increased significantly – the maximum fine is increased 300-fold from RM10,000 to RM3.0 million and the maximum term of imprisonment from three years to five years.
Redemption of preference shares
In addition to the requirement to lodge a declaration of solvency with the Authority within 30 days of redemption of any preference shares, an amendment to section 55(3C) of the Principal Act will require a Labuan company to lodge a notice of redemption in the prescribed form with the Authority within the said 30-day period.
Interest schemes – specific penalties
Specific penalties will be introduced for issuing interests that contravene the requirements under section 69 (Interests to be issued by a Labuan company or a foreign Labuan company only
) and section 70 (Statement to be issued)
of the Principal Act. A default in complying with the requirements set out in these provisions is punishable with a fine of RM3.0 million or a term of imprisonment not exceeding five years or both.
Notification of transfer of shares or debentures
Section 80 of the Principal Act will be amended to impose an obligation on a Labuan company to notify the Authority in the prescribed form of any transfer of shares or debentures or any change in the information submitted in relation to the transfer within 30 days.
Assignment and variation of charge
In the event of any change in the chargee or any variation in a charge registered under section 84 of the Principal Act, a Labuan company is required under a new section 84A to lodge with the Authority a notice stating the assignment or variation containing such information as may be determined by the Authority.
The requirement under section 85(1) of the Principal Act for a Labuan company to have a registered office in Labuan which is to be the principal office of Labuan a trust company will be liberalised as the registered office may be at any other office approved by Authority.
Requirements relating to resident director
Section 87(1) of the Principal Act provides that a Labuan company must have at least one director who may
be a resident director. This section will be amended to require a Labuan company to have one or more directors at least one of whom shall
be a resident director.
Section 87(2) of the Principal Act that sets out the eligibility criteria for a person to be a resident director of a Labuan company is to be replaced and the following persons will be eligible to be a resident director of a Labuan company:
- a trust officer of a Labuan trust company approved by the Authority under the Labuan Financial Services and Securities Act 2010; or
- any natural person who has attained the age of 18, who is otherwise of full capacity, fulfils such criteria or requirement as may be determined by the Authority and has consented in writing to be appointed as a resident director.
When the Amendment Act comes into operation, a body corporate which is a domestic company or a Labuan company wholly owned by a Labuan trust company will no longer be eligible to be a resident director.
A Labuan company that has appointed any person or entity who is no longer eligible to be a director under the amended section 87(2) of the Principal Act will be given six months from the date of coming into operation of the Amendment Act (or any extended period approved by the Authority) to comply with the amended provisions.
A new section 87(10) will provide that the fees payable by a Labuan company for the appointment of a resident director shall be paid to the Labuan trust company where its trust officer is appointed as a resident director, and to the person where such person is appointed as a resident director.
Disqualification of director
Section 90 of the Principal Act is substituted in toto and section 90(1) will, inter alia, prohibit a person from being appointed as a director or holding office or taking part or being in any way directly or indirectly concerned with or in the management of a Labuan company if that person: (a) has been convicted of any offence in connection with the formation or management of a corporation or company; (b) has been convicted of any offence involving fraud, bribery or dishonesty; (c) is an undischarged bankrupt or insolvent; or (d) is deemed unfit by the Authority. The disqualifying events are carried over from the Principal Act except for the event mentioned in paragraph (d) above.
Section 90(2) will require a Labuan company to ensure that no person acting or nominated to act as a director or holding office or taking part or being in any way directly or indirectly concerned with or in the management of a Labuan company is a disqualified person under section 90(1).
The new provision differs from its predecessor in the following respects:
- the burden is shifted to a Labuan company to ensure that none of its directors or proposed directors is affected by a disqualifying event, whereas presently it is for the Authority to issue a direction to disqualify a person from being nominated or appointed or otherwise acting as director if it transpires that the person concerned is disqualified from acting; and
- a person (including a Labuan company) who defaults in complying with section 90(1) or 90(2), as the case may be, commits an offence and is liable to a penalty of RM1.0 million or for a term of imprisonment not exceeding five tears or both.
Disclosure of interests in contracts, property and offices etc. – specific offence
Section 91 of the Principal Act, inter alia, requires every director of a Labuan company:
- who is interested in a contract or proposed contract with the Labuan company to declare the nature of his interest at a meeting of the directors of the Labuan company or cause to be circulated in writing to all the other directors particulars of his interest; and
- who holds any office or possesses any property whereby, duties or interests may be created in conflict with his duties or interests as a director, to declare at a meeting of the directors of the Labuan company or cause to be circulated in writing to the other directors the fact and the nature, character and extent of the conflict.
The Amendment Act will introduce a new section 91(11) to state that a default in complying with the requirements of section 91 is punishable with a fine of RM3.0 million or a term of imprisonment not exceeding five years or both.
Duty and liability of officers - specific offences
In relation to the duty and liability of officers set out in section 92 of the Principal Act, new penalties are introduced for two offences. First, the failure of a director of a Labuan company to exercise reasonable care, skill and diligence with the knowledge, skill and experience which may be expected of a director having the same responsibilities, and any additional knowledge, skill and experience which the director in fact has, will be an offence punishable with a fine of RM3.0 million or a term of imprisonment not exceeding five years or both.
Second, the penalty for making a solvency statement pursuant to the Principal Act without having reasonable grounds for the opinions expressed in the statement is RM500,000 or a term of imprisonment not exceeding five years or both.
Failure to appoint replacement resident secretary
Presently, section 93(2C) of the Principal Act provides that section 151 of the Principal Act, which confers discretion on the Authority to strike off the Labuan company, applies in the event that a Labuan company fails to appoint a replacement resident secretary within 30 days from the effective date of the resignation of a resident secretary. The Amendment Act tightens the default provision by stating that the Labuan company is deemed to be struck off the register by reason of its failure to replace a resident secretary in the circumstances set out in section 93(2C).
Beneficial ownership of Labuan company or foreign Labuan company
New sections 108A to 108H will be introduced into Principal Act to provide a framework for reporting of beneficial ownership of a Labuan company and a foreign Labuan company (each a ‘subject company’). These provisions are summarised below.
The new section 108A defines ‘beneficial ownership’ as ‘a natural person who owns or controls a Labuan company or foreign Labuan company, in whole or in part, through direct or indirect ownership or control of shares or voting rights or other ownership interest in the Labuan company or foreign Labuan company, or who exercises effective control and influence in the Labuan company or foreign Labuan company as may be determined by the Authority.’
Company may require disclosure of beneficial ownership
A subject company is required under section 108B to take reasonable steps to find out and identify its beneficial owner. To this end, it may issue a notice requiring:
- any member whom it knows or has reasonable grounds to believe, or any other person whom it is informed or knows or has reasonable grounds to believe, is a beneficial owner of the subject company to: (a) state whether he is a beneficial owner of the subject company; (b) state whether he knows or has reasonable grounds to believe that any other person is a beneficial owner of the subject company or is likely to have that knowledge and to give such particulars of that person that are within his knowledge; and (c) provide such other information within such reasonable time as specified in the notice; and
- any of its members, within a reasonable time as specified in the notice, to inform the subject company whether ownership or control of such member in the subject company is subjected to an agreement or arrangement under which another person is entitled to control that member’s exercise of his interest or right and if so, to give particulars of the agreement or arrangement and the parties to the agreement or arrangement.
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A resident secretary of a subject company is required to ensure that the subject company complies with the obligations under section 108B.
Lodgement of information with the Authority
A subject company or its resident secretary is required to lodge the particulars of beneficial ownership obtained under section 108B with the Authority as part of the annual return of the subject company.
The Authority may by notice direct a subject company to invoke its powers under this section and immediately provide the Authority with the information obtained under section 108B.
Maintenance of information on beneficial ownership
A subject company is required to maintain the information obtained under section 108B against the name of the relevant member in a separate part of its register of members and keep such information updated. It is also required to lodge with the Authority information on the changes prescribed in section 108E(3) within 30 days. A resident secretary of a subject company is required to ensure that the subject company complies with the aforesaid obligations.
Submission of information
The Authority may, by notice, under section 108F require a subject company, a resident secretary or any person the Authority deems appropriate to furnish all the necessary information and particulars of any beneficial owner of the subject company and have the information and particulars verified by a statutory declaration. Any entity or person served with such notice is required to comply with such notice within seven days of receipt of the notice. The Authority may also exercise the wider powers of inspection and examination conferred on it under sections 28B and 28C of the Labuan Financial Services Authority Act 1996.
A subject company, the resident secretary and every officer of a subject company who defaults in complying with section 108F is punishable with a fine of RM1.0 million, and in the case of a continuing office, a further fine of RM10,000 for each day that the offence continues after conviction. Further, a person who defaults in complying with this section is punishable with a term of imprisonment not exceeding 10 years or a fine of RM3.0 million or both, and in the case of a continuing office, a further fine of RM10,000 for each day that the offence continues after conviction.
Section 108G confers powers on the Authority to issue guidelines to clarify the provisions of Division IV (which includes sections 108A to 108H) of the Principal Act. It is likely that guidelines will be issued to provide guidance on the new beneficial ownership requirements, in particular, the percentage of ownership required to be considered as a beneficial owner.
Matters relating to Accounts – specific offence
Sections 110(1) to 110(3) of the Principal Act, inter alia
, require: (i) a Labuan company to keep proper accounting records that sufficiently explain the transaction and financial position of the Labuan company; (ii) a Labuan company and its directors to cause appropriate entries to be made in the accounting and other records of the Labuan company within 90 days of the completion of the transaction to which they relate; and (iii) the accounting and other records of a Labuan company to be kept at its registered office or such other place in Labuan as the directors think fit and to make such records available for inspection by the directors at all times.
A new section 110(3A) is introduced to provide that a director of a Labuan company who defaults in complying with the foregoing provisions of section 110, is punishable with a fine of RM500,000 or a term of imprisonment not exceeding five years or both.
Notification of change of auditor
A new section 114(4) will impose an obligation on a Labuan company to lodge with the Authority a notice of change of auditor within 30 days of the change, accompanied by the consent of the new auditor.
Allotment of cell shares
A Labuan protected cell company that allots cell shares will be required to lodge with the Authority information of such allotment within 30 days under a new section 130T(1A).
Service of documents
The methods of service of documents on a Labuan company or a foreign Labuan company under section 132 of the Principal Act will be expanded to include sending or leaving the document at the registered principal place of business or sending it by electronic means to the address or numbers provided by the Labuan company or foreign Labuan company.
General penalty and administrative penalty enhanced
The penalty applicable to a contravention of the provisions of the Principal Act for which a specific penalty is not provided under the Principal Act will be increased from RM10,000 to RM50,000 under section 142(2) and the maximum amount of the administrative penalty that may be imposed by the Authority under section 142A(3) on any person for failure to comply with any provision of the Principal Act will similarly be increased from RM10,000 to RM50,000.
Striking off powers widened
The powers conferred on the Authority to strike a Labuan company off the register will be widened under the new sections 151BA and 151BB of the Principal Act. Under the new section 151BA, a Labuan company may be struck off the register if: (i) it fails to pay its annual fees and additional amounts under section 151; (ii) it fails to appoint a replacement resident secretary under section 93(2C); (iii) it contravenes any provision of the Principal Act or any other law relating to Labuan financial services; (iv) its licence, approval or registration under the Labuan Financial Services and Securities Act 2010 or Labuan Islamic Financial Services and Securities Act 2010 is surrendered or revoked by the Authority; and (v) it is not carrying on business or is not in operation. Prior to this amendment, a Labuan company could only be struck off in the circumstances set out in (i) and (ii) above.
The procedure to be followed in striking-off a Labuan company is set out in section 151BB which applies to all instances of striking-off except pursuant to section 93(2C) for failure to replace a resident secretary.
A new section 151C(1)(d) will prohibit the directors, members, approved liquidators and receivers of a Labuan company whose name has been struck off the register from incurring any new liability.
The main amendments to be introduced under the Amendment Act are the reporting framework for beneficial ownership that will apply to a Labuan company as well as a foreign Labuan company, and the expanded powers conferred on the Authority to strike off a Labuan company from the register.
Additional compliance requirements will also be introduced, such as the requirement to notify the Authority of any transfer of shares or debentures of a Labuan company, a change of chargee or the variation of a registered charge, and the change of auditor.
Significantly, the maximum financial penalties for non-compliance of the provisions of the Principal Act have been increased significantly either through the introduction of specific penalties for certain provisions of the Principal Act or amending the penalty payable under existing penal provisions. The maximum penalty for certain offences have increased 300-fold from RM10,000 to RM3.0 million and for others, five-fold from RM10,000 to RM50,000.
Article by Fariz Abdul Aziz (Partner) and Tan Wei Xian (Senior Associate) of the Corporate Practice of Skrine.