Labuan, one of the three federal territories of Malaysia, is positioned by the Malaysian Government as being an international centre for business and financial services. Although Labuan forms part of Malaysia, there are in certain instances, a clear separation between Labuan laws and domestic Malaysian laws.
 
The Labuan Companies Act 1990 (“LCA 1990”) governs the incorporation, registration and administration of Labuan companies and foreign Labuan companies. These companies are not governed by the Companies Act 2016 (“CA 2016”) which provides for, among others, the registration and administration of companies which are incorporated in Malaysia under the CA 2016 or foreign companies registered in Malaysia under the CA 2016. The Labuan Financial Services Authority (“Labuan FSA”) is the main regulator responsible for the development and administration of the Labuan International Business and Financial Centre (Labuan IBFC).
 
In this article, we highlight several distinctive (or some may say, peculiar!) features of the LCA 1990 that are not found in the CA 2016. These features allow a Labuan company to possess additional characteristics that are presumably designed to cater to the needs of investors and accord flexibility to their business vehicles. We also make a comparison of these features between the LCA 1990, the CA 2016 and the laws of some jurisdictions in the Asia-Pacific region.
 
Transfer from Labuan
 
Section 133(1) of the LCA 1990 provides that a Labuan company may, upon obtaining the approval of the Labuan FSA and within two months from the date of such approval, apply to the proper officer of another country or of a jurisdiction within such a country, by the laws of which such transfer is authorised, for an instrument transferring a company as if it had been incorporated under the laws of that other country or jurisdiction, and on the date of the instrument of transfer, the company shall, subject to the provisions of Section 133 of the LCA 1990, become a company under the laws of that country or jurisdiction and be domiciled therein.
 
In essence, Section 133 of the LCA 1990 allows a Labuan company to transfer out of Labuan subject to the prior approval of the Labuan FSA being obtained. An equivalent provision is not found in the CA 2016.
 
In Australia, Section 601AI of the Corporations Act 2001 states that a company may transfer its registration to registration under a law of the Commonwealth, or of a State or Territory by passing a special resolution resolving to transfer its registration to registration under that law and complying with Section 601AJ, subject to the Australian Securities and Investments Commission (ASIC) being satisfied of the matters enumerated in Section 601AK of the said Act.
 
Interestingly, the Singapore Companies Act 1967 permits foreign entities to be transferred into Singapore. Under Part 10A of the Singapore Companies Act 1967, a foreign corporate entity may apply to the registrar of companies i.e. the Accounting and Corporate Regulatory Authority (ACRA) to be registered as a company limited by shares under the said Act.
 
Body corporate as a director
 
Another distinctive feature of the LCA 1990 is that it allows a body corporate to act as a director of a Labuan company. Section 87(4) of the LCA 1990 provides that subject to any contrary provision in the articles of association of a Labuan company, a corporation may be a director of a Labuan company and such corporation may act by itself or through a nominee appointed in writing and may be appointed and may act as a director of more than one company. 
 
In contrast, the CA 2016 does not permit a body corporate to act as a director of a locally incorporated company. This restriction is evident from Section 196(2) of the CA 2016 which states that a director shall be a natural person who is at least 18 years of age. A similar restriction is found in Section 145(2) of the Singapore Companies Act 1967 and Section 201B(1) of the Australian Corporations Act 2001. However, there does not appear to be a corresponding restriction on directors of a foreign company that is registered under the CA 2016, and the permissibility or otherwise thereof will presumably, depend on the laws of the jurisdiction of incorporation of the foreign company.
 
The position in Hong Kong is interesting. A public company, a private company that is a member of a group of companies of which a listed company is a member and a company limited by guarantee are not allowed to appoint a body corporate as a director (Sections 456(1) and 456(2) of the Companies Ordinance (Cap. 622)), but a private company other than a private company that is a member of a group of companies of which a listed company is a member is allowed to have one or more bodies corporate as its directors so long as it has at least one director who is a natural person (Section 457 of the Companies Ordinance (Cap. 622)).
 
Court-free amalgamations
 
Section 118A of the LCA 1990 provides a framework for the amalgamation of two or more Labuan companies into one without requiring the approval of the Court. Section 118A(1) states that two or more Labuan companies (individually, an “amalgamating Labuan company”) may amalgamate and continue as a new Labuan company.
 
The process under Section 118A of the LCA 1990 involves, among others, the preparation of an amalgamation proposal containing the terms of the amalgamation such as the name and share structure of the amalgamated Labuan company, a copy of its memorandum and articles of association and details of any arrangement necessary to complete the amalgamation. The amalgamation proposal must be approved by the members of each amalgamating Labuan company by special resolution. Prior to the passing of the special resolution, the board of directors of each amalgamating Labuan company is required to resolve that the amalgamation is in the best interest of the amalgamating Labuan company and make a solvency declaration. This Court-free mechanism under the LCA 1990 also requires notice of the amalgamation to be provided to every member and secured creditor of the amalgamating Labuan company and the publication of notices in prescribed newspapers. Upon registration of the memorandum and articles of association of the amalgamated Labuan company, the Labuan FSA shall issue a certificate certifying the amalgamation and that the amalgamated Labuan company is, from the date specified in the certificate, incorporated as a Labuan company.
 
The amalgamation of two Labuan companies under Section 118A of the LCA 1990 creates a new legal entity which possesses all the rights, privileges, immunities, powers and purposes as may be agreed by the amalgamating Labuan companies, without further act or deed, be vested with all the property, real and personal, including subscriptions to the shares, causes of action and every other asset of each of the amalgamating Labuan company,  and assumes all liabilities, obligations and penalties of each amalgamating Labuan company.
 
Similarly, a Labuan company, a foreign Labuan company or a corporation may amalgamate and continue as a Labuan company registered in Labuan, subject to the provisions of Section 118B of the LCA 1990. The requirements set out in Section 118A apply generally to an amalgamation under Section 118B with a further requirement that a foreign Labuan company or corporation must obtain and file with the Labuan FSA all necessary authorisations, if any, required under the laws of the jurisdiction in which it is incorporated or registered for it to amalgamate and continue as a Labuan company.
 
Section 118C of the LCA 1990 also provides for a short-form amalgamation in which (i) a Labuan company and one or more of its wholly-owned subsidiaries, or (ii) two or more wholly-owned subsidiary companies of the same corporation, may amalgamate and continue as one Labuan company without complying with Section 118A if the members of each amalgamating company resolve by way of special resolution to approve an amalgamation of the amalgamating companies on the terms prescribed under Section 118C of the LCA 1990.
 
It is to be noted that in each of the forms of amalgamation mentioned above, an amalgamating entity must not be a licensed entity under the Labuan Financial Services and Securities Act 2010 (“LFSSA 2010”) or the Labuan Islamic Financial Services and Securities Act 2010 (“LIFSSA 2010”).
 
The CA 2016 does not have provisions similar to those in the LCA 1990 that facilitate statutory amalgamations but permits a form of amalgamation via the transfer of assets from a transferor company to a transferee company under a compromise or arrangement approved by the Court under Subdivision 2 of Division 7 thereof.
 
The amalgamation regime under the LCA 1990 appears to be largely similar with Sections 215A to 215G of the Singapore Companies Act 1967 (except that the latter allows one of the amalgamating companies to be the amalgamated company).
 
In Hong Kong, the Companies Ordinance (Cap. 622) allows for a Court-free amalgamation procedure similar to the provisions under the LCA 1990 in respect of short-form amalgamation, between two or more wholly-owned subsidiaries within a group (horizontal amalgamation) or between a holding company and one or more of its wholly-owned subsidiaries (vertical amalgamation).
 
Protected cell company
 
Another distinctive feature of the LCA 1990 which is not found in the CA 2016 is that the former contains provisions with regard to a special corporate structure, namely a protected cell company (“PCC”). Part VIIIB of the LCA 1990 provides for the incorporation of a PCC as well as the conversion of an existing Labuan company into a PCC. However, a Labuan company or foreign Labuan company can only be incorporated as a PCC or converted into a PCC if it is formed and will operate for the sole purpose of conducting Labuan insurance/takaful business, Labuan captive insurance/takaful business or mutual funds/Islamic mutual funds business under the LFSSA 2010/LIFSSA 2010 (Section 130O(4) of the LCA 1990).
 
Under the LCA 1990, a PCC remains as a single legal person but may establish one or more “cells” for the purposes of segregating and protecting cell assets in the manner provided by Part VIIIB. In this regard, the assets of a PCC shall be either (a) cell assets which comprise the assets of the PCC held within or on behalf of the protected cells of the company, or (b) general assets which comprise the assets of the PCC which are not cell assets.
 
Further, Section 130X(1) of the LCA 1990 stipulates that where a liability arises which is attributable to a particular cell of a PCC, the cell assets attributable to that cell shall be used to satisfy the liability and a creditor in respect of that cell shall not have recourse against the cell assets of any other cell or the general assets of the PCC. In essence, the purpose behind establishing a PCC is to create multiple cells which can be used to cater to various business plans, each with segregated assets and liabilities, under one umbrella of the PCC without creating separate legal persons to implement such business plans. The unique structure of a PCC is therefore advantageous in managing risks as its individual cells are protected such that a claim against one cell cannot be recovered using the assets of another cell.
 
Labuan is among the few jurisdictions in the world which have legislated to provide for the PCC structure. That said, Singapore has on 15 January 2020 introduced a similar corporate structure for investment funds known as the variable capital company (VCC) under the Variable Capital Companies Act which can be formed as a single standalone fund or an umbrella fund with two or more sub-funds, each holding a portfolio of segregated assets and liabilities.
 
Comments
                       
In our view, there are some merits in adopting the four features of the LCA 1990 highlighted in this article in the CA 2016. In particular, the introduction of a statutory amalgamation framework into the CA 2016 will be welcomed as it is a less complicated, more cost-effective and expeditious manner of effecting an amalgamation as it mainly involves the passing of special resolutions and the issuance of solvency statements by directors of each entity involved in the amalgamation. Further, the uniqueness of a PCC in respect of its ability to create various cells and segregate the respective assets and liabilities of each cell would also be appealing to investors in managing financial risks and various business objectives.
 
Article by Vanessa Ho (Associate) of the Corporate Practice of Skrine.