Labuan Corporate Law Reforms to Meet the Needs of the Financial Sector

The Labuan Companies Act 1990 (“the Act”) was recently updated to be more effective and to meet the ever-changing needs of the financial sector. These welcomed changes bring Labuan’s incorporation, registration and administration of Labuan companies, domestic and foreign, in line with international standards. Key updates include procedures relating to directors’ qualifications, introduction of beneficial ownership, striking off companies, and increase in penalties.

Companies based in Labuan will need to update their registration in line with the updated provisions to avoid penalties. The amended act allows a six-month grace period to allow companies to comply with the new provisions.

Other amendments for the Labuan financial sector allow licensed Labuan insurance/takaful broker to handle insurance or reinsurance of domestic insurance business, transacted in the Ringgit Malaysia in certain cases.

A. Labuan Companies (Amendment) Act 2022

The Labuan Companies (Amendment) Act 2022 (“Amendment Act”) was gazetted on 9 June 2022 and came into force on 10 June 2022.

Key changes are discussed as follows.

Directors

Resident Directors

Previously, Labuan companies had to have at least one director who may be a resident director. This has been amended to provide that a Labuan company may have one or more directors, at least one of which must be a resident director.

A resident director is one who is:

• a trust officer of a Labuan trust company authorised by the Labuan Financial Services Authority (“LFSA”) and made available by the Labuan trust company to be appointed as a resident director; OR
• a natural person who:
  - has attained the age of 18;
  - is otherwise of full legal capacity;
  - fulfils other criteria or requirement determined by LFSA; and
  - has consented in writing to be appointed as a resident director.

Thus, 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. Companies who do not meet the updated requirements have six months from 10 June 2022 (the coming into force date) to comply with the new provisions.

The Amendment Act also provides that any director who discloses any information obtained as by way of his office will be penalised RM3 million or imprisonment for a term not exceeding five years or both.

Directors’ disqualification

The Amendment Act has substituted section 90, relating to directors’ disqualification. While the disqualifying events remain the same (i.e. director should not have been convicted of offence, not involved in fraud, bribery or dishonesty, or not bankrupt or insolvent), the new section allows LFSA to disqualify a director if LFSA deems them unfit.

Further, the burden is shifted to the Labuan company to ensure that no person who is acting or nominated to act as a director is a disqualified person. Failure to do so is an offence and upon conviction, can be fined RM1 million or imprisonment for a term not exceeding five years or both.

Disclosure of interests

The Amendment Act now has included a penalty provision in respect of a director’s duty to disclose interest in contracts, property, offices and etc. as set out under section 91 where failure to comply with section 91 is punishable with a fine of RM3 million or imprisonment for a term not exceeding five years or both.

New penalties for breach of duty and liability

New penalties have also been introduced for two offences under section 92 with regards to the duty and liability of officers:

• failure of a director 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 million or a term of imprisonment not exceeding five years or both; and
• where a solvency statement is made without any reasonable grounds for the opinions, the penalty is RM500,000 or a term of imprisonment not exceeding five years or both.

Further, the officer who breached this section shall be liable to the company for any profits made by him and for any damage suffered by the company as a result of the breach.

Beneficial ownership

New sections have been introduced to deal with beneficial ownership of a Labuan company. Beneficial ownership is defined 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 LFSA.

A Labuan company is now required to take reasonable steps to find out and identify its beneficial owner. This can be done by issuing notice requiring:

• that any member who knows or has reasonable grounds to believe, or any other person, is a beneficial owner of the subject company to:
  - state whether he is a beneficial owner of the subject company;
  - state whether he knows or has reasonable grounds to believe that any other person is a beneficial owner of the subject company; and
  - provide such other information requested in the notice; and

• any members, within the time specified in the notice, to inform the subject company whether their ownership in the subject company is subjected to an arrangement in which another person is entitled to control the member’s interest or right, and provide the particulars and parties to such agreement.

Introduction of bearer share and bearer share warrants

A new section 46A prohibits a Labuan company (including a foreign Labuan company) from:

• issuing a bearer share or bearer share warrants;
• converting a share into a bearer share or bearer share warrants into share warrants; or
• exchanging a share for a bearer share.

Any purported issuance, conversion or exchange, or even including any enabling provision in the company’s memorandum or articles to do so, is void.

Striking off

The striking off powers under the Act have been widened to provide that a Labuan company may be struck off if it:

• fails to pay its annual fees and additional amounts;
• fails to appoint a replacement resident secretary under section 93(2). Previously, LFSA has the discretion to strike off a Labuan company in the event that the Labuan company fails to appoint a replacement secretary within 30 days from the date of resignation. This has been tightened to state that the company is deemed to be struck off for failure to replace a resident secretary;
• contravenes any provisions of the Act or any other law relating to Labuan financial services;
• surrenders or LFSA revokes its licence, approval or registration under the Labuan Financial Services and Securities Act 2010 or Labuan Islamic Financial Services and Securities Act 2010; and
• is not carrying on business or is not in operation.

New provisions have been included to prohibit directors, members, approved liquidators and receivers of a Labuan company whose name has been struck off the register from incurring any new liability.

Notifications to LFSA

The Act has been amended to impose an obligation on a Labuan company to notify LFSA of any transfer of shares or debentures or any change in the information submitted on the transfer within 30 days.

Further, where there is any change in the chargee or details of the charge, under the new section 84A, a Labuan company is required to lodge with LFSA a notice of the assignment or variation containing such information as may be determined by LFSA.

Other amendments

The Act has been amended to remove the restrictions and notification requirements relating to dealings by a Labuan company with residents and in Ringgit Malaysia as they are no longer applicable. Also, LFSA may, in addition to a Labuan trust company, require any person that is approve by LFSA, to subscribe for and file documents electronically.

In relation to capital reduction, the penalty for wilfully concealing the name of a creditor entitled to object 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 has been increased to RM3 million or imprisonment for a term not exceeding five years or both.

With regards to the lodgment of solvency, failure of the directors of the Labuan company to lodge a certified copy of the solvency declaration within 30 days with LFSA is an offence, with the penalty being a fine of RM50,000 or imprisonment for a term not exceeding three years or both.

Section 85(1) has been amended to provide that a registered office in Labuan of the Labuan company has been extended to be any other office approved by LFSA.

B. Labuan Financial Services and Securities Amendments

The Labuan Financial Services and Securities (Amendment) Act 2022 and the Labuan Islamic Financial Services and Securities (Amendment) Act 2022 have also been gazetted and deemed to come into force on 1 January 2019. Such amendments stipulate compliance requirements of international taxations standards that prohibit harmful tax practices.

The amendments provide for the definition of Labuan insurance business and Labuan takaful business, and that a licensed Labuan insurance or takaful broker may handle insurance or reinsurance of domestic insurance business, transacted in the Ringgit Malaysia provided that such activity does not include any activity that is regulated or prohibited under other written law in Malaysia.

Commentary

The Amendment Act supports accountability, enhanced disclosure, further facilitation of businesses and dealings, and better board governance. While the amendments are certainly welcomed, greater clarity is needed on certain introductions. One such question is whether the provision relating to resident director is limited to such director residing in Labuan. There may be further interesting developments to provide clarity on certain introductions but in the meantime, existing Labuan companies should start reviewing its corporate documents and information to ensure that they are in line with the Amendment Act.

If you have any questions or require any additional information, you may contact Stephanie Choong Siu Wei or the Zaid Ibrahim & Co partner you usually deal with.

This article is for general information only and is not a substitute for legal advice.