Labuan Companies Act 1990 amended to strengthen regulatory framework

9 September 2022

The Labuan Companies (Amendment) Act 2022 (“Amendment Act”) came into force on 10 June 2022, bringing significant changes to the Labuan Companies Act 1990 (“1990 Act”). The 1990 Act applies to both Labuan companies and foreign Labuan companies. A Labuan company refers to a company incorporated under the 1990 Act, whereas a foreign Labuan company means a foreign company registered under Part VIII of the 1990 Act, that has a place of business or is carrying on business in Labuan and is not registered under the Companies Act 2016.

This Alert summarises key amendments introduced by the Amendment Act.

Key amendments

Some of the main amendments to the 1990 Act include:

  • Improving procedures relating to the qualification of a director
  • Ascertaining beneficial ownership
  • Increasing the penalty for offences under the 1990 Act
  • Striking off a Labuan company

Removal of prohibition on Labuan companies dealing with residents and in ringgit

The Amendment Act removes provisions relating to prohibition of dealings between a Labuan company with residents and in ringgit from the 1990 Act.

This amendment is intended to prohibit harmful tax practices and brings the law in line with the international taxation standards committed to by Malaysia in 2017. This amendment is deemed to have come into effect from 1 January 2019.

Directors and persons disqualified from being a director

It is now mandatory for every Labuan company to have at least one resident director, who must be either a trust officer with a Labuan trust company approved by the Labuan Financial Services Authority (“Authority”) or any natural person who has attained the age of 18 with full legal capacity who fulfils such criteria as may be determined by the Authority. The Authority is the statutory body responsible for the development and administration of the Labuan International Business and Financial Centre (“LIBFC”).

A Labuan company with an existing resident director appointed based on the previous requirements of the 1990 Act has six months from the date of the Amendment Act coming into force to ensure their resident-director meets the new requirements. This six-month time frame can be extended upon approval by the Authority.

Additionally, the disqualifying criteria for a director has been expanded. A person may now be disqualified from being a director of a Labuan company if they are deemed “unfit” by the Authority. What would constitute “unfit” is, however, not defined.

The responsibility to ensure compliance with this provision lies with the Labuan company with non-compliance attracting a fine amounting to RM1,000,000 or imprisonment for a term not exceeding five years, or both.

New notifications required

The Amendment Act introduces additional notification requirements.

For example, a Labuan company must now notify the Authority using the prescribed form within 30 days of any transfer of shares and debentures or any change in the information submitted in relation to the transfer.

A Labuan company must also notify the Authority on the assignment of or variation to the particulars of the charge by lodging a notice within 30 days and must pay a prescribed fee. The penalty for non-compliance with this provision is a fine of RM50,000.

Prohibition on issuance of bearer shares or bearer share warrants

A new section 46A has been introduced to foster transparency of a Labuan company’s share ownership and in so doing, minimise the possibility of misuse of the same. Under this provision, it is an offence for a Labuan company or a foreign Labuan company to issue any bearer shares or bearer share warrants, convert shares into bearer shares or bearer share warrants into share warrants, or exchange shares for bearer shares.

Beneficial ownership of Labuan company

The Amendment Act introduces new sections 108A to 108H relating to the beneficial ownership of a Labuan company.

“Beneficial ownership” is defined in section 108A 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.”

Prior to the advent of the Amendment Act, the Authority, on 17 November 2021, issued the Guidelines on Beneficial Ownership for Labuan Legal Persons and Legal Arrangements, which stipulate that a natural person is deemed to be a beneficial owner of a Labuan entity (which includes a Labuan company) if, among other things, he holds, directly or indirectly, more than 25% of the issued shares in or the voting rights of the entity. This can be compared to the 20% beneficial ownership threshold set by the Companies Commission of Malaysia for companies incorporated under the Companies Act 2016.

Disclosure of beneficial ownership information

Section 108B of the Amendment Act introduces a requirement for a Labuan company or foreign Labuan company to take reasonable steps to identify their beneficial owner. By notice in writing, the company may ask any member they reasonably believe to be a beneficial owner, to provide certain information for the purposes of discerning beneficial ownership.

Any information obtained under this section must be lodged with the Authority as part of the company’s annual return. The provision also empowers the Authority to direct companies to provide such information immediately.

Maintaining and keeping information up to date

It is now mandatory for a Labuan company or a foreign Labuan company to maintain and keep the particulars of beneficial ownership in its register of members. Any changes to the information must be lodged with the Authority within 30 days from any changes to the particulars. The responsibility for compliance with this obligation lies with the resident secretary of the company.

Submission and examination

The Authority is able to issue a notice in writing to require that all necessary information and particulars of any beneficial owner of the company must be furnished to the Authority and verified by a statutory declaration. Any persons served with this notice must comply within seven days from the date of receipt. Non-compliance with this provision may result in the company, its resident secretary or any officer of the company being penalised with a maximum sum of RM1,000,000 and, in the case of a continuing offence, a further fine of RM10,000 for each day during which the offence continues after conviction.

Increase in penalties for general offences

The Amendment Act increases the penalty for several offences listed under the 1990 Act.

It remains an offence for a Labuan company officer to (i) wilfully conceal the name of any creditor entitled to object to the reduction, (ii) wilfully misrepresent the nature or the amount of the debt or claim of any creditor or aids, or (iii) abet or be party to any such concealment or misrepresentation. However, the penalty for breach of these provisions has been increased from RM10,000 or an imprisonment of three years to RM3,000,000 and imprisonment of five years. This amendment is in line with the Companies Act 2016 which provides for the same penalty for offences of this nature.

Power to strike a Labuan company off the register

The new sections 151BA and 151BB widen the powers of the Authority to strike a Labuan company off the register. Some situations where a Labuan company may be struck off the register include:

  • failure to pay its annual fees or any additional amount within the time specified;
  • failure to appoint a replacement resident secretary after the resignation of the former resident secretary;
  • contravention of any provision of the 1990 Act and any other law relating to Labuan financial services;
  • in relation to a licensed entity under the Labuan Financial Services and Securities Act 2010 or Labuan Islamic Financial Services and Securities Act 2010, its licence being surrendered or revoked by the Authority; and
  • not carrying on any business or in operation.

Before a Labuan company can be struck off the register, the Authority must send a notice to the company requiring the company to show cause to the contrary within 30 days (or such other extended period as approved by the Authority) of the notice. This section is not applicable to a Labuan company which has been struck off because of its failure to appoint a replacement for its resident secretary.

If the name of the Labuan company has been struck off, the company must not incur any new liability.

It is worth noting that the court may now make an order for a dissolved company to be restored, as a means of legal recourse for a person who has locus standi and a legitimate interest in the Labuan company, and to claim undischarged, outstanding debts from the company.

Timeframe to retain registers

The timeframe to retain registers has now been aligned with the timeframe prescribed under the Companies Act 2016. The Authority may destroy or give the registers to the National Archives if they think it is no longer necessary or desirable to retain the registers in the following circumstances and timeframe:

  • Any return of allotment of shares for cash which has been lodged or filed for not less than six years; the timeframe is now amended to seven years instead of six years;
  • Any other document which has been lodged, filed or registered for not less than 15 years; the timeframe is now amended to seven years instead of 15 years; and
  • Where a company that has been dissolved or has ceased to be registered for not less than 15 years; the timeframe is now amended to seven years and six months instead of 15 years.

Electronic lodgement or filing of documents

The 1990 Act stipulates that the Authority may provide services for electronic lodgement or filling of documents and that the Labuan trust company is a subscriber to this service. A Labuan trust company is a corporation registered as a Labuan trust company under the Labuan Financial Services and Securities Act 2010. The Amendment Act widens this ambit and now allows the Authority to approve the lodging of statutory forms by way of electronic means done by any other person aside from a Labuan trust company. Such amendment would have a positive impact on certain transactions, for example in instances where a statement of particulars of charge is required to be lodged with the Authority by a Labuan chargor. Prior to this amendment taking effect, the lodgement of such a document could only be done by the Labuan trust company of the Labuan chargor.

Conclusion

Given the fast-changing pace of the financial sector in recent years, the amendments to the 1990 Act have been made primarily to provide a more cohesive and up to date statute so that the LIBFC can continue to fulfil the ever-growing needs of the financial sector domestically and globally.

Reference materials

The Amendment Act is available at the Attorney-General’s Chambers website www.lom.agc.gov.my or by clicking here.

This article has been prepared with the assistance of Associate Kimberly Lim Ming Ying.