Split Personality?

Samuel Loh explains the concept of a Labuan protected cell company

 

 

BACKGROUND

The island of Labuan was designated as Malaysia’s offshore financial hub in 1990. A re-branding exercise is being undertaken by the Malaysian Government to reflect the financial centre’s new focus and broader role in the offshore financial services industry and to reinforce Labuan’s position as a premier business and financial centre in the Asia Pacific region.

 

As part of this exercise, extensive amendments are being proposed in respect of the existing offshore legislation. The Offshore Companies (Amendment) Bill 2009 ("Bill") which seeks to amend the Offshore Companies Act 1990 is being tabled in Parliament. Along with other major changes, the Bill will introduce the concept of "protected cell companies" ("PCC") into Malaysian law.

 

 

 

BRIEF INTRODUCTION TO PCC

A PCC, sometimes referred to as a "segregated portfolio company" in some offshore jurisdictions, is a company which segregates the assets and liabilities of a particular cell from each other and from the general assets of the PCC. PCCs first originated in Guernsey in 1997 but a number of other offshore jurisdictions have adopted the concept, including Bermuda, Cayman Islands, the Isle of Man and the British Virgin Islands.

 

 

 

LABUAN PROTECTED CELL COMPANY

A Labuan company may be incorporated as a Labuan PCC or be converted into a Labuan PCC, if authorised by its articles and by special resolution. A Labuan company shall not be incorporated as, or operate as, or be converted into a Labuan PCC except in accordance with the terms and conditions of the written approval of the Labuan Financial Services Authority ("Authority").

 

Although PCCs in other jurisdictions have been used for various purposes (including formation of collective investment schemes as umbrella funds and asset holding vehicles), a Labuan PCC shall only be formed and operated for the following purposes:

 

(a) to conduct Labuan insurance business or Labuan captive insurance business and Labuan general takaful business or Labuan captive takaful business; or

(b) to conduct the business of a mutual fund and Islamic mutual fund.

 

 

UNIQUENESS OF A LABUAN PCC

A Labuan PCC differs from a conventional company in that a Labuan PCC may establish one or more cells for the purpose of segregating and protecting cell assets. Notwithstanding this, the Labuan PCC is a single legal person and the creation by the Labuan PCC of a cell does not create, in respect of that cell, a legal person separate from the Labuan PCC.

 

 

 

 

 

 

CELL AND GENERAL ASSETS

A Labuan PCC may have two types of assets, namely, cell assets which comprise the assets of the Labuan PCC held within or on behalf of the protected cells of the company, or general assets which comprise the assets of the Labuan PCC which are not cell assets.

 

Assets of a cell comprise assets representing the consideration paid or payable for the issue of the cell shares and reserves attributable to the cell shares and all other assets attributable to or held within the cell.

 

To ensure proper protection of cell assets, a Labuan PCC is required to maintain separate records for cell assets and keep the cell assets held for each cell separate from cell assets of other cells and from general assets. There must be clear segregation and identification.

 

 

CELL SHARES AND CELL SHARE CAPITAL

A Labuan PCC may create and issue cell shares, the cell capital of which shall be comprised in the cell assets attributable to the cell in respect of which the shares were issued. The proceeds of the issue of shares other than cell shares created and issued by a Labuan PCC shall be comprised in the general assets of the Labuan PCC.

 

Further, a Labuan PCC may declare cell dividend in respect of cell shares by reference only to the cell assets and liabilities attributable to the cell in respect of which the cell shares were issued.

 

 

LIABILITY

Only the assets attributable to a cell are available to satisfy the claims of creditors of that particular cell. Hence, where a liability arises which is attributable to a particular cell of a Labuan 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 be entitled to have recourse against the cell assets of any other cell or the general assets of the Labuan PCC.

 

Conversely, where liability arises which is not attributable to a particular cell of a Labuan PCC the liability shall be satisfied solely from the Labuan PCC’s general assets and a creditor in respect of that liability shall not have recourse to the cell assets of any cell of the Labuan PCC.

 

 

IMPLIED TERMS

The Bill sets out terms which are implied in every transaction entered into by a Labuan PCC, namely:

 

(a) that no party shall, whether in any proceedings or by any other means, use any cell assets attributable to any cell of the Labuan PCC to satisfy a liability not attributable to that cell;

(b) that if any party uses any cell assets attributable to any cell to satisfy a liability which is not attributable to that cell, that party shall be liable to pay to the Labuan PCC a sum equal to the value of the benefit obtained by him; and

(c) that if any party succeeds in levying execution against any cell assets attributable to any cell of the Labuan PCC to satisfy a liability not attributable to that cell, that party shall hold those assets or their proceeds in a fiduciary capacity for the Labuan PCC and shall keep those assets separate and identifiable for that purpose.

 

 

DISCLOSURE

A Labuan PCC is required to inform any person with whom it transacts that it is a Labuan PCC. If a transaction involves a particular cell, a Labuan PCC must identify the cell with which that person is transacting and inform him that only the cell assets of that cell are available to pay the obligations and liabilities of that cell.

 

 

TRANSFER OF CELL ASSETS AND AMALGAMATION OF CELLS

A Labuan PCC may transfer cell assets attributable to any of its cells to another cell of that Labuan PCC or to another person and may amalgamate and consolidate cells within a Labuan PCC.

 

Various conditions have to be satisfied, including approvals being obtained from the Authority and the shareholders of the PCC by special resolution as well as the consent being obtained from the creditors of the Labuan PCC who are entitled to have recourse to the relevant cell assets.

 

 

RECEIVERSHIP AND WINDING-UP

In a receivership and winding-up of a Labuan PCC or any cell of a Labuan PCC, the approved liquidator is required to observe the provisions in the Bill for segregating assets and can only apply assets of a particular cell to those entitled to have recourse to that particular cell.

 

 

 

CONCLUSIONS

The concept of PCC is very similar to the segregated portfolio companies in other offshore jurisdictions. However, there are still some issues which require clarification. For example, it is unclear whether, and the extent to which, holders of cell shares have voting rights in matters pertaining to the Labuan PCC or are entitled to participate in the general assets of the Labuan PCC.

 

From the legal perspective, it is clear that protected cells of a Labuan PCC are not separate legal entities but constitute part of one legal entity comprised in the Labuan PCC. However, from certain operational aspects, in particular, the segregation of assets, the limitation on the rights of cell creditors and the right to declare cell dividend, the protected cells operate like split personalities.

 

 

 

SAMUEL LOH KHIAN SEAH ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 
ACCOLADES & AWARDS

Skrine Retains Who’s Who Legal Accolade for Malaysia

On 15th May 2017, the Who’s Who Global Awards was held in London, United Kingdom and Skrine was conferred the Award:

Malaysia Law Firm of the Year 2017

Skrine previously received this Award in 2013, 2014, 2015 and 2016.

>> READ MORE

SKRINE Clinches Top Honours at ALB Malaysia Law Awards 2017

On 6th April 2017, the Asian Legal Business Malaysia Law Awards was held and SKRINE was named

Malaysia Law Firm of the Year 2017

SKRINE also bagged 5 other awards

>> READ MORE

Asialaw Profiles 2017

The Asialaw Profiles has ranked Skrine as Outstanding Firm and particularly highlighting the following practice areas:

Outstanding Firm

  • Competition & Antitrust
  • Corporate/M&A
  • Dispute Resolution
  • Energy & Natural Resources
  • Intellectual Property
  • IT, Telco & Media
  • Project & Infrastructure

>> READ MORE

PDPA NOTICE

English | Bahasa Malaysia