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Released by the Asian Business Law Institute (ABLI) with support from its parent organization Singapore Academy of Law, the Contract Laws of Asia – Limitations of Liability is the fourth full-fledged publication under ABLI’s Contracts Project which aims to produce a set of standard-form contract terms where risks are relatively evenly allocated and which can be valid in a majority of Asian jurisdictions. The first turn of the Model Clauses is published here.

This fully-cited, 99-page publication considers 12 jurisdictions and governing laws that are high priorities for parties contracting across borders in the Asia Pacific, and focuses on:

  • Operation of exclusion and limitation of liability clauses in contracts in select common law jurisdictions, such as their requirements, restrictions (at common law and by statute, where applicable) and interpretation, whether non-contractual wrongs can be excluded and limited, etc.; and
  • Operation of exclusion and limitation of liability clauses in contracts in select civil law and hybrid jurisdictions, such as whether different standards apply to specific types of contracts or under specialized laws.

Lee Lily @ Lee Eng Cher, Partner, authored the chapter for Malaysia in the publication.

The publication is available here. In addition to this publication and the Model Clauses, the team has also contributed to earlier publications on indemnity clauses and liquidated damages and penalty clause under this project.

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Corporate and Commercial

Zaid Ibrahim & Co contributes as authors to Contract Laws of Asia – Limitations of Liability publication

Contract Laws of Asia – Limitations of Liability publication

Recent amendments to the Franchise Act 1998 (“FA”) have introduced significant changes to the franchise industry. The Franchise (Amendment) Act 2020 (“Amending Act”), gazetted on 6 March 2020 and which came into force on 28 April 2022, introduces more stringent requirements and provides a leveling field between local and foreign franchisors. In this article, we will discuss three major updates to the franchise system in Malaysia.

Launch of the MyFex 2.0 system

In line with the coming into force of the Amending Act, the Franchise Registry, under the Ministry of Domestic Trade and Costs of Living (“KPDN”), launched a new online portal known as MyFex 2.0 (https://myfexv2.kpdn.gov.my/) on 29 July 2022. The portal replaces the previous MyFex 1.0 system and provides for the registration, maintenance and renewal of franchises in Malaysia. According to the KPDN, the MyFex 2.0 system was introduced so that the various requirements of the Amending Act can be met accordingly, in line with the enforcement of the FA.

It is important to note that the launch of MyFex 2.0 system has also resulted in the expiry of all existing franchise registrations in Malaysia. All existing franchisors (foreign and local) are required to re-register their franchises under the MyFex 2.0 system, with a grace period of three years (starting from 1 August 2022) granted to all existing franchisors to complete the re-registration process.

Key amendments to the Franchise Act 1998

There are a number of key amendments made by the Amending Act to the FA which existing and potential franchisors and franchisees in Malaysia should be aware of. They include the following:

Franchise registration requirement under section 6 of the FA is now applicable to a foreign franchisor

Prior to the Amending Act, a foreign franchisor is only required to obtain the Franchise Registrar’s approval pursuant to section 54 of the FA before it can proceed to execute a franchise agreement with its franchisee in Malaysia. In contrast, a local franchisor is required to register its franchise pursuant to section 6 of the FA before executing a franchise agreement. It is now compulsory for all foreign franchisors to comply with both sections 6 and 54 of the FA. This legislative amendment reinforces the Court of Appeal’s judgment in Dr HK Fong Brainbuilder Pte Ltd v SG-Maths Sdn Bhd & Ors [2021] 1 MLJ 549 which affirmed the High Court’s finding that the registration requirement undersection 6 of the FA is applicable to a foreign franchisor and is not limited to a local franchisor only.

There were initial concerns that a foreign franchisor would need to submit two separate applications to comply with the requirements of sections 6 and 54 of the FA. However, in practice, there is no longer any distinction in the online application form for franchise registration in MyFex 2.0 system, unlike the previous MyFex1.0 system where there are different requirements in the online application form that is required to be submitted by a local franchisor and a foreign franchisor. Both local and foreign franchisors are currently required to complete the same online application form and submit the same Franchise Disclosure Document and other documents as required in section 7 of the FA for franchise registration. Other documents to be submitted include the operation manual, training manual, copy of the latest audited accounts and any other additional documents as required by the Franchise Registrar.

It is anticipated that this legislative amendment would result in a level playing field between local and foreign franchisors, considering that in the past, foreign franchisors have an advantage over local franchisors since they are not subjected to the more onerous requirements under section 6 of the FA.

Effective Period of Franchise Registration

The pre-amended section 10 of the FA provides that the registration of a franchise shall continue to be effective unless the Franchise Registrar issues a written order to the franchisor to suspend, terminate or cancel the registration of the franchise. This meant that a franchise registration will last indefinitely with no specified term unless it is suspended, terminated or cancelled by the Franchise Registrar.

The amended section 10 now stipulates that a franchise registration shall continue for a period as may be prescribed by the regulations under the FA. Under the Franchise (Prescription of Period of Effectiveness of Registration) Regulations 2022, the period of effectiveness of a franchise registration is now limited to five years and it has to be renewed periodically every five years. The Amending Act also introduces the new provision, section 10A, which governs the renewal of franchise registration. An application to renew a franchise registration must be submitted together with prescribed fees within 30 days from the expiration date of the franchise registration.

Registration of Franchisees

Before commencing business, a franchisee is required to be registered pursuant to sections 6A and 6B of the FA (depending on whether the franchisor is local or foreign).  In the past, there is no consequence prescribed in the FA if the franchisee fails to obtain registration.  

The Amending Act has inserted new provisions into sections 6A and 6B of the FA which makes it a criminal offence if a franchisee fails to obtain registration. The registration of franchisees is no longer a formality. The general penalty provision in section 39 of the FA [1] now applies to franchisees that fail to register with the Franchise Registry. The latest amendments show that there is a strong intention on the part of KPDN to strengthen enforcement efforts against unregistered franchisees that operate in Malaysia.

It is pertinent to note that the Franchise Registry has imposed an obligation on all franchisors to submit the online application form on behalf of their franchisees in the MyFex 2.0 system. This is a departure from the previous practice in MyFex 1.0 system where each franchisee is responsible to handle its own registration. Moving forward, franchisees will need to rely on their respective franchisors to obtain franchisee registration under sections 6A and 6B of the FA. This is as the current function and design of MyFex 2.0 system only permits franchisors to open an account. An unintended consequence that could arise, is that a franchisee could be found liable for failing to register itself due to the inaction of its franchisor. Therefore, it is crucial for franchisees to follow up very closely with their respective franchisors to ensure that they are properly registered under sections 6A and 6B of the FA.

Public display of franchise registration

A new section has been created, section 10B, which makes it compulsory for a franchisor and franchisee to display the franchise registration at a conspicuous position in the place of business. Failure to do so is an offence which attracts the general penalty in section 39 of the FA. This is another obligation imposed by the Amending Act to enable easier monitoring of compliance by enforcement officers from the KPDN.

Mandatory elements in a franchise agreement

Section 18(2) of the FA prescribes the mandatory elements that are required to be present in a franchise agreement. Pursuant to section 18(3) of the FA, failure to comply with section 18(2) would render a franchise agreement null and void. Section 18(3) has been removed by the Amending Act. The Amending Act has now made changes to section 18(6) where franchisors and franchisees can potentially be liable for an offence if they fail to comply with section 18 of the FA.

The removal of section 18(3) of the FA suggests that a franchise agreement may still be enforceable notwithstanding that it is non-compliant with section 18 of the FA. Nevertheless, section 39(2)(a) of the FA still permits the Court to declare a franchise agreement to be null and void after sentencing a franchisor that is found guilty of an offence.

Hence, it is crucial that franchisors and franchisees consult their lawyers to review their franchise agreement thoroughly as any non-compliance with section 18 would result in criminal penalties.

Revision of Fees

The KPDN has initiated an overhaul of the Third Schedule of Franchise (Forms and Fees) Regulations 1999 which contains the list of fees that are payable for various franchise matters under the FA. The revision of fees can be found in the Franchise (Forms and Fees) (Amendment) Regulations 2022.

Prior to the amendments, there are only several matters which require payment to be made to the Franchise Registry and they are approval of franchise registration, processing of franchise registration, processing of amendments to disclosure documents and processing of registration of franchise broker.

Payment of fees is now extended to a number of other matters including renewal of franchise registration, registration of franchisee and registration of franchise consultant. There is a distinction in the amount of fees payable by a local franchisor and foreign franchisor for franchise registration.

A summary of selected fees areas follows:

Description of fees Type of fees Local Foreign
Registration of franchisor for 5 years Approval RM1,000 RM5,000
Process RM50 RM50
Registration of franchisee for 5 years Approval - RM1,000
Process RM20 RM50
Renewal for 5 years RM1,000 RM5,000
Application for amendment of supporting document Process RM50 RM50
Application for sale of franchise by foreigner in Malaysia Approval - RM5,000
Process - RM50

Final Remarks

The Amending Act has certainly brought about some long-awaited revisions to the FA that resolve existing ambiguities within the original legislation. Franchisors and franchisees are now subjected to stricter requirements under the FA due to the new changes that are brought by the Amending Act. The imposition of criminal sanctions for non-compliance of various provisions in the FA signals a strong message from the KPDN to franchisors and franchisees to take their obligations seriously.

The revision of the schedule of fees by the KPDN for franchise matters as well as the need for periodic renewals of franchise registration has resulted in a notable increase in costs that are required to run a franchise business in Malaysia, especially for foreign franchisors and their franchisees. Nevertheless, it seems that KPDN has chosen to impose lower fee rates to local franchisor and their franchisees to encourage more local companies to adopt this mode of business. It remains to be seen whether the overall increase in the costs of registering and maintaining a franchise registration would create barriers to entry or discourage foreign companies from participating in the franchise system in Malaysia.

For further enquiries on franchise matters, you may contact Jonathan Lim Hon Kiat, Stanley Lee Wai Jin, or Nurul Syahirah Azman of Zaid Ibrahim & Co (in association with KPMG Law).

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

[1] A person who commits an offence under the FA for which no penalty is expressly provided shall, on conviction, be liable:

  1. if such a person is a body corporate, to a fine of not less than RM 10,000 and not more than RM50,000 and for a second or subsequent offence, to a fine of not less than RM20,000 and not more than RM 100,000
  2. if such a person is not a body corporate, to a fine of not less than RM 5,000 and not more than RM 25,000 or to an imprisonment for a term not exceeding 6 months, and for a second or subsequent offence, to a fine of not less than RM 10,000 and not more than RM 50,000 or to imprisonment for a term not exceeding 1 year.


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Corporate and Commercial

Major revamp to the Franchise System in Malaysia

Recent amendments to the Franchise Act 1998 have been introduced providing more stringent requirements to the 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.

Article
Corporate and Commercial

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

Labuan Companies Act 1990 was updated to align with int'l standards. Changes include beneficial ownership, directors' qualifications, and penalties.