Legal Updates November 2019 - Shearn Delamore & Co

Dear valued clients and business partners,

We are pleased to highlight the following legal news and updates for November 2019.

Corporate/M&A

Consultation paper on Beneficial Ownership Reporting Framework

The Companies Commission of Malaysia (“SSM”) issued a consultation paper titled the “Guidelines for the Reporting Framework for Beneficial Ownership of Legal Persons” on 8 November 2019. The objective of the paper is to provide guidance to companies, limited liability partnerships and businesses on the requirements relating to beneficial ownership and the procedures in complying with the reporting framework.

All companies (including foreign companies), limited liability partnerships and businesses will be subject to reporting obligations of beneficial ownership information. However, the following companies are exempted from the beneficial ownership reporting framework:

listed companies on any local or foreign stock exchange;
financial institutions; or
companies whose shares are deposited in the central depository pursuant to the Securities Industry (Central Depositories) Act 1991.

Some of the changes proposed in the consultation paper are:

1. Clarification on the definition of beneficial owner

Companies limited by shares

An individual is deemed to be a beneficial owner or have control over a company if the individual satisfies one or more of the tests below:

directly or indirectly owns more than 20% of the shares;
directly or indirectly has interest in more than 20% of the shares;
holds directly or indirectly more than 20% of the voting shares;
has the right to exercise significant control whether formal or informal over the company or its directors;
is a member of the entity and, under an agreement with another member of the entity, controls a majority of the voting rights in the entity; or
has the right to exercise, or actually exercises, dominant influence or control over the entity.

Companies Limited By Guarantee (“CLBG”)

An individual is deemed to be a beneficial owner or have control over the CLBG if the individual satisfies one or more of the tests below:

has the right to exercise significant control whether formal or informal over the company or its directors;
has the right or power to directly or indirectly appoint or remove a director; or
has the right, or actually exercises, dominant influence or control over the entity.

2. Reasonable measures to identify beneficial ownership

SSM recommends implementing at least one, but not limited to the following actions, in order to identify beneficial ownership:

review all documents and information available at company’s level, for example, register of members, shareholders agreement, constitution, certificates of incorporation, etc;
consider interests in the company held by individuals, corporate entities and/or trusts;
consider any evidence that can show interests or rights held through a variety of means might ultimately be controlled by the same person; and
any other actions that may have to be taken depending on circumstances of each companies.

3. Entry point of beneficial ownership information

Local companies

There is a duty to lodge beneficial ownership information together with the annual return. New companies will have to lodge beneficial ownership information within 30 days from the appointment of company secretaries.

It is proposed that all companies should send out notices pursuant to sections 56(1), (2) and (3) of the Companies Act 2016 in order to frequently update SSM of beneficial ownerships. Companies are required to send a notice under section 56(1) at least once in a calendar year for the purposes of the submission of the annual return.

Foreign companies

There is a duty to submit beneficial ownership information with the annual return, as well as the additional duty to submit this information during the registration stage for new foreign companies.

The consultation paper can be found here. Members of the public are invited to provide feedback by 4 December 2019.

For further information regarding corporate/M&A matters, please contact our Corporate/M&A Practice Group.

Dispute Resolution

Jack-in Pile (M) Sdn Bhd v Bauer (Malaysia) Sdn Bhd [Civil Appeal No: 02(f)-58-07/2018(B)] (Federal Court)

In this Appeal, the Federal Court held unanimously that the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) has prospective effect and is not applicable to construction contracts entered into before the coming into force of the CIPAA, that is, 15 April 2014.

This ruling has in effect overruled the previous decision made by the High Court in UDA Holdings Bhd v Bisraya Construction Sdn Bhd [2015] 11 MLJ 499, where the appeal to the Court of Appeal was dismissed without written grounds of judgment. This means that contractual arrangements reached between the parties in construction contracts pre-15 April 2014 apply notwithstanding the express provisions therein are in contravention of the CIPAA. The entire adjudication proceedings and adjudication decision obtained by the parties were rendered void and were set aside.

Particularly, the Federal Court in the instant case also deliberated on the question of whether section 35 of the CIPAA, which prohibits any payment mechanism in construction contracts to be regulated by a “pay-when-paid” clause (which is the main contractor’s obligation to pay a subcontractor only arises upon the receipt of payment by the main contractor from its principal), has retroactive effect.

In this regard, the Federal Court confirmed that CIPAA does not govern construction contracts entered into before the commencement of CIPAA; any payment dispute arising out of such construction contracts are not regulated by CIPAA.

Hence, section 35 of the CIPAA has no application in contracts entered into before 15 April 2014. The agreed fee mechanism and payment arrangement reached between the contracting parties in construction contracts executed prior to 15 April 2014 remain valid and enforceable even where such fee arrangement is on a conditional payment basis.

The justifications given by the Federal Court are, amongst others, as follows;

That CIPAA does not provide that it operates retrospectively. As such, the general rule applies — that an Act of Parliament operates on a prospective basis unless there is an express, clear and unambiguous provision which states otherwise;
That CIPAA provides substantive rights to the contracting parties in construction contracts. It manifestly affects parties’ freedom to contract. Particularly, sections 5, 13 and 28 to 30 of the CIPAA have considerably curbed and altered the parties’ substantive contracting rights and contractual rights and remedies. In the event CIPAA is of retrospective effect, it would impair the contractual parties’ existing rights and obligations and hence CIPAA ought to have prospective effect in the absence of express word or necessary implication from the CIPAA;
That parties have acted on the agreed terms and conditions of the construction contract. CIPAA, if it operates retrospectively, would effectively affect and interfere with those contractual rights which have already been vested in and exercised by the contracting parties. Such retroactive application of CIPAA would also prejudicially affect vested rights or the legality of past transactions which predate CIPAA.

See also Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd [Civil Appeal No.: 02(f)-124-12/2018(W)] heard together with Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd [Civil Appeal No.: 02(f)-125-12/2018(W) and Ireka Engineering & Construction Sdn Bhd v PWC Corporation Sdn Bhd [Civil Appeal No.: 02(f)-126-12/2018(W)]], where the Federal Court upheld the parties’ contractual arrangement which provides Ireka Engineering with a right to set-off for any cross-claim it has against PWC despite the fact that section 5 of CIPAA expressly precluded parties from entering into arrangement as such on same grounds above.

For further information regarding dispute resolution matters, please contact our Dispute Resolution Practice Group.

Intellectual Property

Groundless threat — Trademarks Act 2019

The Malaysian Trademarks Act 2019 (“the Act”) has brought a multitude of new changes to our trademark legal regime which include the statutory tort of groundless threat for infringement proceedings. This article will now discuss the salient points of groundless threat proceedings under section 61 of the Act.

One may wonder why such tort is necessary in the first place. The rationale for the tort of groundless threat is well summarised in the case of Skinner & Co v Shew & Co [1893] 1 Ch 413 when Bowen LJ held that:

“the legislature desires that threats of patent action shall not hang over a man’s head; that the sword of Damocles, in such a case, should either not be suspended or should fall at once.”

Essentially, it seeks to ensure that the registered proprietor will not recklessly make a threat of legal proceedings against another party.

Under section 61(1) of the Act, an action to obtain reliefs for groundless threat of infringement proceedings can be initiated by any aggrieved person, provided that the threat is in relation to an act other than the following acts

The application of the trademark to goods or to the material used or intended to be used for labelling or packaging goods;
The importation of goods to which, or to the packaging of which, the trademark has been applied; or
The supply of services under the trademark.

A cursory reading of the provision above suggests that an action for groundless threat is limited to a threat of infringement proceedings with respect to acts done by secondary infringers. This legal position is not without merit. Secondary infringers such as retailers and wholesalers may not have the same level of culpability in relation to the infringing acts as compared to the primary infringers.

The reliefs provided for groundless threat proceedings are laid down under section 61(2) of the Act as follows:-

A declaration that the threats are unjustifiable;
An injunction against the continuance of the threats; or
Damages in respect of any loss he has sustained by the threats.

Section 61(3) of the Act goes on to state that the plaintiff shall be entitled to the reliefs above unless the defendant (registered proprietor of the trademark) shows that the acts in respect of which proceedings were threatened constitute or, if done, would constitute an infringement of the registered trademark concerned.

What if the defendant proves that the acts were indeed acts of trademark infringement? This does not mean that the plaintiff is now denied the reliefs. Section 61(4) of the Act provides that the plaintiff shall nevertheless be entitled to the reliefs if the registration of the trademark can be shown to be invalid or liable to be revoked in a relevant respect.

Now, coming back to the fundamental question — what amounts to a threat under this section? In the English case of L’Oreal (UK) Ltd v Johnson & Johnson [2000] EWHC Ch 129, a threat covers “any information that would convey to a reasonable man that some person has trade mark rights and intends to enforce them against another”.

Section 61(5) of the Act sheds some light on this question as it clarifies that a mere notification of a trade mark application or registration is expressly excluded from being a “threat” for the purposes of groundless threat proceedings.

For most cases, a threat of infringement proceedings is usually made against a third party by lawyers who are instructed by their client via a cease and desist letter. This begs the question of whether lawyers will now be liable for groundless threat proceedings. This question is addressed under section 61(6) of the Act. It provides that nothing in section 61 shall render an advocate and solicitor liable to an action for groundless threat in respect of an act done by him in his professional capacity on behalf of a client.

It remains to be seen how the Malaysian courts will give effect to the provisions under section 61 of the Act, particularly on who would be an “aggrieved party” as this is not expressly provided under the Act.

That being said, registered proprietors should be more cautious before making assertions on alleged infringement done by third parties as they may now in turn be liable for relief for groundless threat of infringement proceedings.

For further information regarding intellectual property law matters, please contact our Intellectual Property Practice Group.

Tax and Revenue

Income tax

The following public rulings and guideline have recently been published on the Inland Revenue Board of Malaysia’s official website:

Perquisites from Employment (Public Ruling No. 5/2019) issued on 19 November 2019;
Tax Treatment on Expenditure for Repairs and Renewals of Assets (Public Ruling No. 6/2019) issued on 26 November 2019; and
Operational Guideline No. 2/2019 on “Permohonan Surat Penyelesaian Cukai bagi Syarikat, Perkongsian Liabiliti Terhad dan Entiti Labuan” (available in Malay language only) issued on 12 November 2019.

Service tax

A new Specific Guide on Refund on the Acquisition of Services by Foreign Missions and International Organizations (as at 29 October 2019) has been published on the Royal Malaysian Customs Department’s MySST website.

Sales tax

A revised version of the Specific Guide on Sales Tax Deduction Facility (as at 30 October 2019) has also been published on the Royal Malaysian Customs Department’s MySST website.

Landmark tax decision

Ketua Pengarah Hasil Dalam Negeri v CIMB Bank Berhad [unreported]

Earlier this month, the Court of Appeal confirmed that databases constitute “plant” and qualify for capital allowances. For more info, please click here.

For further information regarding tax and revenue matters, please contact our Tax and Revenue Practice Group.

This Alert is issued for the information of the clients of the Firm and covers legal issues in a general way. The contents are not intended to constitute any advice on any specific matter and should not be relied upon as a substitute for detailed legal advice on specific matters or transactions.

WHAT'S NEW