On 6 July 2016, Worldgate Global Logistics Ltd (the “Company”), a company principally engaged in the provision of international freight services, transportation services, as well as warehousing services to customers around the world, was successfully listed on the Growth Enterprise Market (“GEM”) of the Stock Exchange of Hong Kong Limited (“HKEX”) (Stock Code: 8292).
The Company was the first Malaysian owned company with operations in Malaysia only to be listed on the GEM of the HKEX. We are grateful to the Company for having engaged us as their Malaysian legal counsel in respect of its GEM initial public offering exercise.
The logistics services in Malaysia are regulated by specific legislations regulating freight forwarding or customs clearance, warehousing, and transportation. To undertake such business, various registrations, approvals and licences are required to be obtained from regulatory authorities in Malaysia. We set out below a summary of pertinent Malaysian laws and licensing requirements that are applicable to companies that are involved in the logistics industry in Malaysia.
MALAYSIAN REGULATORY OVERVIEW
1. Freight Forwarding and Customs Brokerage Services
Before a logistics provider can act as a freight forwarder and customs broker, the Customs Act 1967 (“CA 1967”) provides that such persons are required to submit an application to the Royal Malaysian Customs Department for permission to act as a freight forwarder and customs broker. Such permission may be granted subject to such terms and conditions as the Royal Malaysian Customs Department may deem fit to impose. The following are some of the common terms and conditions that may be imposed and are by no means exhaustive:-
- the logistics provider shall have at least fifty one per cent (51%) Bumiputera equity interest, directorship, management and supporting staffs. This condition is not applicable to companies which are only acting as shipping agents and companies which have acquired the status of International Integrated Logistics Service (“IILS”) from Malaysian Investment Development Authority (“MIDA”);
- the logistics provider shall have a paid-up share capital of not be less than Malaysian Ringgit One Hundred Thousand (RM100,000) since it is a company registered under the laws of Malaysia;
- the logistics provider shall apply for renewal of the permission no later than fourteen (14) days before the expiry of such permission;
- the logistics provider if acting as customs agents shall not change its name, address, ownership without the consent of the Royal Malaysian Customs Department of Malaysia; and
- the logistics provider shall not lease or allow another party to use the permission obtained to conduct customs clearance.
2. Warehousing Services
Licensed customs warehouse
At any customs port, customs airport, place of import or export or at any inland customs station, the Minister of Finance of Malaysia has the authority to establish and maintain customs warehouses, wherein dutiable goods may be deposited and kept without payment of customs duty. The Minister of Finance of Malaysia may also prescribe the amount to be paid as warehouse rent on goods deposited in such warehouse and remit any amount payable as rent. It is important to note that the CA 1967, “dutiable goods” is defined as all goods subject to the payment of customs duty and on which duty has not yet been paid. The effect of this definition would be that any goods upon which the duty has been paid or non-dutiable goods are not permitted to be stored in such customs warehouse.
Pursuant to the Customs Regulations 1977 (“CR 1977”), no person shall be allowed to enter any customs warehouses, or other area or premises controlled by the Royal Malaysian Customs Department except with their permission.
In order to store dutiable goods in such customs warehouse, a licence is required from the Director General of Customs and Excise of Malaysia. Pursuant to the CA 1967 and Excise Act 1976 (“EA 1967”), where applicable, the Director General of Customs and Excise of Malaysia may, on payment of the required fees, grant a licence to a licensee for warehousing dutiable goods.
Application of such licence shall be made in accordance to the requirements as stipulated in the CR 1977 or the Excise Regulations 1977 (“ER 1977”), as the case may be.
Warehousing and Carrying Out Commercial Activities in Free Commercial Zones
Notwithstanding the provisions of the CA 1967 and EA 1976, the Free Zones Act 1990 (“FZA 1990”) was implemented to govern the establishment of free zones in Malaysia for promoting the economic life of the country and other related purposes. The Minister of Finance of Malaysia may, by notification in the Gazette, declare any area in Malaysia to be a “Free Commercial Zone” where commercial activities are carried out with minimal customs control.
Commercial activities such as trading (excluding retail trade), breaking bulk, grading, repacking, relabeling, and transit are allowed to be carried out in a Free Commercial Zone without payment of any customs duty, excise duty, sales tax or service tax. The list of Free Commercial Zones in Malaysia is prescribed in the First Schedule of the FZA 1990.
Free Zones Regulations 1991 (“FZR 1991”) provides that any person wishing to carry out any commercial activity, such as warehousing, within a Free Commercial Zone shall apply in writing for approval (“Operating Licence Certificate”) to the authority in charge of operating the Free Commercial Zone. Such approval granted may be subject to such further terms and conditions as the authority of that particular Free Commercial Zone deems necessary to impose.
In the event that a logistics provider decides to rent or lease warehouse(s) in any of the Free Commercial Zones, FZR 1991 provides that no person shall hold leases and tenancies in a Free Commercial Zone for the purpose of carrying out any commercial activity in the zone, unless the permission of the authority is obtained. The permission granted shall be in writing and may be subject to such terms and conditions as the authority deems necessary to impose. In other words, other than obtaining an Operating Licence Certificate, a logistics provider is required to also obtain an additional written permission to rent or lease premises in a Free Commercial Zone from the relevant authorities.
3. Land Transport Operations
Generally, depending on the type of goods being transported, land transport operations can be divided into two types, i.e. bonded trucking and non-bonded trucking. Bonded trucking relates to only the transport of dutiable goods while non-bonded trucking is the transport of any goods upon which the duty has been paid or non-dutiable goods.
Under the CA 1967 and EA 1967, a carrier is obligated to apply for a licence from the Director General of Customs and Excise of Malaysia in order to transport dutiable goods. CA 1967 provides that the Director General of Customs and Excise of Malaysia may grant a licence to any person to act as a licensed carrier subject to such terms and conditions as he may deem fit to impose and may suspend or withdraw such licence.
In granting a licence to act as a licensed carrier, the Director General of Customs and Excise of Malaysia may require such security to be furnished as he may consider adequate to cover the customs duty payable on the goods moved and for the faithful and incorrupt conduct of such licensed carrier and of his agents and employees acting for him both as regards the customs and his employers.
Meanwhile, the operation of commercial vehicles including trucks, prime movers and trailers are governed by the Land Public Transport Act 2010 (“LPTA 2010”) and the Road Transport Act 1987 (“RTA 1987”).
The Land Public Transport Commission, via the authority granted by the LPTA 2010, controls the issuance of licences for operation of goods vehicles in Peninsular Malaysia only. Under the LPTA 2010, all logistics providers carrying out land transport operations is required to apply for an operator’s licence to operate all trucks, prime movers and trailers.
The LPTA 2010 states that no person shall operate or provide a goods vehicle service using a class of goods vehicles for the carriage of goods for hire or reward; or for or in connection with any trade or business unless he holds an operator’s licence issued for goods vehicle service. For avoidance of doubt, “goods vehicle” is defined under the LPTA 2010 to mean any motor vehicle constructed or adapted for use for the carriage of goods or a trailer so constructed or adapted; or any motor vehicle or a trailer not so constructed or adapted when used for the carriage of goods solely or in addition to passengers.
A person is deemed to be operating or providing a goods vehicle service if he uses or drives a goods vehicle himself; or employs one (1) or more persons to use or drive a goods vehicle, to operate or provide a goods vehicle service, and he owns the said goods vehicle; or he is responsible, under any form of arrangement with the owner or lessor of the said goods vehicle to manage, maintain or operate such goods vehicle. Such operator’s licence shall only be entitled the holder of the operator’s licence to operate or use one (1) class of goods vehicle, but a person may hold more than one (1) operator’s licence.
The RTA 1987 and Motor Vehicles (Periodic Inspection, Equipment and Inspection Standard) Rules 1995 require that all trucks, prime movers and trailers to undergo periodic inspection at a vehicle inspection center to ensure that all such vehicles comply with the statutory requirements as to construction, equipment and use of their respective class or category. After the inspection is carried out, an inspection certificate will be issued to specify that the vehicle complies with all the statutory requirements as to its construction, equipment and use.
Upon entering into a franchise agreement with a local franchisee and prior to the commencement of operations, the franchisee of a foreign franchisor is required to make an application to register its franchise with the Registrar pursuant to Section 6A of the Act.
2. Franchisee of a Local Franchisor
Pursuant to Section 6B of the Act, a franchisee who is granted a franchise by a local franchisor is required to register the franchise with the Registrar within 14 days from the date of signing of the franchise agreement between the franchisor and the franchisee.
Once the registration of franchise is approved, a franchisor can enter into the franchise agreement with the franchisee. There is a compulsory requirement for the franchisor to submit to a prospective franchisee a copy of the franchise agreement and disclosure documents at least 10 days before the signing of the franchise agreement. Failure to comply the above is an offence.
The Act mandates the inclusion of certain terms and conditions in the franchise agreement, whereby failure to comply renders the franchise agreement null and void. The franchise agreement must be in writing and include certain provisions specified in the Act which shall include:-
- Cooling-off period of not less than seven working days which the franchisee has the option to terminate the agreement and obtain a full refund of all monies paid to the franchisor, save for an amount to cover expenses incurred by the franchisor to prepare the agreement;
- Duration of the franchise (minimum five years) and terms of renewal;
- Name and description of the product and business of the franchise;
- Territorial rights granted to the franchisee;
- Franchise fee, promotion fee, royalty or any related payment payable by the franchisee;
- Obligations of the parties;
- Franchisee’s rights to use and the description of the mark or intellectual property;
- The conditions under which the franchisee may assign the rights given under the franchise;
- Type and particulars of assistance provided by the franchisor; and
- Effect of termination or expiration of the agreement.
Further, the franchisor must establish a promotion fund to be managed under a separate account and used solely for the promotion of the subject matter under the franchise, if the franchise.
GUARANTEES AND PROTECTION
The Act provides that the franchisee needs to provide a written guarantee not to disclose confidential information or carry on any business similar to the franchised business, for the duration of the agreement and for a period of two years thereafter which extends not only to the franchisee but also its directors, employees and spouses and immediate family members of the directors.
The abovementioned non-disclosure clauses, non-compete clauses and restrictive covenants are generally upheld as contractual terms and enforceable for the duration of the agreement and a period of two years post-termination of the franchise agreement. They form an exception to contract law principles which generally hold a post-contract restraint of trade clause as void. Breach of these covenants entitles the aggrieved party to sue for damages and specific reliefs and may also form the grounds of a complaint to the Registrar. Furthermore, the breach of restrictive covenants set out in the Act is tantamount to an offence under the Act.
In the recent case of La Kaffa International Co. Ltd (“La Kaffa”) v Loob Holding Sdn Bhd (“Loob”), La Kaffa, foreign franchisor of the ‘CHATIME’ franchise filed a suit against its master franchises in Malaysia, Loob and sought for several injunctions which include a prohibitory injunction in relation to the restraint of trade. In the High Court, the learned Judge dismissed the prayers relating to restraint of trade and only ordered the return of properties by Loob to La Kaffa. La Kaffa appealed to the Court of Appeal and the arguments involve the application of Section 27 of the Act which prevents a franchisee (including its directors, spouses, immediate family of the directors, employees) from carrying on business similar to the franchised business during the franchise term and for two years after the expiration or earlier termination of the franchise agreement.
The Court of Appeal ruled in favour of La Kaffa and is of the view that failure to grant the prohibitory injunction by the Judicial Commissioner is flawed which requires appellate intervention. The Court of Appeal granted prohibitory injunction (prohibition to carry out “TEALIVE” business which is similar to “CHATIME”) against Loob on the grounds that the conduct of Loob, i.e. change the name of business ‘CHATIME’ and running the business under ‘TEALIVE’, is not only in breach of legal obligation relating to restraint of trade but also breach of franchise law which does not encourage criminal or tortious conduct of business and goodwill. The Court of Appeal has also dismissed the stay application filed by Loob against the prohibitory injunction to allow “TEALIVE” to run its business pending the disposal of the appeal in the Federal Court.
The abovementioned case illustrates that when the parties have agreed not to do certain acts and the Act also provides for such protection, the court is obliged to give effect to ensure the salient terms of the franchise agreement as well as the Act is not breached.
TERMINATION OF FRANCHISE AGREEMENT
When introduced in 1998, the Act only prohibited the franchisee from terminating a franchise agreement before expiration of the franchise term. Following amendments made in 2012, a similar prohibition now applies to franchisors. In any event, either party may not terminate a franchise agreement before the expiration date except for good cause as stipulated in the Act. ‘Good cause’ is defined to include failure of the franchisee or franchisor to comply with the terms of the franchise agreement or any other relevant agreement between the parties and their failure to remedy such breach within a specified period, which may not be less than 14 days.
Termination without the requirement of notice and the opportunity to remedy the breach is also allowed in certain specified circumstances such as assignment of franchise rights for the benefit of creditors or a similar disposition of the assets to any other person, bankruptcy or insolvency, voluntary abandonment of franchised business, conviction of a criminal offence that substantially impairs the goodwill associated with the franchisor’s trade mark or other intellectual property or repeatedly fails to comply with the terms of the franchise agreement.
In conclusion the main legislations regulating freight forwarding or customs clearance, warehousing, and transportation in the logistics services in Malaysia are the CA1967, the EA 1967, FZA 1990, LPTA 2010 and RTA 1987 as amended, supplemented or otherwise modified from time to time.
In addition to the aforementioned licences, permissions and approvals, a logistics provider may consider applying in writing to the Minister of International Trade and Industry of Malaysia (“MITI”) for a “pioneer status” in relation to the provision of integrated logistics services.
Under the Promotion of Investments Act 1986 (“PIA 1986”) a company granted with pioneer status is entitled to a tax relief period of five (5) years. Pursuant to the Promotion of Investments (Promoted Activities and Promoted Products) Order 2012, “integrated logistics services” has been listed as one of the promoted activity under the PIA 1986.