Asset Protection
Safeguarding Your Wealth Against Creditors
Business owners and service professionals are naturally concerned with protecting their assets. They understand that business is inherently risky and that fortunes can change abruptly. When calamity strikes, creditors may attempt to reach personal assets such as bank balances, properties and investments.
A significant risk involves personal guarantees provided by directors and owners for loans extended to their companies. Should the company default, banks will call on these guarantees, exposing the guarantor’s personal wealth. Furthermore, certain Malaysian laws explicitly bypass the "corporate shield" to hold directors personally, jointly and severally liable. For instance, directors can face personal liability for unpaid company taxes under Section 75A of the Income Tax Act, as well as outstanding EPF contributions for their employees.
Those who sense trouble and attempt to transfer assets to a spouse before bankruptcy may find their efforts defeated by the "long arms" of insolvency laws. These laws allow a liquidator to void transactions or "claw back" assets (often within a two-to-five-year look-back period), if the transfer is deemed to be an undervalued transaction, an unfair preference, fraudulent transaction or an attempt to avoid creditors’ claims. Service professionals, including engineers, auditors, architects, doctors and lawyers, face similar risks; they must protect their personal wealth against negligence claims that may exceed their professional indemnity insurance coverage.
How can these liabilities be ring-fenced to protect a family’s future?
Common methods, such as transferring assets directly to a spouse or children, are highly risky. The owner loses legal control, and in the event of a family dispute, the assets may be lost permanently, for example, if a spouse refuses to transfer the assets back.
Using nominees is also problematic; if a nominee passes away, the asset enters the nominee’s estate rather than reverting to the beneficial owner. Similarly, simply moving money to different bank accounts, locally or overseas, offers little protection. In the event of bankruptcy, creditors can use legal discovery to trace the trail of money back to the actual owner.
The Role of Trusts
A more robust solution is the use of a trust. To be truly effective against creditors, this usually must be an irrevocable trust, where the assets transferred by the "settlor" (the original owner) cannot be retracted. For this to hold up legally, the owner must pass control of the assets to a trustee.
While the settlor typically has less direct say in daily administration, safeguards can be implemented. A Protector can be appointed to oversee the trustee and replace them if the trust is not being administered properly. Alternatively, a Family Council can be given extensive powers, leaving the trustee primarily as a custodian. Some may even establish a Private Trust Company (PTC) to act as the trustee, allowing the family to maintain a degree of control through the PTC’s board. However, these additional layers increase both the complexity and the cost of the structure.
The Labuan Foundation
A Modern Alternative
As an alternative, owners can consider a Labuan Foundation, a separate legal entity established under the Labuan Foundations Act 2010. When assets are transferred into a Foundation, they are owned by the Foundation itself and are legally de-linked from the original owner (the "Founder"). This makes it significantly harder for creditors to seize these assets to satisfy personal debts if the assets have been transferred to the Foundation for more than 2 years.
A Labuan Foundation is managed by an Officer and a Council (similar to a Board of Directors). The Founder can head this council to provide direction and maintain a level of control over the assets. While creditors could theoretically take legal action against the Council, the Council members do not own the assets; they merely administer them according to the Foundation’s Charter. Crucially, creditors cannot reach the beneficiaries' entitlements until a distribution has been formally declared. Until that time, the beneficiaries have no vested rights over the Foundation’s assets. The Labuan Foundation therefore offers a relatively simple and elegant solution for asset protection and wealth preservation without excessive complexity.
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