Regulation

New Regime for Foreign Companies


By Andrew Webb, Counsel, and Sophia Wong, Trainee Advocate, Appleby (Isle of Man) LLC (01/11/2014)

Before the Foreign Companies Act 2014 (the Act) came into force on 1 July 2014, companies incorporated outside the Isle of Man carrying on business from an established place of business in the Isle of Man, were registered under Part XI of the Companies Act 1931 (Part XI). 

The provisions of Part XI had been amended from time to time to legislate against perceived abuses, for example, the deeming requirement in the Companies Act 1968 that the holding of land constituted the establishment of a place of business dates back to the massive residential developments of the late 1960s when details of corporate absentee landowners were required.  It was also designed to ensure so far as possible that creditors had a local remedy, by requiring the name and address of a local person for service of process and notices, rather than having to undertake service out of the jurisdiction or costly proceedings elsewhere.  Plainly, in a small jurisdiction the opportunity for fly-by-night operators is considerable and Part XI went some way to controlling foreign business activity.  However, Part XI was difficult to interpret.

The Foreign Companies Act 2014

The Act purports to be a radical overhaul of Part XI; however, a number of provisions are still referential.  For example, the registration of charges provisions in Part III of the Companies Act 1931 (the 1931 Act) still apply without any policy change.  It is noteworthy that the UK equivalent legislation has abolished the requirement for foreign companies to register charges. 

The Act applies to foreign companies in the usual sense as well as foundations and limited partnerships; indeed any entity with separate legal personality not incorporated in the Isle of Man. There is also the addition of an election, allowing a foreign entity which is not conducting business from an established place of business or holding land in the Isle of Man but has established another nexus with the Island, to elect that the provisions of the Act apply to it. 

The Act helpfully lists circumstances when a foreign company is not, by reason only of any one or more of those circumstances applying, to be treated as carrying on business from an established place in the Island; these circumstances are as follows:

·         Being party to, or settling legal proceedings;

·         Holding meetings or carrying on activities which relate only to its internal affairs;

·         Maintaining a bank account;

·         Purchasing or investing in assets (except in land in the Isle of Man);

·         Selling its assets;

·         Holding property (except land in the Isle of Man);

·         Charging its property;

·         Incurring debt;

·         Collecting monies owing to it;

·         Enforcing its legal rights; or

·         Receiving services which –

o    Are provided by the holder of a licence issued under section 7 of the Financial Services Act 2008 whose licence permits the holder to carry on the regulated activity within the meaning of section 3(1) of that Act of providing corporate services; and

o    Are corporate services for the purposes of that Act.

Oddly, these same circumstances also permit a foreign company to claim that it has established a nexus with the Isle of Man and thereby allowing it to elect to be treated as a company to which the Act applies and make an application for registration.  This is counter-intuitive, the listed circumstances not being sufficient in themselves to require registration and yet sufficient to establish a right of election to register.

The Act has gone some way to clarify when a foreign company is not carrying on business from an established place of business in the Island; however, there is still ambiguity over what actually constitutes an “established place of business” with the term remaining undefined.

Applications for Registration

Applications for registration must be made within one month of the legislation applying to it. A foreign company, which chooses to elect to register under the Act where registration is not mandatory, is required to make an application within one month of that election.  This is rather ambiguous as there are no provisions for the foreign company to notify the Department of Economic Development (the Department) of the election so time begins to run when the applicant itself decides it should run.  An election being subjective could be revoked if not notified to the Department, thereby suspending any lapse of time.

The Act introduces a power allowing the Department to refuse to register documents, this includes where a document does not comply with the legislation or the regulations made under it.  This suggests that any filings not made in the approved form will be refused.  However, practitioners can take comfort from section 42 of the Interpretation Act 1976, which states that a form will not be invalidated by virtue of it not being in the prescribed form, provided it does not materially affect the substance of the form.  Where a document is rejected it will be treated as not submitted, this makes it critical to ensure that any filings submitted are in compliance with the provision, so as not to be in default of the one month filing requirement.  There is no express power for the Department to make concessions in this regard and in principle the penalties contained in the legislation will apply.

A noticeable difference between Part XI and the Act is the reduction in the amount of information that must be submitted.  Foreign companies are no longer required to submit their constitutional documents. Instead only the basic registered details of the company are required: company name and number, jurisdiction of incorporation, date of incorporation and the address of the established place of business or address of land it holds in the Island.  The reasoning appears to be that the register will clearly identify the company’s jurisdiction of incorporation so any information relating to the internal constitutional details of the company will be obtainable from that jurisdiction.  Language difficulties alone may make enquiries difficult for the creditor or consumer who needs further information from abroad.  

A foreign company is still required to make an annual return, failure to submit a return within the required time represents an offence under the Act and the foreign company may be removed from the register.

A foreign company may be removed from the register by the Department where the Act ceases to apply to it, or where the company fails to submit an annual return within four months after the company’s return date.  If a foreign company is removed from the register, the Department must publish a notice of the removal.  The previous lengthy process requiring the Department to send a series of letters to the foreign company in default has been removed. 

Service of Process

With one exception, a foreign company must ensure that it is able to accept service of process and notices in the Island.  Oddly, a significant change is that a foreign company, which holds land in the Isle of Man, is no longer deemed to have established a place of business in the Isle of Man but is still required to register.  In those circumstances the foreign company is only required to provide an address outside of the Isle of Man for service.  This change has not been reflected in the amendment to the Rules of High Court of Justice (the Rules) contained in the Schedule to the Act.  These provide that where a foreign company has no address for service, a document must be left at the address of the person who is authorised to accept service under the legislation or at any place of business within the Island.  This does not consider foreign companies registered by reason of holding land in the Island, which do not have a place of business and have not provided an address on the Island.  A creditor would have to obtain service out of jurisdiction upon that overseas address, returning the legislation to the position which prevailed before the Companies Act 1968.  This seems a retrograde step for creditors or consumers where foreign companies owning land in the Island choose not to provide a local address for service.

Notification of Events

The Act makes provision for the notification of certain events; such as change of address.  It also requires notification of the appointment of a liquidator or receiver of the company or its assets under the laws of the jurisdiction outside the Island.  Under Manx laws, section 238 of the 1931 Act, as applied by Part X requires a liquidator to register a notice of his appointment with the Department within 21 days after his appointment.  There is no similar provision for notification of the appointment of a receiver appointed under Isle of Man law. Better consumer protection would be achieved if an appointment had to be notified in all cases, irrespective of the jurisdiction in control of the appointment.  

Penalties

The penalties under the Act remain unchanged though there is the addition of a defence where a person took all reasonable precautions and exercised due diligence to avoid committing the offence.  A company that has been removed from the register may make a further application for registration accompanied by the outstanding annual return and any prescribed fees.  A foreign company that fails to re-register commits an offence, it is yet to be seen how this will be prosecuted since it is unlikely that there will be anyone in the Isle of Man. 

Conclusion

It remains to be seen whether creditor and consumer rights have been adequately protected under the new regime in pursuing the endeavour to reduce administration for foreign companies.