Labuan International Business and Financial Centre (“Labuan IBFC”) is governed by an extensive legal framework which consists of 8 principal legislations and supplemented by various subsidiary legislations (such as regulations and orders). The Labuan Financial Services Authority (“Labuan FSA”) acts as the central regulatory, supervisory and enforcement authority of the Labuan IBFC, and in this regard, Section 4A of Labuan Financial Services Authority Act 1996 (“LFSAA 1996”) confers Labuan FSA the power to issue guidelines “to clarify any provision of this Act or the laws specified in the Schedule to facilitate compliance with the law by a Labuan financial institution or any other matters relating to Labuan financial services”.
A perennial question posed - what weight should be attached to guidelines issued by Labuan FSA. This issue was addressed by the Malaysian apex Court in the recent Federal Court decision in Nabors Drilling (Labuan) Corp v Lembaga Perkhidmatan Kewangan Labuan [2020] 12 MLJ 54.
The appellant, a Labuan licensed entity, leased an offshore oil rig drilling platform (“Rig 503”) to a Malaysian company resident in Labuan, without obtaining Labuan FSA’s prior approval and without payment of the requisite fees. Their action breached Item 8.2 of Labuan FSA’s ‘Guidelines on the Establishment and Operation of Labuan Leasing Business 2013’ dated 1 August 2013 (“the Guidelines”), which stipulates that all leasing transactions with Malaysian residents are subject to Labuan FSA’s prior approval (“Prior Approval") and payment of the requisite fees.
After failing to obtain Labuan FSA’s retrospective approval for the leasing of Rig 503, the appellant filed a judicial review application in the High Court on, inter alia, the grounds that (i) the Guidelines have no force of law and (ii) Item 8.2 of the Guidelines contradicts section 7(6) of the Labuan Companies Act 1990 (“LCA 1990”), and is therefore, ultra vires and unlawful.
The High Court dismissed the judicial review application. The appellant appealed to the Court of Appeal, which upheld the High Court’s decision and subsequently, the appellant appealed to the Federal Court.
The issues that the Federal Court had to decide were, inter alia, whether the Guidelines carry the force of law, and more specifically, whether item 8.2 of the Guidelines contradicts and is ultra vires Section 7(6) of the LCA 1990?
The Federal Court, in a unanimous decision, held that the requirement under item 8.2 of the Guidelines is intra vires Labuan FSA’s powers and functions, and is not inconsistent with the LCA 1990:-
- Guidelines issued by Labuan FSA have the force of law - The Federal Court held that Section 4A of the Labuan Financial Services Authority Act 1996 confers Labuan FSA the power to issue guidelines which carry the force of law. Thus, in this case, Labuan FSA’s “Guidelines on the Establishment and Operation of Labuan Leasing Business 2013”, which impose the requirement of obtaining Labuan FSA’s approval for every subsequent leasing transaction, falls squarely within Labuan FSA’s powers and has the force of law;
- Labuan FSA’s implied power under the Interpretation Acts - The Federal Court, after considering Sections 40 and 95 of the Interpretation Acts 1948 and 1967, further held that Labuan FSA has the implied power to make subsidiary legislations or to impose conditions when granting a licence or approval;
- ‘Generalibus specialia derogant’ – Applying this principle, the Federal Court further affirmed that the Labuan Financial Services and Securities Act 2010, being a specific legislation governing Labuan licensed activities, prevails over the Labuan Companies Act 1990, which is general in nature.
You may read the full judgment here: https://bit.ly/3qOHBXF
The Federal Court decision demonstrates that guidelines issued by Labuan FSA are not mere ornaments, but have the force of law. Thus, a Labuan company which fails to comply with the relevant guidelines and conditions issued/imposed by Labuan FSA from time to time could risk the following (not exhaustive):-
- Find that its business falls outside the Labuan Business Activity Tax Act 1990 (“LBATA”), potentially resulting in the Labuan company having to pay taxes based on the standard corporate tax rates (as opposed to the tax rate of 3% on chargeable profits under LBATA); and
- Expose the Labuan company and/or its officers to the risk of enforcement action by the authority.
Operating from Kuala Lumpur, we are one of the leading Malaysian law firms with a strong presence in Labuan IBFC. We have acted for Labuan FSA in a plethora of regulatory actions and litigation matters. We also have extensive experience representing both local and international clients in matters on regulatory compliance, offshore advisory and dispute resolution.
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