Federal Court Clarifies Definition of "Security" in State-Backed Loans for Stamp Duty Remission

The Federal Court in its broad grounds of judgment dated 17 September 2024 in Perbadanan Pembangunan Pulau Pinang v Pemungut Duti Setem Malaysia (Civil Appeal No. 01(f)-28-10/2023 (K)) held that a Letter of Undertaking issued by the Penang State Government to the Ministry of Finance (“LOU”) did not constitute security for stamp duty purposes, thus entitling the financing agreement in respect of a RM100 million Islamic Tawarruq facility granted by Bank Islam Malaysia Berhad (“BI”) to Penang Development Corporation (“PDC”) to stamp duty remission under the Stamp Duty (Remission) Order (No. 2) 20121 (“Remission Order”).
 
The Federal Court’s unanimous decision in this appeal has overturned the Court of Appeal's decision in Pemungut Duti Setem Malaysia v Perbadanan Pembangunan Pulau Pinang [2024] 8 CLJ 323 that had interpreted the LOU as a security, thereby disqualifying the financing agreement from stamp duty remission under the Remission Order.
 
Key issue before the Federal Court
 
The primary legal issue revolved around whether the LOU constituted a security for the financing agreement between PDC and BI.
 
In coming to its decision, the Federal Court had to decide on the broader question of whether statutory provisions or obligations under other legislation could be "imported" to construe or interpret the meaning of "security" within the Stamp Act 1949 (“Stamp Act”) and the Remission Order.
 
Decision of the Federal Court
 
While acknowledging that a purposive approach to statutory interpretation under section 17A of the Interpretation Acts 1948 and 1967 is to be encouraged, the Federal Court cautioned that it should be confined to the statute and should not extend to importing purposes from unrelated statutes.2
 
The Court also cautioned against conflating statutory requirements from unrelated legislation with the Stamp Act's provisions and emphasised that each statute should be interpreted in accordance with its own objectives and legislative context.
 
According to the Federal Court, the Incorporation (State Legislatures Competency) Act 1962 (“ISLCA”) and the Penang Development Corporation Enactment 1971 (“PDCE”) confer powers on the Minister of Finance (“Minister”) to, inter alia, control and supervise the financial affairs of state development corporations such as PDC, and for this purpose, to require such corporations to obtain the Minister’s permission to obtain a loan. The apex court added that in granting its permission, the Minister could attach any conditions that he deemed fit. However, such consent relates to separate and different legislation and has nothing to do with the Stamp Act which is primarily a fiscal statute aimed at raising revenue for the government. Hence, the pre-requisites under the PDCE cannot be regarded as a security for the financing agreement between BI and PDC.
 
The Federal Court stated that it is trite law that statutory requirements from unrelated statutes cannot be used to interpret the Stamp Act or the Remission Order unless those statutory provisions are pari materia or legislatively directed. The Federal Court held that the Court of Appeal had erred by incorrectly importing the requirements and statutory provisions of ISLCA and PDCE when construing the term "security" under the Stamp Act and the Remission Order.
 
The Federal Court reaffirmed that fiscal statutes such as the Stamp Act must be interpreted strictly within their specific legislative framework. Attempting to conflate statutory requirements from different laws, as the Court of Appeal did in the present case,  led to misinterpretation and unintended consequences, particularly in a context like stamp duty, which is designed to raise revenue rather than regulate financial oversight. The Federal Court held that the term "security" must be interpreted in accordance with the Stamp Act and not through the lens of unrelated statutory requirements. Fiscal statutes require precision in interpretation, particularly where tax or stamp duty obligations are concerned.
 
Specifically in relation to the LOU, the Federal Court said that the provision of the LOU was to meet the requirements of the ISLCA and PDCE and not those in the financing agreement. If there was no requirement in those legislation, PDC would have obtained the financing without the need for the Penang State Government to furnish the LOU to the Ministry of Finance. Hence, the Federal Court concluded that it is not simply a question of the construction of the term “security” but more an issue of whether it is permissible to import statutory requirements from separate and unrelated legislation in construing the Remission Order, and more importantly applying those requirements to the remission under the said Order to preclude and prohibit its application, which is not permissible.
 
The Federal Court commented, per obiter, that the situation might differ if it was a condition precedent to the grant of a loan to PDC that security in the form of a letter of undertaking was to be issued by the Penang State Government to BI. That would comprise security to ensure repayment of the loan sum.
 
Answers to the Questions of Law
 
The Federal Court proceeded to answer Questions 2, 3, 5 and 6 of the seven questions of law for which leave to appeal was granted.
 
Question 2: Whether in determining the meaning of the words “loan without security” in the Remission Order, a Letter of Undertaking issued by the Penang State Government to the Ministry of Finance (and not to the lender/creditor) constitutes “security”?
 
Answer: No.
 
Question 3: Whether an undertaking to which both the borrower and lender were not privy would nevertheless be considered as a “security” within the meaning of the Remission Order?
 
Answer: No.
 
Question 5: On the interpretation of the words “loan without security” in the Remission Order, whether the word “security” should be interpreted in the context of insolvency laws or in some other wider or narrower context and, if so, the appropriate context that should be applicable in the case of the Remission Order?
 
Answer: The term ‘security’ should be interpreted in accordance with the Stamp Act.
 
Question 6: Whether the words in the Remission Order should be interpreted in accordance with the principle in National Land Finance Co-operative Society Ltd v Director General of Inland Revenue [1994] 1 MLJ 99, Exxon Chemical (M) Sdn Bhd v Ketua Pengarah Dalam Negeri [2006] 1 MLJ 428 and Premium Vegetable Oils Sdn Bhd v Palm Oil Research and Development Board Malaysia & Anor [2002] 4 MLJ 552 that ambiguity in tax legislation should be read in favour of taxpayers and not against them?
 
Answer: The law as stated in the cases cited in that question remain good law.
 
The Federal Court declined to answer the remaining three Questions of Law, namely Questions 1, 4 and 7.
 
Having provided its reasons, the Federal Court then allowed the appeal by PDC.
 
Commentary
 
This decision has significant implications for the classification of state-backed guarantees in the context of stamp duty. It clarifies that state-issued guarantees for regulatory purposes do not automatically constitute "security" under the Stamp Act. For state-backed loans, statutory assurances required by separate statutes do not disqualify financing agreements from stamp duty remission unless they provide the lender with enforceable rights.
 
The term "security" should be strictly interpreted within the context of the Stamp Act rather than the requirements in other legislation. The Federal Court’s strict interpretation of the Stamp Act and its refusal to import definitions or requirements from unrelated statutes ensures that fiscal obligations remain clearly delineated.
 
Our case note on the Court of Appeal’s decision can be accessed here.
 
Case note by Victoria Low (Associate) of the Tax Practice of Skrine.
 

1 The Remission Order provides, inter alia, that the amount of stamp duty that is chargeable under item 22(1)(b) of the First Schedule to the Stamp Act upon a loan agreement or loan instrument without security for any sum or sums of money repayable on demand or in single bullet repayment under that item which is in excess of 0.1% is remitted.
2 Teo Kim Hui & Ors v Golden Plus Holdings Bhd [2021] MLJU 2849 and Taza bin Tarji v Public Prosecutor and another appeal [2020] MLJU 1822 (CA) cited.

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