JRI Resources Sdn Bhd v Kuwait Finance House (Malaysia) Berhad (06(i)-06-07/2017 (B))

It is indeed possible to characterize with precision that an agency of the State is executive, legislative or judicial, but it cannot be predicated (1) [1962] 2 S.C.R. 339 that a particular function exercised by any individual agency is necessarily of the character which the agency bears.” [10] It is in this context that I approach the fundamental constitutional question at hand as set out earlier. [11] Thus, turning now to the question, what is important in the setting of the present Constitutional Reference is that the constitutional scheme of the Federal Constitution empowers Parliament, the legislative branch of the government, to make laws with respect to any of the matters enumerated, among others, in the Federal List as set out in the Ninth Schedule. Item 4(k) of the Federal List in the Ninth Schedule expressly empowers Parliament to make laws with respect to: “4. Civil and criminal law and procedure and the administration of justice including: 11

Ascertainment of Islamic law and other personal laws for the purposes of federal law.” [12] It is uncontroverted that item 4(k) of the Federal List, Ninth Schedule of the Federal Constitution vests legislative competence in Parliament to enact laws aimed at ascertaining Islamic law and other personal laws for purposes of Federal law. The legal consequence of the constitutional arrangement is that, the ascertainment of Islamic law for the purposes of federal law has been assigned by the Federal Constitution to a specific branch of government, that is to say, the legislative branch. The words could have no room for doubt as they are expressed in very imperative and conclusive terms. The mandatory wording in the provisions is absolute and does not admit any exceptions or exemption. I emphasise that in so far as our Federal Constitution is concerned, ascertainment of Islamic law for the purposes of Islamic financial business falls under the legislative power and thus, in my opinion, powers and discretion on such matters are neither inherent nor integral to the judicial function. [13] What then is the legislative mechanism to ascertain the applicable Islamic law in relation to any aspect of Islamic financial business? The Federal Constitution is silent on the methodology 12 to be used to ascertain Islamic law for that purpose. In my opinion, it falls entirely within the powers and discretion Parliament to decide how this should be exercised. One of the important features of our Federal Constitution is that it does not contain any express prohibition upon the exercise of legislative powers by the executive or of judicial powers by either the executive or the legislature. Lord Diplock speaking for the Privy Council makes this very point in Hinds v The Queen [1977] AC 195: “It is taken for granted that the basic principle of separation of powers will apply to the exercise of their respective functions by these three organs of government [viz, the Legislature, the Executive and the Judiciary]. Thus the constitution does not normally contain any express prohibition upon the exercise of legislative powers by the executive or of judicial powers by either the executive or the legislature.” [14] Within the framework of the Federal Constitution, Parliament is endowed with plenary powers of legislation. Parliament in its discretion is legally empowered to assign or delegate its power of ascertaining what is the applicable Islamic law in relation any aspect of Islamic financial business to any branch of the government or to any administrative body. Support for this 13 approach is to be found in the two decisions of the High Court of Australia that were cited by learned counsel for the respondent. [15] First, the important case of The Federal Commissioner of Taxation v Munro [1926] 38 CLR 153, which concerns a Taxation Board of Review to review the decisions of the Commissioner of Taxation as to the amount of tax payable. The High Court of Australia had recognized that the Australian Parliament was empowered to make laws in respect of taxation by virtue of section 51 of the Australian Constitution. It then went on to state that the Board of Review, which was established pursuant to the Income Tax Assessment Act 1922-1925, was merely auxiliary to the Commissioner of Taxation in his administrative functions. Isaacs J in delivering his judgment, with the necessary emphasis, said: “The Constitution, it is true, has broadly and, to a certain extent imperatively separated the three great branches of government, and has assigned to each, by its own authority, the appropriate organ. But the Constitution is for the advancement of representative government, and contains no word to alter the fundamental features of that institution. Partly repeating, for emphasis, some previous observations, I would say that some matters so clearly and distinctively appertain to one branch of government as to be incapable of exercise by 14 another. An appropriation of public money, a trial for murder, and the appointment of a Federal Judge are instances. Other matters may be subject to a no a priori exclusive delimitation, but may be capable of assignment by Parliament in its discretion to more than one branch of government. Rules of evidence, the determination of the validity of parliamentary elections, or claims to register trademarks would be instances of this class. The latter class is capable of being viewed in different aspects, that is, as incidental to legislation, or to administration, or to judicial action, according to circumstances. Deny that proposition, and you seriously affect the recognized working of representative government. Admit it, and the provision now under consideration is fully sustained.” [16] The second High Court of Australia case is equally important. In The Queen v Trade Practices Tribunal; Ex parte Tasmanian Breweries Pty. Ltd [1970] 123 CLR 361, a challenge was mounted as to whether the decisions of the Trade Practices Tribunal in determining whether a trade agreement can be examined and adjudicated upon as being an agreement against public policy, is exercising judicial power. In the course of delivering his judgment, Kitto J observed as follows: “Thus the work of the Tribunal is work which would be appropriate for the legislature itself to do if it had the time to consider individual cases. It would be obviously impracticable for the 15 Parliament to apply its own ideas as to what is contrary to the public interest, either by passing a special Act for every individual case or by laying down a definition, which in every case would be sure to produce a result satisfactory to it. There is probably no practicable alternative to setting up an authority, which with some but incomplete guidance from the legislature will apply its own notions concerning the public interest. This course the Trade Practices Act adopts, contenting itself with prescribing the qualifications for membership of the Tribunal, giving a limited measure of guidance, and then relying upon the Executive’s choice of members to ensure, so far as assurance is possible, that the notions applied will be such as the Parliament would approve. …None of the powers of the Tribunal, then, involves any adjudication upon a claim of right.” [17] It can be seen from the foregoing discussion that save in respect of certain matters where one branch of government should not exercise the functions of another, other matters may be capable of assignment by Parliament in its discretion to more than one branch of government or for that matter to any administrative body. In my opinion, the present case does not fall within any of the matters in which one branch of government should not exercise the functions of another. Applying this approach, it falls 16 within the discretion of our Parliament to decide how the ascertainment of Islamic law should be put into effect. [18] As the legislative branch of the government, Parliament could legislate a body of laws to ascertain what is the Islamic law applicable on any transactional dispute. However in the complexity and variety of problems that Islamic financial business have to face in the present dynamic business environment, such a methodology is highly impracticable and may cause serious inefficiency. Instead, as it turned out, Parliament, as a matter of policy, recognised a need for the establishment of a single point of reference for the purposes of ascertainment of Islamic laws in relation to Islamic financial business. To this end, Parliament in its wisdom has taken steps, as part of its legislative process, in enacting several legislations to establish SAC in order to support and facilitate the operation of Islamic banking in Malaysia. Parliament had passed the requisite legislations, which in effect assigns or delegates its powers to the SAC to ascertain what is the applicable Islamic law for the business. [19] The objective behind the establishment of the SAC as the ultimate authority for the ascertainment of Islamic law for the purposes of Islamic financial business is to act as the single point 17 of authoritative reference to ensure consistency and certainty in the application of Islamic principles in Islamic financial business. [20] In the Central Bank of Malaysia’s affidavit of 23.4.2018 filed in the present proceedings affirmed by the Assistant Governor, it has been stated that the necessity for a single authority to ascertain Islamic law for the purpose of Islamic financial business arose because of the rapid increase in the number of players in Islamic banking and finance in the country over the years, the rising complexities of Islamic finance products and the corresponding increase in disputes. An unsatisfactory feature of the resolution of the disputes before the civil courts previously has been the reliance on various differing sources of Islamic principles. [21] As submitted by learned counsel for Central Bank of Malaysia (“CBM”), it is an acknowledged fact that diversity of opinion among experts on Islamic legal principles had led to uncertainty in the Islamic banking industry that affected the stability of the Islamic financial system to the detriment of the economy (citing Malayan Banking Bhd v Ya’kup bin Oje [2007] 6 MLJ 389, Arab-Malaysian Finance Bhd v. Taman Ihsan Jaya Sdn. Bhd. & Ors [2008] 5 MLJ 631, Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other appeals [2009] 6 MLJ 839). 18 [22] In the case of Tan Sri Abdul Khalid Ibrahim v Bank Islam Malaysia Berhad & Anor [2010] 4 CLJ 388, Rohana J (now FCJ) explained why Parliament deemed it fit and necessary to designate the SAC to ascertain the acceptable Islamic law: “Taking cognizance that there will always be differences in views and opinions on the Syariah, particularly in the area of muamalat, there will inevitably be varied opinions on the same subject…It must be in contemplation of the differences in these views and opinions in the area of muamalat that the legislature deems it fit and necessary to designate the SAC to ascertain the acceptable Syariah position.” [23] The same point was made by Mohd Salleh Zawawi J (now FCJ) in the case of Mohd Alias Ibrahim v RHB Bank Bhd & Anor [2011] 4 CLJ 654: “In the light of the above, to ensure that the development of Islamic financial instruments progresses smoothly and orderly, the establishment of one supervisory authority in a country is very important. This supervisory authority should have the power to regulate a uniformed interpretation of Islamic law within the sphere of Islamic finance and banking in that country and may choose the best opinion in its decision-making process after 19 taking into consideration all of the authorities, custom of the locality etc.” [24] Among the challenges facing the Islamic financial services industry are the development of financial services and instruments that are Shariah compliant, commercially viable, valid and enforceable, based on the prevailing governing laws (see The New Central Bank of Malaysia Act 2009 (Act 701): Enhancing the Integrity and Role of the Shariah Advisory Council (SAC) in Islamic Finance by Hakimah Yaacob). Consequently, the SAC was established to preclude any uncertainties in the interpretation of Islamic laws with regard to Islamic financial business. The SAC was established pursuant to section 124 of the (now repealed) Banking and Financial Institutions Act 1989, which was amended vide the Banking and Financial Institutions (Amendment) Act 1996. The amending Act had amended section 124(7) to state as follows: “(7) For the purposes of this section

there shall be established a Syariah Advisory Council which shall consist of such members, and shall have such functions, powers and duties as may be specified by the 20 Bank to advise the Bank on the Syariah relating to Islamic banking business or Islamic financial business;” [25] It was as a result of all the above that the Central Bank Act, 1958 (“the 1958 Act”) was then amended to introduce section 16B, which came into force on 1.1.2004. Section 16B of the 1958 Act provided for the SAC to become the authority for the ascertainment of Islamic law for Islamic banking business, takaful business, Islamic financial business, Islamic development financial business or any other business which is based on Shariah principles that are supervised and regulated by CBM. [26] One important point has to be highlighted: Parliament plainly had complete constitutional powers to enact these impugned provisions (see Tan Sri Abdul Khalid Ibrahim v Bank Islam (M) Bhd [2013] 3 MLJ 269 and Sulaiman Takrib v Kerajaan Negeri Terengganu; Kerajaan Malaysia (Intervener) & Others [2009] 2 CLJ 54). [27] It is relevant to note that Parliament in debating the proposed amendment to incorporate section 16B into the 1958 Act, had the following goals in mind. At the Dewan Rakyat: 21 “memperkemaskan rangka kerja perundangan dan syariah bagi sektor kewangan dan perbankan Islam dan memperluaskan skop aktiviti Bank Negara yang selari dengan kehendak Syariah. “kewujudan suatu rangka kerja perundangan yang lebih menyeluruh bagi sektor kewangan dan perbankan Islam adalah amat penting terutamanya dalam memastikan keseragaman pendapat Syariah yang berkaitan system perbankan dan kewangan Islam.” [28] In the context of civil disputes in court relating to Islamic finance, section 16B(8) of the 1958 Act provides: “(B) Where in any proceedings relating to Islamic banking business, takaful business, Islamic financial business, Islamic development financial business, or any other business which is based on Syariah principles and is supervised and regulated by the Bank before any court or arbitrator any question arises concerning a Syariah matter, the court or the arbitrator, as the case may be, may—

take into consideration any written directives issued by the Bank pursuant to subsection (7); or

refer such question to the Syariah Advisory Council for its ruling. 22 [29] Pursuant to section 16B of the 1958 Act, the rulings made by the SAC were of a non-binding nature on the Courts. Section 16B(9) of the 1958 Act provides: “(9) Any ruling made by the Syariah Advisory Council pursuant to a reference made under paragraph (8)(b) shall, for the purposes of the proceedings in respect of which the reference was made -

if the reference was made by a court, be taken into consideration by the court in arriving at its decision; and

if the reference was made by an arbitrator, be binding on the arbitrator,” [30] Pursuant to the above, the Courts were not compelled to make a reference to the SAC with regard to any Islamic and/or Shariah principles nor be compelled to take into consideration the SAC’s rulings. [31] Following the rapid growth of Islamic financial business in Malaysia, the number of disputes in relation to Islamic banking products in the Civil Courts however rose significantly. However, as section 16B of the 1958 Act was non-compulsory in nature in terms of referring a Shariah issue to the SAC, the Courts took it 23 upon themselves to determine if a facility was Shariah compliant or not. This approach resulted in the wide-ranging, inconsistent decisions with regard to the principles of Al-Bai’ Bithaman Ajil (BBA) (see Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2008] 6 MLJ 295, Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249, Malayan Banking Bhd v Ya’kup bin Oje & Anor [2007] 6 MLJ 389, Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, Third party) [2008] 5 MLJ 631). [32] In the face of this, the question arose during that time as to the solution to this increasing challenge. Thus, in line with the Parliament’s aim and policy of providing certainty and to prevent incoherent and anomalous decisions in Islamic financial cases, sections 56 and 57 of the 2009 Act, were introduced. [33] As a result, in 2009, the 1958 Act was repealed and replaced by the Central Bank of Malaysia Act 2009 (“the 2009 Act”), which came into force on 25.11.2009. The 2009 Act also introduced the impugned provisions that made the SAC the authority for the ascertainment of Islamic law with regard to Islamic financial business. The SAC was set up by Parliament to ascertain what is 24 the applicable Islamic law in relation to any aspect of Islamic financial business. [34] Section 51 of the 2009 Act authorised the establishment of the SAC by CBM. It provides: “(1) The Bank may establish a Shariah Advisory Council on Islamic Finance which shall be the authority for the ascertainment of Islamic law for the purposes of Islamic financial business.

The Shariah Advisory Council may determine its own procedures.” [35] Section 52 of the 2009 Act further provides for the functions of the SAC: “(1) The Shariah Advisory Council shall have the following functions:

to ascertain the Islamic law on any financial matter and issue a ruling upon reference made to it in accordance with this Part;

to advise the Bank on any Shariah issue relating to Islamic financial business, the activities or transactions of the Bank; 25

to provide advice to any Islamic financial institution or any other person as may be provided under any written law; and

such other functions as may be determined by the Bank.

For the purposes of this Part, “ruling” means any ruling made by the Shariah Advisory Council for the ascertainment of Islamic law for the purposes of Islamic financial business.” [36] Section 53 sets out the persons who are qualified to be appointed to the SAC. These would be persons who are qualified in the Shariah or who have knowledge or experience in the Shariah and in banking, finance, law or such other related disciplines. Thus the SAC comprises members who are best-suited to ascertain what Shariah law is, as opposed to members of the judiciary who are not trained and equipped to arrive at a decision concerning Shariah law. This was to ensure that Islamic financial business law strictly adheres to Shariah law. [37] Pursuant to the impugned provisions, it is now mandatory for the Courts to refer to any published rulings of the SAC and in the absence of such rulings, to refer a question to the SAC for a ruling on Shariah matters and such rulings shall be binding on the Courts. Section 56 of the 2009 Act, provides: 26 “(1) Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall—

take into consideration any published rulings of the

refer such question to the Shariah Advisory Council for its ruling.

Any request for advice or a ruling of the Shariah Advisory Council under this Act or any other law shall be submitted to the secretariat.” [38] Along with this, section 57 of the 2009 Act further provides that any ruling made by the Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the Court or arbitrator making a reference under section 56. [39] The 2009 Act thus established the SAC of CBM as the authority and reference point for the ascertainment of Islamic law for the purposes of Islamic banking and financial business. Under the constitutional framework, Parliament has assigned the role of ascertainment Islamic law in resolving Islamic financial disputes in 27 the Civil Court to both the SAC and the Courts. Ascertainment of Islamic law by the SAC and the Courts is part of the most recent Parliament’s policy and methodology to ascertain Islamic law for the purposes of resolving disputes on this matter. To borrow the words of Chief Justice Chan in the Singapore case of Mohammad Faizal bin Sabtu v Public Prosecutor [2102] 4 SLR 947, this ‘reflects more the functional efficiency of the constitutional arrangement’ of our Federal Constitution. I will delve into this case in the later part of this judgment. For now, it is important to note that under this constitutional arrangement the Courts are duty bound to refer Shariah issues arising from Islamic banking and finance to the SAC, but more importantly they are legally obliged to adopt the SAC’s ruling to the disputed matters. The key point to note here is that this should be looked at as a proper constitutional mechanism in order to assist the Courts in applying the correct Islamic laws to resolve Islamic financial disputes and upholding Shariah compliant on such matters, as permitted by the Federal Constitution. Within the framework of the Federal Constitution, the SAC and the Courts have to operate with some level of integration if our Islamic banking and Islamic financial services are to function well. In this context, I think it is pertinent to refer to the remarks made by Lord Reed at the recent 32nd Sultan Azlan Shah Law 28 Lecture, 2018 entitled Politics and the Judiciary, where Lord Reed, among others, said: “But neither the separation of powers, nor the principle of judicial independence, means that the courts have to be isolated from the other branches of the state. Although the different functions of the state are best performed by different institutions, those institutions have to operate with some degree of integration if society is to function well. This point was well made by Justice Robert Jackson of the United States Supreme Court in the case of Youngstown Sheet and Tube Co v Sawyer, where he said: ‘While the Constitution diffuses power the better to secure liberty, it also contemplates that practice will integrate the dispersed powers into a workable government. It enjoins upon its branches separateness but interdependence, autonomy but reciprocity.’ ” [40] The powers of the SAC and the Courts to ascertain any Shariah issues that may arise in Islamic banking and financial disputes are for all intent and purposes powers delegated by Parliament to the SAC and the Courts. The implication of the Courts deriving their power from a delegated legislative powers was considered in the Singapore High case of Mohammad Faizal (supra). An important feature of Mohammad Faizal (supra) is 29 this that our Federal Court in the case of Indira Gandhi a/p Mutho v Pengarah Jabatan Agama Islam Perak & Ors and other appeals [2018] 1 MLJ 545 accorded approval to the decision in Mohammad Faizal (supra) in determining the scope, nature and the meaning of “judicial power”. [41] In Mohammad Faizal (supra) the accused that had previously been admitted into a Drug Rehabilitation Centre (“the Centre”) twice, was charged with a drug offence under the Misuse of Drugs Act (‘MDA”) for the consumption of morphine. The relevant section of the MDA provided that where someone is found guilty of a relevant drug-related offence and had two prior Centre admissions this would trigger an enhanced punishment regime. In other words, courts are required to impose a fixed or mandatory minimum punishment. The central constitutional issue raised in this case was whether sentencing power was a judicial or legislative power. Chan CJ noted that it is important to know when executive or legislative powers ends, and where judicial power begins, “to separate one constitutional power from the other constitutional powers functionally”. Chan CJ noted that all common law courts, including Singapore, assumed that punishing offenders was part of the judicial power, which included passing a 30 sentence and determining the measure of punishment to impose. However, there was little historical or doctrinal support for the proposition that sentencing power was essentially or exclusively a judicial power, even if the long practice of courts exercising discretion in sentencing gave rise to this impression. After considering several authorities, Chan CJ held that it fell within the discretion of the legislature to decide whether to confer broad sentencing discretion to courts and thus, the judicial discretion to determine sentences for offenders was a “modern legislative development”. In other words, judicial discretion in relation to sentencing was a power delegated by the legislature to courts. Historically, sentencing power was “neither inherent nor integral to the judicial function; it was for Parliament to determine the measure and range of punishments, which involved social policy and value judgments. On the exercising of a function delegated by the legislative branch to the judicial branch, I agree with the following analysis of Chan CJ, with the necessary emphasis: “Based on Munro’s and Ashworth’s theses on the sentencing power of the courts, no punishment prescribed by the legislative branch can intrude into the sentencing function of the courts (since that function is itself derived from a delegated legislative power). In other words, the principle of separation of powers has 31 no application to the sentencing function because, in constitutional theory, it is a function delegated by the legisIative branch to the judicial branch. The sentencing power is not inherent to the judicial power (except, perhaps, where it is ancillary to a particular judicial power, eg, to punish for contempt of court). Instead, the courts’ power to punish is derived from legislation. The fact that judges have exercised the power to sentence offenders for such a long time reflects more the functional efficiency of this constitutional arrangement, rather than the principle of separation of powers.” [42] Adopting this approach to the present case, I reach the conclusion that ascertainment of Islamic laws for the purposes of Islamic financial business are a function or power delegated by the legislative branch to the judicial branch and the SAC. As such the impugned provisions could not and did not trespass or intrude onto the judicial power; the provisions did not violate the doctrine of separation of powers. The principle of separation of powers did not apply to invalidate any legislative delegation of powers to the SAC and the Courts to ascertain Islamic law for the purposes of resolving disputes on Islamic financial matters. This is not stripping the judiciary of its powers. Neither the executive nor legislature ursups or intrudes the sphere of judicial powers. 32 Dated this day, 10th April 2019. -sgd- (AZAHAR BIN MOHAMED) Federal Court Judge Counsel for the Applicant: Malik Imtiaz Sarwar (Pradeep Nandrajog, Chan Wei June, Dinesh Nandrajog, Clinton Tan Kian Seng and Aliff Benjamin with him) Messrs. Nandrajog Counsel for the Respondent: Yoong Sin Min (Samuel Tan Lih Yau and Sanjiv Naddan with her) Messrs. Shook Lin Bok Counsel for the 1st Intervener: (Presiden Persatuan Institusi Perbankan Islam Malaysia) Mohd Johan Lee (Muhamad Nakhaie bin Ishak with him) Messrs. J. Lee & Associates Counsel for the 2nd Intervener: (Bank Negara Malaysia) Dato’ Cyrus Das (Abdul Rashid Ismail and Siti Nurani Zahidi with him) Messrs. Rashid Zulkifli