Labuan was considered as a safe shelter and strategically positioned to protect Bruneian interests in the region, especially the Chinese trade route between Brunei and Manila.

Following the events which affected the Brunei Sultanate in Sarawak, the British, pressured by its commercial interests, decided that it was a good opportunity for them to occupy Labuan.

The expansion of other western powers in the region caused Britain to realise the need for a permanent harbour in northwestern Borneo to prevent further foreign interference.

Nevertheless, Labuan was considered a safe shelter and strategically situated to protect British interests in the region especially the China trade route.

It was on 24 December 1846 when Captain Mundy, commanding HMS Iris (1840), took possession of Labuan, "in the Name of Her Majesty Victoria Queen of Great Britain and Ireland under the Direction of His Excellency Rear Admiral Sir Thomas Cochrane, C.B., Commander-in-Chief".

Peace, friendship, and good understanding shall subsist for ever between Her Majesty the Queen of Great Britain and Ireland, and His Highness the Sultan of Borneo Proper, and their respective Heirs and Successors.

His Highness the Sultan hereby cedes in full sovereignty and property to Her Majesty the Queen of Great Britain and Ireland, Her Heirs and Successors for ever, the Island of Labuan and its dependencies, the Islets adjacent thereto.

The Government of Her Majesty the Queen of Great Britain and Ireland hereby engages, in consideration of the cession above specified, to use its best endeavours to suppress Piracy, and to protect lawful commerce, and the Sultan of Borneo, and his ministers, promise to afford every assistance to the British authorities.