High Court Sheds Light on Section 31 of the Employment Act 1955
31 December 2019
A commentary on Perwaja Steel Sdn Bhd (In Liquidation) v RHB Bank Berhad and 789 Others by Foo Siew Li.
The decision of the High Court in Perwaja Steel Sdn Bhd (In Liquidation) v RHB Bank Berhad and 789 Others
 5 AMR 342 provides guidance as to how a secured creditor is to deal with wages and statutory payments due to employees under section 31 of the Employment Act 1955 (“EA”) when it disposes of a security held over property which is a place of employment.
The Plaintiff was ordered to be wound up on 8 November 2017 by the High Court in Kuala Lumpur, and liquidators were appointed.
Defendants are financial institutions that had provided the Plaintiff with credit facilities.
The Plaintiff had also issued Murabahah Medium Term Notes (“Notes”). The 5th
Defendant is the trustee for the holders of these Notes and holds all securities provided to secure payment under these Notes.
The credit facilities and the Notes are secured by, inter alia
, debentures executed by the Plaintiff over its assets in favour of the 1st
to the 5th
Defendants (“Debenture Holders”) respectively and charges over four parcels of industrial land held by the Plaintiff (“Charged Lands”). It was common ground that on the Charged Lands was the Plaintiff’s factory and would have been a “place of employment” for the employees of the Plaintiff.
By a Security Sharing Agreement dated 1 June 2012, the Debenture Holders agreed that the debentures and the Charged Lands shall rank pari passu
and any proceeds from the sale of any of the securities taken shall be payable to the Debenture Holders rateably, and pari passu
On 17 November 2014, prior to the Plaintiff being wound up, the Plaintiff had ceased operations on the Charged Lands and had terminated the employment of its employees.
After the Plaintiff was wound up, a Receiver (“Receiver”) was appointed under the terms of the debentures on 24 January 2018. Pursuant to his appointment, the Receiver took steps with the view to disposing, inter alia,
the Charged Lands. Based on a valuation report, the total proceeds from any sale of the Charged Lands was not expected to satisfy the Plaintiff’s total debt owed to the Debenture Holders.
to the 790th
Defendants claim to be former employees of the Plaintiff (“Employee Defendants”). The Employee Defendants allege that they are owed their wages by the Plaintiff and that such wages should be paid out from the proceeds of any sale of the Charged Lands in priority over the Debenture Holders by virtue of section 31 of the EA.
THE TWO QUESTIONS
It was against this backdrop that the Receiver sought directions from the High Court pursuant to section 384 of the Companies Act 2016 (“CA”) on two questions, namely:
- Whether the Receiver of the property of the Plaintiff which is in liquidation is obliged under section 31 of the EA to cause any part of the sale proceeds of the Charged Lands to be paid to any of the former employees of the Plaintiff if none of them was working on the Charged Land at the time of the sale thereof (“1st Question”); and
- Whether the maximum amount payable to any of the former employees of the Plaintiff who are eligible or entitled to be paid from the sale proceeds of the Charged Lands (if any) shall be limited to wages for four consecutive months' work only and such payment shall exclude termination and lay-off benefits, annual leave pay, sick leave pay, public holiday pay and maternity allowance (“2nd Question”).
The 1st Question
As regards the 1st Question, the arguments posed by the Debenture Holders turned on three issues, namely:
- Whether section 31 of the EA applies in respect of a company that has been wound up;
- If not, whether section 31 of the EA is applicable only to floating charges; and
- Whether employees who are eligible to be paid under section 31 of the EA had to be working on the Charged Lands as their “place of employment” at the time of sale of the Charged Lands by the Receiver.
On the first issue, the High Court noted that neither section 31 of the EA itself, nor any related section, indicate whether they apply to companies that have been wound up. The Court however noted that there exists section 527 of the CA that caters for priority of payments, specifically in a winding up.
The High Court considered Director of Customs, Federal Territory v Ler Cheng Chye (Liquidator of Castwell Sdn Bhd, in Liquidation)  3 CLJ 316;  2 MLJ 600 (“Ler Cheng Chye”) where the Supreme Court invoked the maxim generalia specialibus non derogant, that is, general words do not derogate from the specific, and held, inter alia, that section 292(1) of the Companies Act 1965, a special provision dealing with a subject distinctive to companies “must be read as an exception to the general provision of s.10(1) of the Government Proceedings Act 1956”, which conferred priority to sales tax above all tax.
Applying Ler Cheng Chye, Darryl Goon J held that –
- in relation to the CA, section 31(1) of the EA is a specific statutory provision giving priority to employees for payment of their wages and statutory payments out of the proceeds of the sale of their place of employment;
- in comparison, section 527 of the CA caters generally for priority of payment in respect of “all other unsecured debts” in winding up; and
- if having made the general provision in the CA, which existed as section 292(1) of the now repealed Companies Act 1965, the Legislature subsequently passed the special provision in section 31(1) of the EA in 1998, which conflicted with the earlier legislation, the special provision is treated as “a mere exception to the general provision”.
The Court also held that while the word “priority” is not used in the substantive part of section 31(1), based on the wording of section 31(1) and paragraph (a) under the second proviso in section 31(1) of the EA, its effect is clearly to provide priority for wages to employees from proceeds of sale over the claims of the Debenture Holders qua secured creditors.
Also, the Court held that having regard to the Explanatory Statement in the Bill that brought about the amendment of section 31(1) of EA (“Explanatory Statement”), both a literal and purposive interpretation of section 31(1) EA would lead harmoniously to achieving the intention of the Legislature to give priority to the rights of employees over secured creditors and that right ought not to be defeated by the general provisions to be found in section 527 of the CA.
On the second issue, the learned judge held that for the same reasons given as to why section 31(1) of the EA is not subject to section 527(1) of the CA, so too is section 31 not subject to section 392 of the CA which sets out preferential debts (including wages and salaries) that have priority over claims under a floating charge. The Court therefore found that it is immaterial whether the Charged Lands are secured under a floating charge or a fixed charge.
In respect of the third issue, the High Court considered the cases of Weng Neng Medical & Liquor (KL) Sdn. Bhd.  3 MLJ 278 and Ban Hin Lee Bank Bhd v Applied Magnetics (M) Sdn Bhd (In Liquidation)  5 CLJ 1 but found that they did not specifically address or consider whether there is a requirement for the employees to be working at the place of employment “at the time of the sale” for section 31(1) of the EA to apply. The Court also considered and found that the express words in section 31(1) of EA do not make it a requirement that the employees must be working at the place of employment that is sold at the time it was sold.
By virtue of the above and also having borne in mind the Explanatory Statement and the fact that the EA is a piece of “beneficent social legislation”, the Court held that what is required is that the employee to whom wages are due under section 31(1) “was employed or worked at the time when such wages were earned or such money accrued due …”; in other words, the requirements are “when and where” the wages in question were earned rather than whether the employee was still working at the place of employment at the time of its sale.
In relation to the Debenture Holders’ contention that there should be a cut-off point at the time the place of employment is sold such that only employees working at that point in time may have priority for their unpaid wages, the Court held that the said contention would call for the insertion of words into section 31(1) of the EA that do not exist and is neither warranted nor necessary. Giving further consideration to the Explanatory Statement and the fact that the EA is a piece of “beneficient social legislation”, the Court concluded that “while section 31(1) may have a side effect undesirable to secured creditors, namely the inability to determine the extent of an employer’s liability which would affect the value of the security, this is a matter that perhaps needs to be considered by the Legislature”.
Accordingly, the High Court answered the 1st Question in the affirmative.
The 2nd Question
The 2nd Question concerns the amount of “wages” the employees are eligible to as provided under section 31(1) of the EA and whether the term “wages” for this purpose includes “termination and lay-off benefits, annual leave pay, sick leave pay, public holiday pay and maternity allowance” (collectively “Statutory Payments”).
In relation to the Debenture Holders’ contention that the payment of “wages” under the second proviso to section 31(1) of the EA would exclude Statutory Payments because of the wording of section 31(2) and the fact that “priority” is only brought into issue under the second proviso to section 31(1), the Court held that:
- it is the substantive part of section 31(1) which precludes authorisation of payment of proceeds of sale to the secured creditor or debenture holder until the “wages” of employees eligible thereunder are ascertained and paid, that confers priority for such “wages” over the claim of the secured creditor; and
- as section 31(2) provides that except for the second proviso, the term “wages” includes the Statutory Payments, “wages” in the substantive part of section 31(1) includes Statutory Payments while “wages” under the second proviso does not.
Thus, the High Court answered the 2nd Question in the negative.
In summary, the effect of the High Court’s decision is as follows:
- section 31 of the EA applies to a company that has been wound up;
- it is immaterial whether the Charged Lands are secured under a floating charge or a fixed charge;
- there is no requirement that the employees must be working at the place of employment that is sold at the time it was sold; what is required is that the employee to whom wages are due under section 31(1) of the EA was employed or had worked at the place of employment at the time when such wages were earned or such money accrued due;
- under paragraph (a) to the second proviso to section 31(1) of the EA, the total amount due to an employee who enjoys priority is limited to four consecutive months of wages (excluding Statutory Payments); and
- Statutory Payments are not subject to the limit imposed under paragraph (a) to the second proviso and there is no limit as to the amount of Statutory Payments payable to an employee who enjoys priority under section 31(1) of the EA.
The High Court’s decision is illuminating as the issue as to whether section 31 of the EA prevails over the priority provisions of the CA has been one that has long vexed receivers. While the interpretation of section 31 of the EA in this case may have certain undesirable side effects to secured creditors particularly in respect to the inability to determine the extent of the employer’s liability which would affect the value of security, as the learned High Court judge has pointed out, the Court’s role in the interpretation of legislation is to give effect to the intention of the Legislature. This decision accords with the intention of the legislation in question, the EA, as a piece of social legislation.