Introduction
Generally, the liability on failure to make mandatory Employee Provident Fund (EPF) contribution falls on the company as employer. However, section 46 of the Employment Provident Funds Act 1991 (“EPF Act”) clearly sets out a provision whereby the directors of the company who failed to make mandatory EPF contribution will be made jointly and severally liable for the EPF contributions due and payable to EPF.
This case before the Court of Appeal brings forth the issue of whether one may argue on the doctrine of separate legal entity between the directors and the company.
Brief Facts
The Plaintiff (EPF) in this case initiated a claim against the company and the director of the said company at the material time of contribution due to the failure of the company to make mandatory contribution in respect of its employees for the material periods for a total sum of RM180,624.00. Upon the company being wound up, EPF decided to withdraw its claim against the company and maintained the claim against the directors.
EPF then obtained a summary judgement at the Sessions Court against the directors under section 46 of the EPF Act. The directors unsuccessfully appealed at the High Court to set aside the summary judgment hence the appeal by the directors at the Court of Appeal.
Questions of Law at the Court of Appeal
The following questions of law were raised for the determination:-
Whether the appellants being the directors of the company during the material times, can be held jointly liable to pay EPF contributions on behalf of the company as the employer.
Whether Section 46 of the EPF Act is applicable to the company which has been wound up or only to those which are still in operation.
Whether Section 46 of the EPF Act is in contradiction with the doctrine of separate legal entity as laid down in the case of Salomon v. Salomon & Co. Ltd [1897] AC 22
Whether the claim by EPF under section 46 of the EPF Act tantamount to fraudulent preference under the Companies Act 1965, and thus should be held as invalid.
Decisions of the Court of Appeal
Ramly Ali JCA in delivering the judgement of the Court of Appeal held inter-alia that:
It is clear that under Section 46 of the EP Act, all directors of the company including former directors who were in the position of the company’s directors at the time where the mandatory contributions were liable to be paid, is jointly and severally liable. Section 46 of the EPF Act is to be enforced notwithstanding any other written law to the contrary as this provision stands on its own. Section 46 of the EPF Act states that :
where any sum of money by way of contributions together with any dividend due thereon remaining unpaid by a company, a firm or an association or persons, then, notwithstanding anything to the contrary in this Act or any other written law, the directors of such company including any persons who were directors of such company during such period in which contributions were liable to be paid, or the partners of such firm, including any persons who were partners of such firm during such period in which contributions were liable to be paid, or the office-bearers of such association of during such period in which contributions were liable to be paid, as the case may be, shall together with the company, firm or association of persons liable to pay the said contributions, be jointly and severally liable for the contributions due and payable to the fund.
The liability under section 46 of the EPF Act existed during the period in which the contributions were liable to be paid. During these periods, the company was still in operation and both the appellants were the directors. On that premise, the fact that the company had been wound up after that period does not in any way absolve the appellants from the liability imposed by Section 46 of the EPF Act.
It is further clear under section 46 of the EPF Act that the liability imposed on the directors of the company is “directly” and “personally”. Thus, the contributions due and payable by the company become the debt of the directors personally, jointly and severally with the company.
The claim here is made against the directors of the company and not against the company itself, the issue of fraudulent reference under the Companies Act1965 does not arise at all.
In consequence of the above, the Court of Appeal answers to the following questions as follows to :-
Question (i) - that the context of “jointly and severally liable” in Section 46 of the EPF Act indicates that the directors of the company are truly liable either jointly together or severally on their own.
Question (ii) - that section 46 of the EPF Act is still applicable in this case because at all material times, the company was still in operation and both the appellants were the directors. Therefore, the appellants are still liable to pay the unpaid contributions on behalf of the company as it is their responsibility under Section 46 of the EPF Act.
Question (iii) - that the issue where EPF should file a Proof of Debt to the Company and the separate legal entity principle as laid out in the case of Salomon v Salomon is not applicable in the claim by EPF against the directors of the company under Section 46 of the EPF Act, as the directors of the company can be made personally liable due to the failure of the company to pay mandatory EPF contribution.
Question (iv) - that claim by EPF against both the directors are on their personal liabilities under section 46 of the EPF Act, not a claim against the company, thus the issue of "fraudulent preference under the Companies Act 1965" as alleged by the appellants does not arise at all.
Conclusion
The liability under section 46 of the EPF Act on the directors is created by statute 'directly' and 'personally' on the directors or former directors of any defaulting company. Thus, the contributions due and payable became the debt of the directors personally, jointly and severally with the company
In the event where the company is wound up or failed to pay monthly EPF contributions on behalf of the employees, it falls upon the directors of the company who hold the position during the material times to take over and pay such contribution.
It is important to note that the above principles are still being applied by the Malaysian courts when deciding on the same issue in the recent decided cases. (see. Lionel Khoo Boo Kheng v. Lembaga Kumpulan Wang Simpanan Pekerja [2016] 1 LNS 370 (HC), Lembaga Kumpulan Wang Simpanan Pekerja v. Azimuddin Ab Ghani & Ors [2012] 1 CLJ 522 (HC), Lembaga Kumpulan Wang Simpanan Pekerja v. Goon Institution Sdn Bhd & Ors [2011] 10 CLJ 403 (HC))
For further advice on the above, you may contact Cik Azreen Latif at 03-2171 1484 or at 03-2171 1484 or at mail@azamlaw.com.
