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High Court: Priority of Wages Over Debenture Debts in Liquidation

Updated: Apr 7, 2023


In Perwaja Steel Sdn Bhd (in receivership) v. RHB Bank Berhad and 789 Others, the High Court has delivered its grounds of decision with a publication date of July 18, 2019.


The case involved a company undergoing liquidation with insufficient funds to pay both the employees' wages and the debenture holder's debts.


In accordance with the provisions of the debentures, a receiver and manager (R&M) was appointed after the winding up of Perwaja Steel in November 2017. The R&M tried to take necessary measures to get the Charged Lands ready to sell.

The debenture holder argued that they had priority over the employees' wages as they held a security interest in the company's assets.


However, the employees argued that the Employment Act 1955 provides for the priority of wages and that their wages should take precedence over the debenture holder's debts.


The case was brought before the High Court of Malaysia. The Court was asked two questions:


Question 1:

Whether the Receiver of the property of Perwaja Steel, which is in liquidation, is obliged under section 31 of the Employment Act to cause any part of the sale proceeds of the Charged Lands to be paid to any of the former employees of Perwaja Steel if none of them was working on the Charged Lands at the time of sale by the Receiver.


Question 2:

Whether the maximum amount payable to any of the former employees of Perwaja Steel who are eligible or entitled to be paid from the sale proceeds of the Charged Lands (if any) shall be limited to wages for 4 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.


Decision

Question 1:

The court ruled that the Employment Act 1955, which provides for the priority of wages, prevails over the debenture holder's security interest.


The court also noted that the priority of wages is a fundamental right of employees and is essential for their well-being and livelihoods.


The decision is significant as it clarifies the hierarchy of payments in a liquidation scenario and reinforces the importance of protecting employees' rights.


Question 2:

The second question from the R&M was about how wages and statutory benefits should be interpreted and whether the four-month limit applied.


The Court decided that the four-month limit only applies to wages, like salary. There is no cap on how much you can get in statutory benefits.


Statutory benefits include:

  • benefits for being terminated or laid off,

  • annual leave,

  • paid sick leave,

  • paid public holidays,

  • and maternity allowance.

Conclusion

Companies and debenture holders should know the priority of payments and employees' statutory rights when structuring their financial arrangements.


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