Recently, the Court of Appeal in the Woon Kim Choy case clarified the legal position that a person may, at the same time, be both a director and an employee of the company if a valid and separate contract of employment exists.
The court held that “There is nothing incompatible between a person exercising his role as an executive director of the company and at the same time having a contract of employment with the company. The two positions and their respective roles and responsibilities may co-exist.”
This alert discusses the duality of roles and the implications for companies in managing employment and directorship relationships.
Brief Facts
The first respondent, Acexide Technology Sdn Bhd (the Company), was incorporated in 1996. The Appellants, Woon and Chang, were the promoters of the Company, together with one Lim. Upon the incorporation of the Company, the Appellants and Lim were appointed as the directors and shareholders of the Company. Lim, together with his son, Jovi, collectively held a majority shareholding of 54% in the Company, whilst Woon and Chang respectively held 10% and 36% of the shares.
Subsequently, Lim convened an extraordinary general meeting (EGM) to remove the Appellants from their positions as directors of the Company. During the said EGM, resolutions were passed for the removal of the Appellants as directors, and on the same day, Jovi was appointed as a director of the Company.
Following their removal, the Appellants lodged a complaint in the Industrial Court under section 20 of the Industrial Relations Act 1967 (IRA) against the Company for unlawful dismissal.
The Industrial Court’s Decision
The Company filed an application to strike out the Appellants' claims in the Industrial Court on the basisthat the Appellants, being directors of the Company, did not fall within the statutory definition of "workmen" under Section 2 of the IRA. Consequently, the Company contended that the Industrial Court lacked the requisite jurisdiction to adjudicate the dispute.
The Industrial Court held that the Appellants were not “workmen” as they were the “directing mind and brain”of the company and not an employee. As such, the Industrial Court ruled that the issue of unlawful dismissal was a non-starter, as there was no employment in the first place and thus no dismissal to begin with.
The High Court’s Decision
The Appellants filed an application for judicial review against the Industrial Court’s decision, which was subsequently dismissed by the High Court. The High Court upheld the Industrial Court’s findings of facts that the contribution of EPF as well as SOCSO and monthly deduction of income tax, did not, in and of themselves, concluded that the Appellants were“workmen” of the company.
The High Court accepted the Company’s justification that these were agreed benefits extended to all its director. Further, the High Court was not persuaded that the inclusion of the Appellants in the “register of the employees” of the Company displaced their primary status as the directors of the Company.
The Court Of Appeal’s Decision
Dissatisfied with the High Court’s decision, the Appellants appealed and raised, inter alia, the issue of whether executive directors of the company could be considered as employees and thus qualified as “workmen” under the IRA.
In its judgment, the Court of Appeal held that an individual serving as an executive director of a company may also be an employee pursuant to a distinct contract of employment with the company. Such a contract of employment may be oral or written, express or implied.
The court further held that the dismissal or cessation of one role, such as an individual's directorship, does not automatically affect or extinguish the rights and responsibilities attached to his other roles, such as that of a shareholder or employee. In this case, the court observed that the company's conduct consistently recognised the Appellants as its employees. Since the inception of the company’s business operations, Lim, Woon, and Chang were recorded in the company’s register of employees. Further, the Company’s financial and accounting documentation have made reference to the Appellants receiving “salaries” rather than “fees” of the directors,the latter being a term normally associated with non-executive directors who are not employees of the company.
In view of these facts, the court held that the Appellants’ roles as employees were not subsumed into or superseded by their positions as directors of the company. Hence, the Appellants fall squarely within the meaning of “workmen” under Section 2 of the IRA. Upon reviewing the documentary evidence, the Court is satisfied that the Appellants’ dismissals were without just cause and excuse and accordingly awarded compensation in lieu of reinstatement.
To this end, it is also imperative to emphasise that the court has clarified that the legal principle established in the Supreme Court case of Inchcape (M) Holdings Bhdv RB Gray & Anor [1985] 2 CLJ 305, which in absolute terms held that a director cannot be a “workman” under the IRA, appear to have been relegated to the past and is no longer regarded as binding authority in such circumstances.
Commentary
This case highlights the distinct legal capacities an individual may hold within a company, specifically as both a director and an employee. While recognising this duality, this decision also serves as a critical reminder for companies to meticulously differentiate between the termination of a directorship and the termination of an employment.
Pursuant to Section 206(1)(a) of the Companies Act 2016, shareholders may, by a simple majority vote at an EGM, remove a director at any time and there is no protection against a director's removal for any reason whatsoever. In contrast, the dismissal of an employee is subject to statutory safeguards under the Employment Act 1955 and the Industrial Relations Act 1967. The law mandates procedural fairness and substantive justification for such dismissals, including the right to be heard in cases of alleged misconduct.
In light of this decision, it is abundantly clear that the removal of a director does not, ipso facto terminate the individual’s employment with the company. Therefore, companies must ensure that the relevant processes are complied with in respect of the removal of a director and/or the dismissal of an employee, even when those roles are held by the same individual. Conflating these distinct roles and failing to adhere to the respective legal frameworks and procedural requirements may expose companies to significant legal repercussions and liabilities.
14 February 2025