The Employees Provident Fund Act 1991 (“EPF Act”) is one of the main statutes that employers must be familiar with. The EPF Act imposes obligations on employers which, if not complied with, is an offence that is punishable with imprisonment (in its severest form).

For example, employers are under an obligation to make monthly contributions to the EPF for the benefit of employees, failure of which would render the employer liable to imprisonment for a term not exceeding 3 years or to a fine not exceeding RM10,000.00 or to both. This is provided under section 45 of the EPF Act:

“…the employer shall, in the first instance, be liable to pay both the contributions payable by himself and also, on behalf of and to the exclusion of the employee, the contributions payable by that employee.”

Can directors of companies be personally liable for non-compliance with EPF Act?

In the case where the employer is a company, the obligation to pay EPF contributions would generally fall on the company. However, where the company fails to do so, Section 46 of the EPF Act provides that the directors of the company will be made jointly and severally liable for the contributions due and payable to the EPF.

As such, the general principle that companies and directors are separate entities with separate liabilities would have no application to absolve directors from being personally liable in this situation.

What about “sleeping directors?”

The liability of directors to pay would be imposed even if the director is a sleeping director who is not actively involved in the management of the company, as held in a recent case of Hardie Billie & Ors v Lembaga Kumpulan Wang Simpanan Pekerja (WA-11ANCVC-38-03/2018, 26 June 2018).

The facts of this case show that a heavy burden is placed on directors to ensure that the company complies with its statutory duties under the EPF Act.

In this case, management of EPF payments was delegated to one of the directors. This director was said to have been negligent in the discharge of his duties which resulted in EPF contributions not being paid.

However, the Court held that the other directors were to be personally liable for the unpaid contributions, even though those other directors may have been “sleeping” or “non-active” directors. Once the company’s breach under the EPF Act is established, the directors are liable to pay any contribution remaining unpaid by the company, which include both the company and the employees’ portion of contribution:

“In the circumstances, as much as I sympathize with the predicament of these Defendants, who are very much in the position of non-active directors, the position in law is clear. Hence, pursuant to Section 46 of EPF Act, these Defendants are liable for EPF contributions.. for the relevant period when they were directors.”

Key Takeaways

When it comes to statutory non-compliance, some statutes will require a director to show that he took reasonable precautions and due diligence to prevent the offence from occurring if they want to absolve themselves of personal liability.

For example, Section 69 of the EPF Act provides:

“Where an offence under this Act or any regulations or rules made thereunder has been committed by a body corporate, firm, society or other body of persons, any person who at the time of the commission of the offence was a director, manager, secretary or other similar officer or a partner of the body corporate, firm, society or other body of persons or was purporting to act in such capacity shall, as well as such body corporate, firm, society or other body of persons, be deemed to be guilty of that offence unless he proves that the offence was committed without his consent or connivance and that he exercised all such diligence to prevent the commission of the offence as he ought to have exercised, having regard to the nature of his functions in that capacity and to all the circumstances.

Similarly, in Lembaga KWSP v Adorna RMit Sdn Bhd [2003] 4 MLJ 729, the High Court specifically held that “it is not appropriate for a director to attempt to escape culpability by pleading that he is a sleeping partner or director, or a silent director or a non-active director.”

Being a director of a company is a serious responsibility and should not be taken lightly. Sleeping directors / non-active directors should still undertake reasonable diligence to ensure that their company is legally compliant, or face the consequences.

***

This article was written by Donovan Cheah (Partner) and Adryenne Lim (Legal Executive). Donovan  has been named as a recommended lawyer for labour and employment by the Legal 500 Asia Pacific 2017 and 2018. He has written for publications such as the The Edge and the Star, as well as for the Malaysian-German Chamber of Commerce and Industry.

Have a question? Please contact us.

 

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