In advising employers about retrenchment, the usual advice is that there must be a “genuine redundancy”. There are many cases which explain what amounts to a genuine redundancy, and we won’t repeat the definitions here.  However, many employers (and sometimes, lawyers) don’t realise that there is a practical element to retrenchment that needs to be considered.

Structuring your retrenchment to meet the legal requirements is one thing. If there is an unfair dismissal claim arising from a retrenchment, an employer must be able to discharge its burden of proof that the dismissal is with just cause and excuse. Since most retrenchments are usually premised on economic and financial conditions of the business, financial documents play an important role in an industrial court trial.

The recent decision in Lee Sau Wah v Northland BJ Paper (M) Sdn Bhd (Award No. 708 of 2021, 13 April 2021) demonstrates how a business’ financial information can make or break a case for retrenchment.

Brief Facts
  • The Claimant was notified that due to the deteriorating financial health of the Company, the Company would be ceasing operations.
  • The Claimant was asked to sign a “Deed of Mutual Release”, which she refused to do so.
  • The Company then dismissed the Claimant via “24 hours Notice of Retrenchment” and paid her one month’s salary in lieu of notice.
Court’s Findings on the Financial Status of the Company

At the Industrial Court, the Company argued:

  • It had been suffering losses since 2015 and was unable to sustain itself due to increasing competition in the industry and the global economic slowdown.
  • The Company had been posting losses after tax since 2015, in the hundreds of thousands.
  • Therefore, the Company decided to close down its operations entirely and exit the industry due to market uncertainty and lack of resources .
  • The Company had an original workforce of 5 employees and all employees were made redundant.
  • The Company since ceased its operations as stated in the audited report and financial statements.

The Claimant attempted to argue that the Company was just making paper losses because the management had manipulated the circumstances to show it was a loss making company. The Claimant alleged that in reality, the “losses” were due to non-payments by Vision Greetings Sdn Bhd (“Vision”), which was a company owned by the same directors and shareholders of the Company. If Vision paid up the money owing to the Company, the Company’s financial statements would show a profit.

The Court considered the evidence before it relating to the Company’s financial health:

  • The Company tendered its debtors list and aging list, which included the amounts allegedly owed by Vision to the Company. However, this list was incomplete and did not show any data from 2 July 2014 to 19 March 2019 (almost 5 years).
  • Based on the aging list, Vision owed the Company a sum of RM340,937.55.
  • Therefore, if the Company was suffering a decline in profits, it is the management of the Company that contributed to the deteriorating financial health of the Company by allowing Vision, a company controlled by the management, to owe the Company the above sum of money.
  • There was no evidence about what cost-cutting measures were taken by the Company since 2016 to mitigate the alleged losses, which the Company says had been occurring year after year since 2015.
  • Documents obtained from the Companies Commission of Malaysia (“CCM”) dated 17 February 2021 show that the Company still has directors and shareholders and the status of the Company is stated as “existing”. This shows that the Company is still in operation and did not close entirely as alleged in the notice of retrenchment.
  • Despite the Company’s allegation that it had ceased its operations completely, the Key Financial Information section of the CCM report showed that the Company generated a “whopping revenue of RM927,580.00” as at 14 December 2021. In order to determine the true financial position of the Company, the Court chose not to discount items like taxation paid, provision for depreciation and amortisation against the profits of the Company.
  • On the contrary, the revenue generated by the company after it purportedly ceased operations in 2020, was higher than the revenue generated in financial year 2019. This did not support the Company’s position that it had genuinely ceased operations on 31 January 2020.
  • Further, the Company’s bank statement closing balance as at 29 February 2020 showed a balance of RM163,041.99. Even though all employees were terminated effective 31 January 2020 in line with the “alleged” business closure, there were items showing withdrawals of cheques in March 2020 and December 2020.
  • Based on an evaluation of the evidence before the Court, the Court was of the view that the Company was not facing financial constraints.

Ultimately, the Industrial Court found that the Company’s dismissal of the Claimant was motivated by a collateral motive to remove the Claimant, due to her refusal to accept a Deed of Mutual Release. The Company had failed to prove that there was a bona fide redundancy situation, and the dismissal was unfair.

Key Takeaways

Here, the Industrial Court observed that the Company failed to adduce contemporaneous documentary evidence to show how the decision had been made for the retrenchment. Among other things, the Industrial Court noted that there was no position paper on the closure of the Company and/or any record of board discussions or management discussions on the closure of the Company.

Further the financial documents that were produced contradicted the Company’s position that they were facing financial constraints, and that they had followed through with their business closure.

While there is no legal requirement for a company to produce a position paper for redundancy, or have detailed board/management meetings, being able to produce such documents may bolster an employer’s claim that the retrenchment exercise was justified and not capricious. Among other things, it may demonstrate that the employer had fairly considered all the commercial issues behind the retrenchment and had consulted the right stakeholders. It may also negate allegations of victimisation or individual bias, if the managerial prerogative to implement a retrenchment is exercised collectively rather than the sole decision of an individual in power.

Additionally, employers and their lawyers must be able to understand and properly explain financial documents. Being unable to comprehend financial information can damage your case, since you will not be able to explain the commercial rationale behind the retrenchment and why it led to a redundancy. Worst of all, a failure to understand financial information may result in contradicting positions taken in court.

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This article was written by Donovan Cheah. Donovan has been named as a Recommended Lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019, 2020 and 2021, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory.  Have a question? Please contact us.

 

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