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Employees' Claims Take Priority over Secured Creditors - International Law Office

International Law Office

Insolvency & Restructuring - Malaysia

Employees' Claims Take Priority over Secured Creditors

November 07 2003


The recent case of Ban Hin Lee Bank Berhad v Applied Magnetics (M) Sdn Bhd (In Liquidation) ((2003) 5 CLJ 1 vividly illustrates how an amendment to the Employment Act 1955 works to the advantage of unpaid employees in liquidation proceedings. The Malaysian High Court held that in relation to the proceeds of a sale of land by a liquidator on which a factory stood, the factory employees' claims for unpaid wages had priority over the claims of a lien holder's caveat on the land.


In 1995 Applied Magnetics (Malaysia) Sdn Bhd obtained banking facilities from Malayan Banking Berhad (MBB). As security for the facilities, a lien holder's caveat was included regarding land owned by the company. Under Malaysian law, a lien holder's caveat is a form of security over land. It entitles the holder to apply to the High Court pursuant to Section 218(2) of the National Land Code for an order for sale of the land if the lien holder wins a judgment for the amount due.

Employees of the factory which stood on the land had claims against the company for unpaid wages. When the company subsequently went into liquidation, the liquidator applied to the High Court for directions pursuant to Sections 237(3) of the Companies Act 1965(1) regarding a possible sale of the land. Various questions were posed to the court, including whether Section 31 of the Employment Act applied.

Section 31 of the Employment Act applies to a sale of land by:

  • a receiver/manager;
  • the court, upon the application of any person holding a mortgage, charge, lien or decree; or
  • the holder of a debenture over the land.

A place of employment must stand on the land, and Section 31 provides that payment of the proceeds of sale of any such property can be authorized only once the receiver/manager or court has ensures that the employees' wages are paid. The total amount of payable to any one employee cannot exceed four months' wages.


Under Section 236(2)(c) of the Companies Act, a liquidator has the power to sell land owned by a company in liquidation by public auction, public tender or private treaty. MBB contended that Section 31 of the Employment Act did not apply to a private treaty sale of the land by the liquidator, but applied only to a sale pursuant to a court order.

The High Court disagreed and held that Section 31 did apply. The court noted that factory buildings stood on the land and employees were affected. The court held that if the company was not in liquidation, MBB would have to apply for an order for sale under Section 281 of the National Land Code, in which case Section 31 of the Employment Act would apply and the wage claims would have priority over the lien holder of the land. The court held that it would be inequitable for MBB to claim priority over employee's claims for unpaid wages and MBB could not therefore contend otherwise. The court concluded that the employee claims had priority over MBB's claims as a secured creditor, and that 'wages' excluded termination and lay-off benefits.

Accordingly, the court directed that four months' wages be paid to each employee from the proceeds of the sale of the land in priority to MBB.


In winding-up proceedings, debts usually take a certain order of priority as follows (in descending order):

  • debts secured by fixed or statutory charge, which are paid from the proceeds of the charged assets;
  • costs and expenses relating to a winding-up, including liquidators' costs and remuneration;
  • preferential debts under the Companies Act, which include employee's wages/salaries, employees' statutory contributions and federal taxes;
  • debts secured by a floating charge, which are paid from the proceeds of charged assets; and
  • the debts of unsecured creditors.

The decision means that employees' claims for unpaid wages have priority over any secured creditor that has security over the workplace land in the form of a mortgage, charge, lien, decree or debenture.

For further information on this topic, please contact Rabindra S Nathan at Shearn Delamore & Co by telephone (+603 2076 2871) or by fax (+603 2034 2763) or by email (rabindra@shearndelamore.com).


(1) Section 237(3) of the Companies Act provides that a liquidator may apply to the High Court for directions in relation to any particular matter arising under the winding-up.

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