Case Background & Strategy

A managing director is removed by the shareholders at an EGM. The next morning her access card no longer works and her salary stops. Is she a director who has simply lost her seat, or an employee who has been dismissed without just cause? In Malaysia the answer decides whether she can bring a claim for unfair dismissal in the Industrial Court, and it is one of the most litigated questions in corporate and employment law.

Two hats: office and employment

Being a director is an office, not a job. A person holds the office of director by appointment under the Companies Act 2016 and the company’s constitution. Employment, on the other hand, is a contract of service. The same person can hold both. An executive director or managing director who works full time for the company, is paid a salary, reports to the board and is subject to its control is usually both a director and an employee. A non-executive director who attends meetings and receives fees is usually only an office holder.

The two capacities are legally separate. Removal from the board under section 206 of the Companies Act 2016 ends the office. It does not, by itself, end the employment. Section 206 expressly preserves the removed director’s right to compensation or damages for termination of any appointment that ends with the directorship.

The Malaysian test: substance over label

The leading authority is the Federal Court decision in Hoh Kiang Ngan v Mahkamah Perusahaan Malaysia & Anor [1995] 3 MLJ 369. The court held that whether a person is a workman under the Industrial Relations Act 1967 depends on the functions and duties actually discharged, not the label attached to the position. A person called a “director” can be a workman. A person called an “employee” can, on the facts, be an independent contractor. The court looks at the whole relationship.

The factors the Industrial Court and the civil courts examine include whether the director received a fixed monthly salary rather than fees, whether the director was subject to the control and direction of the board or a superior, whether the director had fixed working hours, leave entitlements, EPF and SOCSO contributions, whether there was a written employment contract or service agreement, and whether the director could be dismissed like any other staff member. The more these features are present, the more likely the director is a workman entitled to the protection of section 20 of the Industrial Relations Act 1967.

Directors who own the company

The analysis is harder where the director is also a substantial shareholder. Courts are cautious about treating a person who controls the company as its employee, because it is difficult to see who exercises control over whom. A director who holds a minority stake and serves at the pleasure of a majority shareholder is far more likely to be a workman than a founder who holds 70 percent of the shares and answers to no one. Each case turns on the actual balance of power, not the shareholding percentage alone.

Removal from the board versus dismissal from employment

A company that wants to part ways with an executive director must deal with both hats. The directorship is ended by a shareholders’ resolution under section 206, following the notice requirements in the Act and the constitution. The employment is ended by termination under the contract of service, and if the director is a workman, that termination must be for just cause or excuse. A company that removes a director from the board and simply stops paying salary, without any proper process for the employment, has very likely dismissed the director without just cause or excuse.

From the director’s side, the removal is not the end of the matter. A representation under section 20 of the Industrial Relations Act 1967 must be lodged with the Industrial Relations Department within 60 days of the dismissal. Remedies in the Industrial Court include reinstatement, back wages of up to 24 months and compensation in lieu of reinstatement, commonly assessed at one month’s salary for each completed year of service. In addition, a director-employee may have contractual claims under a service agreement, including notice pay and any agreed severance.

Compensation for loss of office

Companies sometimes offer a departing director a payment for loss of office to avoid a fight. Section 227 of the Companies Act 2016 regulates this. A payment to a director as compensation for loss of office, or as consideration for retirement, must be disclosed to and approved by the shareholders in general meeting. A payment made without that approval is held on trust for the company and the director may be ordered to repay it. Any settlement with a departing director must therefore be structured with both employment law and section 227 in mind.

Practical steps for companies and directors

For companies, the safest course is a written service agreement for every executive director that sets out the role, reporting line, remuneration and the process for termination, together with a board and shareholder process that deals with the office and the employment separately and in the correct order. For directors, the key documents are the appointment letter, the service agreement, payslips, EPF statements and any board minutes or emails showing the degree of control exercised over your work. These documents usually decide whether the Industrial Court has jurisdiction.

Frequently asked questions

Can a managing director claim unfair dismissal in Malaysia?

Yes, if the managing director is a workman under the Industrial Relations Act 1967. The court looks at whether the person worked under a contract of service with salary, control and employee benefits, not merely at the title.

Does removing a director from the board terminate his employment?

No. Removal under section 206 of the Companies Act 2016 ends the office of director only. Employment under a contract of service must be terminated separately, and if the director is a workman, only for just cause or excuse.

How long does a dismissed director have to file a claim?

A representation under section 20 of the Industrial Relations Act 1967 must be filed with the Industrial Relations Department within 60 days of the dismissal. The deadline is strict.

Can a company pay a director to leave quietly?

It can, but a payment for loss of office must be disclosed to and approved by shareholders under section 227 of the Companies Act 2016, failing which the director holds the payment on trust for the company.

How NZSK Legal can help

NZSK Legal’s Employment and Industrial Relations practice, recognised by The Legal 500 Asia-Pacific, regularly acts for both companies and executive directors in Industrial Court claims arising from boardroom removals. We combine employment law and company law in a single strategy, so that the removal, the termination and any settlement are handled correctly from the start.

This article is general information on Malaysian law as at September 2026 and is not legal advice. Every matter turns on its own facts and documents. Contact Messrs Ng, Zainurul, Seke & Khoo (NZSK Legal) for advice on your specific situation.