Australia: Federal court decision relating to a breach in Section 200B concerning the payment of retirement benefits to a director

In a judgment delivered on 10 April 2014, Justice Melissa Perry of the Federal Court found in favour of an employer company and required repayment of termination payments made to Mr Renshaw and other parties arising from his resignation as Managing Director of QMCL in October 2012. Repayment of the termination payments will be required in accordance with Section 200J of the Corporations Act 2001 (Cth) (Act), which creates a statutory trust over any termination benefit that is paid to a person who has resigned from a managerial or executive office, where the termination benefit contravenes Section 200B of the Act.

Mr Renshaw was Managing Director of QMCL from 8 July 2004 until 23 October 2012 and both he and his controlled entity, Butmall Pty Ltd (Butmall), were parties to a Services Agreement dated 23 November 2011 (Services Agreement). Pursuant to the Services Agreement, Mr Renshaw and Butmall provided certain services to QMCL.

On 23 October 2013, before the end of the term of the Services Agreement, Mr Renshaw resigned from his position as Managing Director and a settlement deed was executed by Mr Renshaw, Butmall and QMCL on that date (Settlement Deed). The Settlement Deed provided for various payments to be made by QMCL to Mr Renshaw, Butmall and a third defendant, DFK Richard Hill Pty Ltd (DFK). DFK was an accounting firm that had been engaged by QMCL and separately, Mr Renshaw personally. The payments pursuant to the Settlement Deed were also made on 23 October 2012.

In finding in favour of QMCL, Her Honour made a number of findings which clarify the operation of the relatively new Part 2D.2 of the Act. These findings are briefly summarised as follows:

  1. the meaning of "benefit " in Section 200AB(1) of the Act is broadly defined and is intended to ensure that all payments or other things given in connection with the retirement from a managerial or executive office are subject to the statutory regime except where the Act or the Regulations create an exemption.
  2. the payment to DFK of an amount that purported to be in respect of superannuation contributions for Mr Renshaw for the unfulfilled balance of the Services Agreement did not amount to an excluded benefit under Regulation 2D.2.02(c) on the basis that the entitlement to superannuation had not accrued at the time of the resignation and in any event, there was no evidence that the amount had been paid or would be paid to a superannuation fund,
  3. an amount paid to DFK purporting to be for remission to the ATO on behalf of Mr Renshaw in respect of tax liabilities arising as a result of the termination payments was not an exempt benefit under Regulation 2D.2.02 or on any other basis under the legislative regime and accordingly, was regarded as a benefit,
  4. an amount paid to DFK purporting to be for remission to the ATO on behalf of Butmall in respect of a GST liability arising as a result of the termination payments was not an exempt benefit under Regulation 2D.2.02 or on any other basis under the legislative regime and accordingly, was regarded as a benefit,
  5. in regard to an argument by Mr Renshaw and Butmall that an exemption under s 200F(2)(a) of the Act applied in relation to the benefits because the payments under the Settlement Deed were genuine payments by way of damages for breach of the Services Agreement, the Court found that QMCL had not repudiated the Services Agreement, the Settlement Deed was the result of a negotiated outcome and Mr Renshaw's evidence indicated that he would not have resigned as Managing Director had the termination payments not been made on the same day that the Settlement Deed was signed,
  6. various payments to Mr Renshaw and Butmall from QMCL that were sought to be included by Mr Renshaw and Butmall in the calculation of Mr Renshaw's base salary in the relevant period prior to his resignation were excluded by the Court, namely: fees paid to Butmall, long service leave, bonuses that were contingent on a performance condition being met, allowances, payments for share options and the reimbursement of annual leave. These amounts were not permitted to be included in Mr Renshaw's base salary for the purposes of the calculation under Section 200F(2)(b) and that as a result thereof, the termination payments exceeded the average annual base salary of Mr Renshaw over the relevant period.

Mr Renshaw and Butmall also argued that as a result of representations by QMCL allegedly arising in the Settlement Deed (as a result of a release clause and a clause that required each party to obtain any necessary shareholder approvals for the termination payments), QMCL was estopped from relying upon the legislative regime to seek repayment of the termination payments. Her Honour rejected that an estoppel could prevent the operation of Part 2D.2 on the basis that: (a) this would permit Section 200B to be circumvented by contract, which is clearly inconsistent with the legislative regime; and (b) an estoppel could not arise on the facts of this case in any event.

It is also important to note that her Honour held that prior shareholders' approval is necessary for any lawful payment to occur that it is not available for shareholders to ratify a payment made to a person who retires from a managerial or executive office after the payment is made.

This is a most interesting case in which Kemp Strang represented QMCL. It is the first case decided in relation to the amendments which occurred to Part 2D.2 of the Corporations Act effective from 24 November 2009 which were intended to prevent excessive termination payments to former executives without prior shareholder approval.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

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