Directors need to be cautious about making remuneration
payments, particularly to themselves, as shareholders can bring
statutory derivative actions to recover such payments.
The recent Cummings Engineering1 case, which was
decided by the Supreme Court of NSW on 26 March 2014, serves as a
timely reminder that directors must act in the company's best
interests, even above their own interests. The Cummings case is
also important because it considered the power of shareholders, and
whether directors acting honestly can be immune from personal
Ultimately, this case is important because it reinforces that
directors must act in the company's best interests and that, if
they don't, shareholders can commence statutory derivative
actions against them.
Cummings Engineering Holdings Pty Ltd was a sheet metalworking
business in which Mr Cummings was a shareholder and managing
director. The company was a family run company, with his wife as a
fellow director and his 3 sisters as minority shareholders.
In 1998 the company entered into a management agreement with Mr
Cummings. For many years Mr Cummings was paid in accordance with
that agreement and the company functioned profitably.
However, in 2009 the company became unprofitable and Mr Cummings
decided to proceed to wind up the company. Before this occurred he
sent a letter to his sisters, who were the minority shareholders,
informing them that he was going to cause the company to pay him
$250,000. This figure was considered a remuneration payment based
on the income he was expected to earn in the management agreement
the company was subject to, and also based on his early termination
without six months' notice. His sisters, unhappy with this
amount responded with a counter-offer of $50,000.
Ignoring this counter-offer, Mr Cumming called a meeting of the
company directors on 24 November 2009, and he and his wife (as the
other director) caused the company to make a payment of $250,000 to
Not surprisingly, this led to his sisters commencing a
shareholder derivative action against Mr Cumming (which is a court
action brought by a shareholder on behalf of a company) to recover
the $250,000 payment.
The decision of the Court
Although the facts of this case are reasonably straightforward,
the law is quite complex.
As a starting point, directors are generally not allowed to make
payments for retirement benefits without membership approval (see
section 200B of the Corporations Act 2001 (Cth)). However,
this approval is not necessary if it is a genuine payment of a
pension or a lump sum payment (see section 200G). This loophole is
what allowed Mr Cummings to legally make the payment to
The Court's inquiry didn't stop at whether the payment
was legal. It also considered whether the payment was in the
company's best interests, and thus whether Mr Cummings had
fulfilled his fiduciary obligation to the company under section 180
of the Corporations Act. In conjunction with this
question, the Court also had to consider whether it was appropriate
for the company to offer Mr Cummings a "golden
handshake", being a large payment as part of a severance
The court held that the payment could not be considered as being
in the best interests of the company and it could not be considered
as genuine "golden cufflinks" payment, especially since
it could not be justified as being for the purpose of preserving
goodwill, avoiding disputation, or encouraging continuing
employment. This was further supported by the fact that the company
was about to be wound up.
This led to another issue for the Court, which was whether Mr
Cummings could avoid his liability as a director, since he acted
legally, and did not require the approval of the members to make
the payment (section 1318). Section 1318 of the Corporations Act
states that when a director breaches his duty, although he is
liable to pay compensation to the company, the court may excuse
this liability if the director was acting honestly and reasonably
in the circumstances. In this case however, the Court held that Mr
Cummings could not be excused from this liability as he had not
acted honestly, particularly as he had ignored the disapproval
expressed by the shareholders.
What this finding means for you as a director
This case highlights the primacy of the director's
obligation to act in the best interests of the company as a whole.
In this case, even though Mr Cummings did not need the
shareholders' approval to make certain parachute payments,
because he acted against the shareholders' and the
company's interests, where the shareholders themselves voiced
concerns about the amounts involved, he was found in breach of his
duties as a director.
1In the matter of Cummings Engineering
Holdings Pty Ltd  NSWSC 250
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).