The statutory exemption can be refreshed each time a person signs a new contract, even if he/she continues to hold the same position.

Receivers of a failed company have been unable to convince the Federal Court that statutory restrictions on termination payments reduced the payout entitlement of a senior executive (White v Norman; In the Matter of Forest Enterprises Australia Limited (Receivers and Managers Appointed) (in Administration) [2012] FCA 33).

Background

Mr White was employed as CEO by FEA in 2003. He continued in that role under a series of contracts. In mid-2009, he signed a new contract which included a provision for payment of a sum in lieu of notice of termination.

FEA went into receivership in 2010. The receivers terminated Mr White's contract without notice.

Mr White claimed that he was entitled to receive the full contractual payment in lieu of notice. The receivers disagreed on the grounds that it was subject to the prohibition on termination payments made in connection with retirement from office (in Part 2D.2 of the Corporations Act).

This required the Court to consider two legal issues:  

  • whether the payment in lieu was a benefit "given in connection with" Mr White's retirement, within the meaning of section 200B; and
  • if the payment fell under section 200B, was the payment covered by one of the statutory exemptions for termination payments (in section 200F)?

"Given in connection with"

Mr White argued that the payment in lieu of notice was caused by the receivers' decision not to give him notice and was not, therefore, "in connection with" his retirement from office.

He apparently relied on a comment in an earlier case that a payment in lieu of notice was not "in connection with" with an employee's retirement (being, instead "in connection with" the company's obligation to give notice).

The Federal Court agreed that the immediate cause of a payment in lieu was the employer's decision to proceed that way rather than by giving notice. However, that was too narrow a reading of "in connection with". In this case, the payment in lieu had followed on from Mr White's loss of office, and that was enough to show that it had been "in connection with" it.

Benefit under pre-employment agreement

Mr White therefore fell within the statutory provisions. That was not, however, the end of the story.

Under section 200F there's an exemption for a payment which:  

  • is a benefit given under a pre-employment agreement, as consideration for taking up the employment; and
  • does not exceed the monetary limits in section 200F.

The receivers argued that the 2009 agreement to provide payment in lieu could not have formed part of the consideration for Mr White's agreeing to take the CEO position, since he had already been CEO since 2003.

The Court held that the "consideration" referred to in section 200F was consideration given "from time to time". In other words, the statutory exemption can be refreshed each time a person signs a new contract, even if he/she continues to hold the same position.

Quantum of payment

As noted above, a termination payment is not exempted merely because it falls under section 200F. The quantum of the payment must not exceed the limits set by section 200F(2)-(5).

Those limits are based on an averaging of the amount paid to the officer over the "relevant period". "Relevant period" is defined as the "period" or "number of periods" that the person has held the relevant office (section 200F(5)).

The receivers argued that, if Mr White was holding the office of CEO as a result of the 2009 contract, then the relevant period was only from the date of signing the contract until his termination a year later.

The Court took a different view. It said that the issue is not the number of contracts under which the executive has been employed, but the length of time he or she has been in office, whether in a single period or a number of periods. If a person has been CEO for X years under one contract, then the "relevant period" is X years. If a person has been CEO for X years under a series of contracts, the "relevant period" is still X years.

Mr White was entitled to the payment in lieu.

Comment

The restrictions on termination payments to executives have been headline news for some time.

They were considerably beefed up by Parliament in 2009. Although this case relates to events before those changes, the Court's reasoning appears to be applicable to the current provisions.