This case provides some useful guidance on Part 2D.2 of the Corporations Act 2001 (Cth) in relation to termination benefits. Importantly, the Court held that section 200B casts a very wide net to catch all payments or other benefits given in connection with the retirement from a managerial or executive office, and that section 200B cannot be trumped by any provisions in a contract. Executives should ensure that where their termination payments may not fall squarely within a statutory exception to section 200B, shareholder approval has been obtained (ideally promptly after their appointment) to reduce the risk of subsequently being required to repay them.
Mr Renshaw was managing director of Queensland Mining Corporation Limited (QMCL) and both he and his controlled entity, Butmall Pty Ltd (Butmall) were parties to a Services Agreement with QMCL (Services Agreement). Prior to the expiry of the Services Agreement, Mr Renshaw resigned in accordance with a Settlement Deed (Deed) between Mr Renshaw, Butmall and QMCL which provided for payments in connection with termination of Mr Renshaw’s employment to be made by QMCL to Mr Renshaw, Butmall and DFK Richard Hill Pty Ltd (DFK) (an accounting firm engaged by QMCL and also by Mr Renshaw personally) (Termination Payments).
Perry J in the Federal Court of Australia:
- found that the Termination Payments contravened section 200B of Part 2D.2 of the Corporations Act 2001 (Cth) (Act) which precludes the giving of a benefit in connection with retirement from a managerial or executive office without shareholder approval (subject to certain exceptions); and
- ordered repayment of the Termination Payments to QMCL pursuant to section 200J of the Act which deems payments made in contravention of section 200B to have been received by the recipient on trust for the giver.
In delivering her judgment, Perry J found that:
- the term ‘benefit’ and the circumstances in which ‘a benefit is given in connection with a person’s retirement’ are defined broadly, with a priority for substance over form, no need for a direct causal connection and an express recognition that a person gives a benefit even if already obliged by contract to do so;
- even if it could be said that the Termination Payments were no more than compensation for the relinquishment of rights under the Services Agreement, this did not mean that they were not ‘benefits’;
- a payment to DFK purportedly in respect of superannuation contributions (for a period of more than 2 years after Mr Renshaw’s resignation) did not comprise an exempted “genuine superannuation contribution” under Regulation 2D.2.02(c) as there was no evidence that the amount had been paid to a super fund and in any event, the exemption did not extend to compensation for loss of future but as yet un-accrued superannuation entitlements; and
- payments to DFK purportedly to be remitted to the ATO in payment of withholding tax in connection with the Termination Payments and purportedly representing a ‘grossing up’ payment for GST were benefits and were not caught by a statutory exception.
Perry J also found that the Termination Payments:
- were not ‘a genuine payment by way of damages for breach of contract’ under section 200F(2)(a) - QMCL had not repudiated the Services Agreement, rather the Settlement Deed was negotiated between the parties; and
- exceeded the value of the average annual base salary of Mr Renshaw over the relevant period prior to his resignation calculated under section 200F(2)(b) – For this calculation, Perry J excluded fees paid to Butmall, long service leave, bonus payments contingent on performance conditions, allowances, payments for share options and reimbursement of annual leave.
Perry J also found that:
- QMCL was not estopped from seeking repayment on the basis that the Settlement Deed included a release clause and a clause requiring each party to obtain any necessary shareholder approvals – to find otherwise would allow section 200B to be contracted out of and in any event, no estoppel arose on the facts; and
- payment of termination benefits could not subsequently be ratified by shareholders - prior approval is required.
See the case.