Clarification of the meaning of ‘managerial or executive office’ for the purposes of the termination payments regime: Nichol v Discovery Africa Limited [2016] FCAFC 182

The Full Federal Court has clarified that for the termination payments regime in the Corporations Act, section 200AA(1) and 200AA(3) fully define what constitutes a “managerial or executive office” of a disclosing entity.

Mr Nichol and Mr Van Den Bergh were directors of Discovery Africa Ltd (Discovery Africa) and each provided consultancy services to Discovery Africa pursuant to agreements made between Discovery Africa and interposing entities, rather than directly with Mr Van Den Bergh and Mr Nichol. Mr Nichol and Mr Van Den Bergh were each paid a sum of money by Discovery Africa (Payments) on the same day they retired as directors in the context of a looming boardroom spill, the likely result of which was that they would each be removed from office.

Discovery Africa subsequently sought to claim back the Payments on the basis that they contravened section 200B(1) of the Corporations Act 2001 (Cth) (Act) because they constituted benefits given in connection with Mr Van Den Bergh’s and Mr Nichol’s respective retirements from a managerial of executive office without member approval. Gilmour J in the Federal Court ordered in a summary judgment that Mr Van Den Bergh and Mr Nichol repay the amounts to Discovery Africa

Mr Van Den Bergh’s appeal

Mr Van Den Bergh’s appeal centred around whether he held a “managerial or executive office” within the meaning of section 200AA of the Act which relevantly provides that:

  • for a disclosing entity, a person holds a managerial or executive office during the current financial year if the person‘s details were included in the directors’ report for that previous financial year (section 200AA(1)); and
  • for a body corporate not covered by section 200AA(1), a managerial or executive office for that body is an office of director or any other office or position in connection with the management of the body corporate’s affairs that is held by a person who also holds an office of director of the body corporate or a related body corporate (section 200AA(3)).

Mr Van Den Bergh challenged the approach by Gilmour J that the question as to whether a person holds a managerial or executive office as something that can be established factually rather than under s 200AA(1) in some circumstances.

In rejecting Mr Van Den Bergh’s appeal, the Full Court acknowledged that there may be some difficulty with Gilmour J’s approach given that the terms “managerial or executive office” is defined in section 9 as having the meaning given in section 200AA (which appears to set out a meaning for the definition). However, after considering the legislative history of section 200AA (which indicated that section 200AA(1) was designed to expand (not limit) the range of persons covered), the Full Court preferred an alternative construction which involved reading 200AA(3) as applicable to disclosing entities in situations where a person’s name does not appear in the directors’ report for the previous financial year. Such an approach was preferable because it meant that the expression “managerial or executive office” was fully defined by section 200AA.

The Full Court also noted that:

  • Mr Van Den Bergh’s construction could lead to the policy objective of the termination benefits regime in Part 2D.2, Div 2 of the Act to be severely undermined in circumstances where companies and executives seek to avoid obtaining shareholder approval for ‘golden handshakes’; and
  • the classification of whether persons held a managerial or executive office by sole reference to the annual report (which may simply reflect the amount of time the person has been in office) could lead to other unintended or absurd consequences.

Mr Nichol’s appeal

Mr Nichol raised a number of grounds of appeal, most significantly relating to Gilmour J’s finding that the Payment to him was a benefit that was caught by section 200B(1).

The Full Court upheld Gilmour J’s construction of section 200B(1), noting that:

  • the introductory words in section 200 stress that the term “benefit” in section 200B is to be given a broad interpretation requiring determination of the economic and commercial substance over legal form; and
  • the interposition of an entity in the contractual relationships relating to a payment or transfer more broadly would in effect limit what constitutes a “benefit” contrary to the express terms of section 200 so as to defeat the policy objectives.

However, the Full Court allowed Mr Nichol’s appeal on the basis that the granting of summary dismissal by Gilmour J was inappropriate because:

  • the material before Gilmour J gave rise to, at least, an arguable contention that an agreement was made between Discovery Africa and Mr Nichol for his appointment as managing director and that the benefit was paid by Discovery Africa under that agreement, and was therefore exempt under s 200F(2)(a)(ii); and
  • clearer evidence was needed to determine whether the threshold amount in section 200F(2)(b), worked out under section 200F(4)(e), was reached.