This is the sorry tale of how Howard Renshaw (Mr Renshaw), managing director of Queensland Mining Corporation Limited (QMC), an ASX listed company, fell foul of the termination benefits provisions of the Corporations Act 2001 (Cth) (Corporations Act) (section 200B) and was required to pay all his termination benefits back to QMC.
The matter came before Justice Perry who gave her judgment on 10 April 2014.1 She held that the $677,333 paid by QMC to Mr Renshaw and his service company, Butmall Pty Ltd (Butmall), be paid back to QMC.
Perry J held that the payments to Mr Renshaw had not been approved by shareholders and that no exception to the prohibition on the payment of termination benefits under the Corporations Act applied to Mr Renshaw’s circumstances.
Consequences of the case for CEOs and other Executives
Clearly Mr Renshaw did not do well out of this court action. If properly documented, Mr Renshaw may have been entitled to a payment of up to $331,666.
The changes to the law in November 2009 have created much complexity in relation to the payment of termination benefits to executives. Much of this complexity can be avoided by a properly drafted agreement with an executive on their engagement, but perhaps even better is to get the prior approval of shareholders to a general termination benefits policy to allow the payment of benefits to officers on their retirement. This is the subject of a separate Addisons’ Focus Paper entitled “Termination Benefits Policy: Does your Company need one?”
The story begins with some foreign investors taking a significant interest in QMC, securing board representation and then agitating for the removal of Mr Renshaw as QMC managing director.
Back in November 2011, Mr Renshaw and Butmall had entered into a service agreement (Service Agreement) with QMC under which Mr Renshaw was engaged as managing director of QMC and Butmall agreed to provide certain services to QMC. The Service Agreement was for a term of 3 years ending on 30 November 2014 and did not contain provisions for its early termination on the giving of notice or otherwise.
At a QMC board meeting on 16 October 2012, there was an attempt to get Mr Renshaw to tender his resignation as managing director.
After that board meeting, Mr Renshaw consulted his lawyers and asked them to prepare an agreement with QMC which would formalise the payment of his and Butmall’s entitlements on the termination of the Service Agreement. That agreement (Settlement Deed) was executed by Mr Renshaw, Butmall and QMC on 23 October 2012, the date that Mr Renshaw resigned as managing director.
At a meeting on 3 November 2012, the QMC board confirmed the execution of the Settlement Deed.Under the terms of the Settlement Deed, QMC paid a total of $677,333 to Mr Renshaw and Butmall.
At a general meeting on 21 January 2013, a further director was appointed to the QMC board with the support of the foreign shareholders. Over the next few months, the Chairman and Company Secretary resigned and the head office of QMC was moved from Sydney to Perth.
With this change of board personnel, there was a change in attitude to the terms of the Settlement Deed by QMC. As a result, QMC took action to recover the $677,333 paid to Mr Renshaw and Butmall under the Settlement Deed on the basis that those payments were made in breach of the termination benefits provisions of the Corporations Act.
Section 200B of the Corporations Act provides that a company cannot give a termination benefit to a person in connection with that person’s retirement from a managerial or executive office of the company or a related body corporate, unless the giving of the benefit has received approval from shareholders in accordance with the requirements of the Corporations Act.
There are certain exceptions to this prohibition including an exception (in subsection 200F(2) of the Corporations Act) (Damages Payment Exception) for:
- a benefit which is a genuine payment by way of damages for breach of contract; and
- where the value of the benefit, when added to the value of all other benefits (if any) already given in connection with the person’s retirement from offices or positions in the company and related bodies corporate does not exceed, at the maximum, 1 x the average annual base salary that the person received from the company and related bodies corporate during the last three years of employment.
In November 2009, substantial amendments were made to the termination benefits provisions of the Corporations Act, including to the exception in section 200F.
Under section 200F before the amendments, a company and its related bodies corporate could pay a retiring executive a termination benefit of up to 7 x that executive’s total annual remuneration before shareholder approval was required.However, under the revised section 200F, shareholder approval is required where the proposed termination benefit exceeds the executive’s average “base salary” for one year.
What the Judge Said
Perry J said Mr Renshaw’s circumstances did not fall within the Damages Payment Exception. She came to this conclusion for two reasons:
- it could not be said that the payments received by Mr Renshaw were received as a general payment by way of damages for breach of contract; and
- even if she was incorrect in relation to the above matter, the value of the benefits received by Mr Renshaw exceeded 1 x his base salary.
In relation to the first point, Perry J said that rather than a dispute as to the terms of the Service Agreement, the Settlement Deed was a mutual agreement to bring the Service Agreement to an end. Although QMC may have sought to have Mr Renshaw resign, it did not breach the contract but only terminated it with the agreement of Mr Renshaw.
In relation to the second point, Perry J went through a detailed calculation of what Mr Renshaw was paid and what he was entitled to be paid. Mr Renshaw suggested that on his calculations, his average annual “base salary” was $751,138.22. On QMC’s analysis, which was accepted by Perry J, Mr Renshaw’s average annual “base salary” was $386,114.67,2 a figure substantially below that contended by Mr Renshaw.
Consequences of payment not being permitted by the termination benefits provisions
Perry J noted that section 200J of the Corporations Act contains an unqualified statutory obligation on Mr Renshaw and Butmall to pay back to QMC any benefits paid to them in breach of the termination benefits provisions.
Even though Mr Renshaw might have been able to structure the payment of his termination benefits from QMC to receive up to $386,114.673 without shareholder approval and without breaching the termination benefits provisions, because of the operation of section 200J of the Corporations Act, he had to repay to QMC the entire $677,333 he was paid.
In addition, in a subsequent judgment, Perry J ordered that Mr Renshaw and Butmall pay QMC:
- interest from the date on which the termination payments were made to Mr Renshaw and Butmall; and
- its costs.4