Australia: Director´s Retirement Benefit Held To Be Valid

In brief

• A director arranged for his services to be made available through a company, and requested that payment be made to it.

• The court accepted that the payment had been made available, indirectly, to the director as remuneration, for the purpose of calculating the maximum retirement benefit that could be paid to the director.

The Corporations Act 2001 limits the amount that companies may pay a director in connection with their retirement, without shareholder approval. In Dome Resources NL v Silver [2008] NSWCA 322, the New South Wales Court of Appeal considered this limitation in the context of a challenge to the validity of a retirement deed, which it held to be valid and effective.

The company's constitution – businesslike interpretation

Clause 11.5 of Dome Resources NL's (Dome's) constitution provided that "the Directors may at any time adopt any scheme or plan" to provide retirement or superannuation benefits for both present and future non-executive directors. Under the agreement, Mr Silver, the outgoing director, (or more accurately a company controlled by Dome which procured his services) was entitled to be paid a benefit upon his retirement.

The question in this case was whether clause 11.5 required a pre-existing "scheme or plan", pursuant to which benefits are conferred or whether clause 11.5 empowered the board to provide for benefits in whatever way it thought appropriate.

The court took the latter view. It stated that, in interpreting a company's constitution, it is appropriate to approach the task so as to give the document a "businesslike interpretation", paying "attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure". The Court said that these principles require that the provision in a constitution conferring power on the directors should be given as broad an operation as is reasonably available on the language and without imposing procedural constraints on the board, absent some contextual indication or purpose requiring the language to be so construed.

Section 200G – shareholder approval required?

The second question the court had to decide was whether the payments to companies controlled by Mr Silver and procuring delivery of his services were "remuneration" for the purposes of the Corporations Act, and therefore could be counted in determining the maximum retirement benefit that could be paid under section 200G.

The court had regard to the fact that the Corporations Act adopts the accounting standard definition of "remuneration", which under the relevant accounting standard at the time extended to all benefits paid to a director, whether direct or indirect. The court also considered that the economic and commercial substance of the payments should prevail over their legal form. Accordingly, it held that providing a payment to a party associated with the director is to provide the benefit to the director. The payments made to Mr Silver's companies by Dome for the provision of Mr Silver's personal services therefore constituted part of his total remuneration from the company.

A further question was whether Mr Silver could include in the calculation amounts which he had received for his services as managing director, prior to stepping down from his executive role and becoming a non-executive director of Dome. The court held that these amounts could be included, because section 200G did not require that the calculation be made by reference to a period during which the officer held the particular office from which they retired.

Lessons

The court adopted a commercial interpretation of the company's constitution and a purposive interpretation of the legislation to find this retirement benefit valid.

In drafting and reviewing constitutions, it is worth bearing in mind that provisions conferring powers on directors will tend to be construed broadly and without imposing procedural constraints, absent some indication they should be construed otherwise.

The case reminds us of the need to construe the retirement benefit provisions of the Corporations Act in a way that makes sense having regard to the purpose of the legislation. It also reminds us that statutory provisions may require that conduct be traced through corporate entities, not stopping the analysis at the point at which a new corporate entity is introduced.

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