17 Apr 2014

Payment in lieu of notice may be for "past services"

by David Landy, Robbie Walker

Payments in lieu of notice under the monetary threshold for termination benefits may not require shareholder approval under the "past services payment" exception.

A company cannot give a person a benefit in connection with their retirement if:

  • they hold a managerial or executive office; or 
  • the person has, at any time during the last three years before his or her retirement, held a managerial or executive office.

unless approval of the company's members is obtained.

One of the exceptions to this restriction is for payments in connection with a person's retirement where:

  • the payment is for "past services" the person rendered to the company; and 
  • the amount of the payment together with the value of other termination benefits given in connection with the person's retirement does not exceed a monetary threshold (which, generally speaking, is the average annual base salary during the last 3 years before retirement).

In Cummings Engineering Holdings Pty Ltd, the NSW Supreme Court recently dealt with a situation in which a managing director who had a contractual entitlement to payment in lieu of notice voted to give himself an ex gratia payment instead (in recognition of his past services). The Court held that the ex gratia payment in lieu of notice could be a payment for "past services". As a result, the ex gratia payment would not have required shareholder approval if it had been below the threshold. . This reasoning would appear to apply equally to payments made under a contractual obligation to give a payment in lieu of notice. 

However, the managing director in this case: 

  • had breached his directors' duties by voting in favour of the ex gratia payment; and 
  • had forfeited his contractual entitlement to a payment in lieu of notice by failing to give himself notice of termination in circumstances where he knew that the business was going to close but had continued to draw his salary without looking for another job.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.