In the matter of Cummings Engineering Holdings Pty Ltd ACN 001 794 743
[2014] NSWSC 250
•26 March 2014
Supreme Court
New South Wales
Case Title: In the matter of Cummings Engineering Holdings Pty Ltd ACN 001 794 743 Medium Neutral Citation: [2014] NSWSC 250 Hearing Date(s): 11, 12 March 2014 Decision Date: 26 March 2014 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: THE COURT DIRECTS that the plaintiffs bring in short minutes at a time to be fixed to give effect to this judgment to the effect: 1. on the plaintiffs' claim, judgment that the defendants pay the third plaintiff $250,000; 2. on the cross-claim, judgment that the third plaintiff pay the first defendant $122,522; 3. an order that Engineering be joined as third defendant, and a declaration that Holdings is liable to pay Engineering the sum of $34,518 by way of clause 4.3 bonus for the year 2011/12.
Catchwords: CORPORATIONS - management and administration - duties and liabilities of officers of corporation - restrictions on termination payments - "golden handshake" to director upon termination - whether payment in contravention of Corporations Act s 200B - whether member approval required - whether "in consideration of past services" - application of Corporations Act Part 2D.2 to contracts made before 24 November 2009 - transitional provisions - whether payment in contravention of directors' duties - where company's business at an end and no ongoing interest in reputation for generosity - held, payment could not be justified in interests of company
CORPORATIONS - management and administration - duties and liabilities of officers of corporation - relief from liability - whether directors acted honestly - whether directors ought to be relieved
DEEDS - what amounts to a deed - whether document expressed as agreement but sealed operates as a deed
EMPLOYMENT LAW - the contract of service and rights, duties and liabilities as between employer and employee - termination - notice - pay in lieu of notice - whether managing director entitled to pay in lieu of notice where he had practical control of sale and closure of business and could have given requisite notice - held, not entitled
EMPLOYMENT LAW - the contract of service and rights, duties and liabilities as between employer and employee - termination entitlements - annual leave and long service leave
LIMITATION OF ACTIONS - contracts, torts and personal actions - the period of limitation - employee's cross-claim for underpaid remuneration - when time stops running - held, upon institution of principal actionLegislation Cited: (CTH) Corporations Act 2001, s 180, s 181, s 182, s 200B, s 200E, s 200G, s 200J, s 236, s 237, s 1317H, s 1318
(CTH) Corporations Amendment (Improving Accountability on Termination Payments) Act 2009, Sch 1 Part 3.
(CTH) Corporations Regulations 2001, reg 2D.2.03(1)(C)
(NSW) Annual Holidays Act 1944
(NSW) Conveyancing Act 1919, s 38(3)
(NSW) Limitation Act 1969, s 14(1)(a), s 16, s 74Cases Cited: ASIC v Edwards (No 3) (2006) 57 ACSR 209
ASIC v Macdonald (No 12) [2009] NSWSC 714; (2009) 259 ALR 116; 73 ACSR 638
ASIC v Vines [2005] NSWSC 1349; (2005) 224 ALR 499; 56 ACSR 528
Electricity Meter Manufacturing Co Ltd v Manufacturers' Products Pty Ltd (1930) 30 SR(NSW) 422; 54 ALJ 46
Fletcher's Fotographics Pty Ltd v Patman [1982] 2 NSWLR 876
Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 54 SASR 285
McKinlay v Dodds (1984) NSW ConvR ¶55-188
Nelson v Wyong Shire Council (1989) 68 LGRA 164
Patman v Fletcher's Fotographics Pty Ltd (1984) 6 IR 471 (NSWCA)
Proud Projects Pty Ltd v Plotkin [1977] AR(NSW) 315
Randall v Aristocratic Leisure Ltd [2004] NSWSC 411
Re A Forsyth & Co Pty Ltd (In Liq) and the Companies Act (NSWSC, Wootten J, 11 December 1975, unreported)
Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418
Rodenstock v Leahy [2002] NSWSC 957
Rose v Commissioner of Stamps (1979) 22 SASR 84
Woolworths Ltd v Kelly (1991) 22 NSWLR 189
Xenios v Wickham (1866) LR 2 HL 296Texts Cited: Austin & Black's Annotations to the Corporations Act Category: Principal judgment Parties: Wendy Anne Hansen (first plaintiff)
Sandra Crayn (second plaintiff)
Diane Styles (third plaintiff)
Chaljenamu Pty Ltd (fourth plaintiff)
Jackev Pty Ltd (fifth plaintiff)
Cupieson Pty Ltd (sixth plaintiff)
Cummings Engineering Holdings Pty Ltd (seventh plaintiff)
Michael Cummings (first defendant)
Robyn Cummins (second defendant)Representation - Counsel: Counsel:
M. W. Sneddon w K P Tang (plaintiffs)
S. Galitsky (defendants)- Solicitors: Solicitors:
Carrolls Lawyers (plaintiffs)
Websters Solicitors (defendants)File Number(s): 2013/ 52846
JUDGMENT
Each of the first, second and third plaintiffs Wendy Hansen, Sandra Crayn and Diane Styles, and the first defendant Jeffrey Michael Cummings, are siblings; their father was the late Jack Townsend Cummings. The second defendant Robyn Gai Cummings is Michael's wife. For convenience, and without any disrespect, I shall refer to those parties by their first names. The fourth, fifth and sixth plaintiffs Chaljenamu Pty Limited, Jackev Pty Limited and Cupieson Pty Limited are respectively the trustees of family trusts controlled by Wendy, Sandra and Diane, having replaced Glenwall Pty Limited in that capacity in or about 1998. Cummings Engineering Pty Limited ("Engineering") is the trustee of Michael's family trust.
Each of Wendy, Sandra and Diane holds two shares, and Michael holds eight shares, in the company Cummings Engineering Holdings Pty Ltd ("Holdings") - originally the third defendant but now the seventh plaintiff, pursuant to leave to bring a derivative action under Corporations Act 2001, ss 236 and 237, on the application of Wendy, Sandra and Sue. In these proceedings, Holdings claims compensation for breach by the defendants of their duties as directors of Holdings in approving a redundancy payment of $250,000 to Michael on the termination of his employment as managing director; and Michael cross-claims for underpaid remuneration and leave entitlements.
Background
Holdings was incorporated on 10 October 1979, and from shortly after its incorporation, was the trustee of the Cummings Engineering Unit Trust, which was settled by deed dated 30 November 1979. Originally, each of Engineering as trustee of the J. T. Cummings Family Trust (presumably controlled by Jack), and the four siblings' trusts, held 12 of the 60 issued units in the unit trust.
As such trustee, Holdings owned and operated an engineering sheet metalworking business, originally from premises at Balmain and later from Rydalmere. Until his death in 1991, Jack was a director of Holdings, and his wife Eveline was a director and secretary until 1986. Michael has also been a director since 7 November 1979, and secretary since 3 June 1986. Robyn has been a director since 3 April 1989. It seems likely that originally Jack held four shares, Michael four shares, and Wendy, Sandra and Diane two shares each.
Following Jack's death, it appears that Michael inherited Jack's shareholding in Holdings, and differences emerged between the siblings. By deed of 20 October 1993 ("the 1993 settlement deed"), Sandra, Diane, Wendy, Glenwall, Holdings, Engineering, and Michael agreed to resolve proceedings that Sandra, Diane, Wendy and Glenwall had commenced in the Equity Division against Holdings, Engineering, and Michael. Engineering agreed to transfer the twelve units it held as trustee of Jack's trust equally among the siblings' trusts; as a result, each of the four siblings' family trusts held 15 of the 60 issued units. The deed also provided that a management contract would be entered into between Holdings as employer and Michael as Managing Director, and that Michael would observe and perform the terms of the management agreement, and use his best endeavours to maintain the value of the business. Michael undertook to keep his sisters informed in relation to the operations, finances and management of the business, and was to be subject to their veto in respect of incurring any single item of expenditure or liability exceeding $40,000, or selling the business. Clause 7 of the deed provided that upon Michael's death or cessation as managing director, the business was to be sold, unless otherwise agreed.
Also on 20 October 1993, Holdings, Michael, Glenwall and Engineering entered into the management agreement contemplated by the settlement deed ("the 1993 management agreement"). Relevantly, it provided for Michael to be employed as managing director of Holdings for a minimum of five years from 1 July 1993 until determined by six months' notice given either by Glenwall or by Michael (clause 1); for Michael to devote the whole of his working time and attention to the discharge of his duties and to conform with such hours of work as may reasonably be required and not be entitled to remuneration for work performed outside his normal hours (clause 2.1); and for him to be entitled to a remuneration package for the year ended 30 June 1994 of $156,139.50, and with effect from 1 July 1994 to the same remuneration package, adjusted annually in accordance with any increase in average weekly earnings (clause 3). In addition, Engineering was entitled to a bonus of 20% of the amount by which, in any year while Michael was managing director, the Accounting Profit exceeded $300,000 (clause 4.2). It was recorded that Michael had accrued long service leave since the commencement of his employment in 1972, none of which had been taken (clause 5.1), and that he was entitled to four weeks holiday (exclusive of public holidays) each year, to be taken at such time as he considered most convenient having regard to the requirements of the company's business, and to a statutory loading (if any) applicable to the position of a managing director of a company such as Holdings (clause 5.2).
By 1998, Glenwall had been succeeded by Chaljenamu (then called Primrose), Jackev and Cupieson as trustees of the daughters' trusts. At least since July 1998, each of the plaintiffs has held two issued shares, and Michael the remaining eight issued shares, in Holdings; and each of Chaljenamu, Jackev, Cupieson and Engineering have held 15 of the 60 issued units in the trust.
In 1998, Sandra, Diane, Wendy, Jackev, Cupieson, Chaljenamu, Holdings, Engineering, and Michael entered into a "deed of agreement" which amended the 1993 deed of settlement ("the 1998 amending deed"). Relevantly, it substituted, for the right of veto formerly contained in clause 4(e), a provision that in the event that Michael desired to incur any single item of expenditure or liability exceeding $40,000 in his conduct of the business, then he shall provide written notice of not less than 30 days prior to doing so to each of Sandra, Diane and Wendy of his intention to do so.
Contemporaneously, Holdings, Michael, Jackev, Cupieson, Chaljenamu and Engineering entered into a new management agreement ("the 1998 management agreement"). It provided for Michael to be employed as managing director of Holdings for a minimum of two years from 1 July 1998 until determined by six months' notice given either by Michael or by any two of Jackev, Cupieson and Chaljenamu (clause 1); for Michael to devote 20 hours per week for the first year, and thereafter 13 hours per week, of his working time and attention to the discharge of his duties (clause 2.1); and for Michael to be entitled to a remuneration package for the year ended 30 June 1999 of $95,154.00, "so that the remuneration package shall be the totality of the benefits payable by the Company to the Employee and the members of his family for all services (including services as directors of the Company) rendered to the company or the Business by them or by any of them. Nothing in this clause is to be construed as in any way prohibiting the engagement by the Company of any member of the family of the Employee from performing any services for the Company in consideration of remuneration therefore additional to those already being performed at the date of this agreement". Michael was entitled to a remuneration package for the year ended 30 June 2000 of $66,101.00, with the same qualification; and in the event that he was engaged beyond 30 June 2000, then with effect from 1 July 2000 to the same remuneration as received in the previous year, adjusted annually in accordance with any increase in average weekly earnings with a base date of 1 July 1999 (clause 3). Additionally, for the financial year ending 30 June 1999, Engineering was entitled to a bonus of 10% of the amount by which the Accounting Profit exceeded $330,000, so long as Michael remained managing director (clause 4.2); and for the financial year ending 30 June 2000 and thereafter, Engineering was entitled to a bonus of 6.67% of the amount by which the Accounting Profit exceeded $330,000, so long as Michael was managing director (clause 4.3). It was recorded that Michael had accrued long service leave since the commencement of his employment in 1972, none of which had been taken, and that this was to be calculated at 30 June 1998 and preserved until cessation of employment, with leave continuing to accrue pro rata from 1 July 1998 (clause 5.1); and that he was entitled to four weeks holiday (exclusive of public holidays) each year, to be taken at such time as he considered most convenient having regard to the requirements of the company's business, and to a statutory loading (if any) applicable to the position of a Managing Director of a company such as Holdings (clause 5.2).
On 30 May 2000, Michael executed a "memorandum of understanding", which relevantly provided that he would continue under the 1998 management agreement at the salary determined by clause 3.2 and 3.3 of that agreement, and that the salary of $66,101 (subject to adjustment under clause 3.3) was the total package to be received by Michael, and that there was to be no entitlement to receive remuneration for services rendered beyond 13 hours per week.
On 26 October 2009, Michael sent a letter on Holdings letterhead to Sandra, Diane and Wendy, relevantly as follows:
To this point in time, we, the shareholders in the company have had discussions regarding the sale of the business and the building. An original proposal by the company's solicitor was that the business and building be sold at the end of the 2011-2012 financial year. In this case, in my opinion, the following conditions will apply.
1/ Mike will put the business up for sale at a time he considers appropriate but not later than 1/7/11 allowing a minimum of 12 months to effect a sale.
2/ Mike will put the building up for sale at a time he considers appropriate but not later than 1/1/12 allowing a minimum of 6 months to effect a sale.
3/ If the sale of the business should hinge on tenancy, i.e. the new owner wishing to remain in the building under a lease, Mike will make this a condition of the sale of the building and will include it as a possible condition when listing the building for sale.
4/ At the end of financial year 2011-2012, the business if unsold, will cease trading unless an extension of time is agreed to by a majority of shareholders. If no extension of time is agreed to a clearing sale/auction will be held to sell off the contents of the building. Similarly, if applicable, at the end of any extension period.
5/ At the end of financial year 2011-2012, the building, if unsold, will be listed for auction unless an extension of time is agreed to by a majority of shareholders. The reserve price will be at Mike's discretion and if not reached the building will be put back on the market for sale with a view to a further auction in 3 months.
6/ Prior to the distribution of funds to the shareholders from the sale/s and after the company has paid all debts and liabilities a payment of $250,000.00 will be made to Mike in recognition of his service to the company.
On 26 May 2010, Michael sent a further letter on Holdings letterhead to Sandra, Diane and Wendy, relevantly as follows:
I haven't received a reply to my letter of 26/10/09.
You were keen to get this information, but it seems you have little interest by ignoring to reply to it.
Your attention to this matter should be of some importance to yourselves.
Eventually, Wendy replied to Michael's correspondence, on behalf of Sandra, Diane and herself, by email on 14 June 2011, relevantly as follows:
In reply to your letter dated 26/10/09.
We three, namely Sandra Crayn, Diane Styles, and Wendy Hansen acknowledge receipt of the above mentioned letter regarding your required conditions on closure of Cummings Engineering Holdings P/L, of which we are all part owners.
...
We find your request that we agree to a $250,000.00 golden handshake is excessive in the extreme, and outline our reasons for not making a decision on this point at this time.
1. MC and wife have been paid a commercial wage for the work performed
2. MC has not been negotiable on the amount despite several offers to discuss
3. Not usual in small business, in this industry, with the financial results he has achieved to pay such a large additional payout
4. Continuation of the business despite losses, little financial return (as unit holders we have been required to forgo interest entitlements) - such has increased MC's entitlement to annual leave and long service leave
5. Inability of business to meet its debts as and when they fall due - requirement to obtain external funding against the value of the land (such will reduce the available monies at the end when determining what is available for distribution)
6. Reduction in the saleable value of the business to $Nil
Please advise your availability so that we can have an informal meeting to discuss the above mentioned items of concern.
During the latter part of 2011, Michael explored the sale of Holdings' business and real property. He consulted Holdings' external accountant Mr Amargianitakis, and three business agents. He received advice, and formed the opinion, that as a going concern the business was of no marketable value, and that in the light of a favourable offer received for the real property in later 2011 it would be most advantageous to sell the land, and separately realise the business assets. The view that the business as a going concern was of no market value appears not unreasonable in the light of its trading results for FY2010-11: for the financial year ending 30 June 2011, gross profit from trading was $531,205.91, total expenses $690,241.19 and the resulting loss $133,861.37.
As a result, Michael accepted an offer for the land of $1,500,000, conditional on vacant possession by Christmas 2011. He then proceeded to realise the machinery for $140,000 - significantly more than the $60,000 a machinery broker had advised him. The business was closed, the premises vacated, the machinery sold, and the staff (other than Michael) terminated, by Christmas 2011. Michael however continued to draw his remuneration until May 2012.
On 12 March 2012, an accountant on behalf of Diane, Sandra and Wendy and their respective trusts sent an email to Mr Amargianitakis on behalf of the company, relevantly as follows:
Thank you for the financials for the termination of the trust.
On behalf of Diane, Sandra and Wendy and their respective trusts I advise that they do not approve of the golden handshake of $250,000 claimed by Mike and Robyn.
The beneficiaries of the golden handshake are also the trustees of the unit trust. The $250,000 has no commercial reality and is funded from the sale proceeds of the trusts freehold property.
Profits over the past few years have been low and if a commercial rental for the premises owned by the trust was taken into account the business profits were unsatisfactory.
Both Michael and Robyn received salaries and associated benefits at commercial rates at all times during their employment.
Without prejudice a termination payment of $50,000 is offered as a compromise.
On 22 March, Michael responded to the effect that he had received the 12 March email, that he disagreed with the statements in it and felt that clarification was needed "before I take the proposed action in winding up the company's operation", which would involve Holdings retaining a solicitor "to help to bring the business to a tidy conclusion". On 10 April, Wendy (also on behalf of Sandra and Diane) replied, noting the rejection of their offer of a $50,000 "handshake", and stating:
Due to concerns of a conflict of interest, we would appreciate the name and contact details of the solicitor you are proposing to retain for the purpose of bringing the business to a tidy conclusion. We look forward to your reply via email as soon as possible.
On 16 April, Wendy emailed Michael again, requesting a reply to the previous email and adding:
I'm sure you are as anxious as we are to reach a tidy conclusion to this issue, and would therefore appreciate your co-operation in this matter.
Michael answered on 18 April 2012:
As yet I haven't received the solicitor's advice and feel that it might be prudent to wait until that time before you contact him. I will endeavour to hurry things along.
On or about 26 April 2012, Mr Amargianitakis received a letter from Websters, solicitors, addressed to Holdings, which in substance advised that the 1998 management agreement was not a new agreement but merely a variation of the 1993 management agreement; that for a service agreement entered into prior to 24 November 2009 which was not renewed, extended or varied thereafter, a director's termination benefit of up to seven times the total annual remuneration could be approved by the directors without needing shareholder approval; and that later amendments to the Corporations Act did not affect existing contracts as at 24 November 2009.
Rather than providing this advice to the plaintiffs, Michael on 26 April convened a meeting of the directors of Holdings (being Michael and his wife Robyn) for 30 April 2012. The notice of meeting specified the business as follows:
1. To discuss the termination of the services of Michael Cummings and Robyn Cummings
2. To determine the termination of the employment and approve the termination payment of $250,000
3. To approve the sale of the share holdings in Cummings Engineering Pty Ltd to Michael Cummings and Robyn Cummings
4. To discuss any general business that may be tabled
There is no suggestion that the plaintiffs were informed that the legal advice had been received, nor of the intention to convene the meeting. Of course, as they were not directors, they were not entitled to notice, but the manner in which these affairs of the company were conducted, at a time when they had expressed their opposition to a "golden handshake" of $250,000, and sought access to the legal advice the company was obtaining, bears upon some of the issues.
The minutes of the meeting relevantly record the following:
2. Present: Jeffrey Michael Cummings, Robyn Gaye Cummings
3. By invitation: Dimitri Amargianitakis
4. Jeffrey Michael Cummings was declared Chairman of the Meeting
5. The chairman declared that a quorum of directors was present
6. The chairman noted that reasonable notice of the meeting had been given as required by s248C of the Corporations Act 2001 (C'th) and that in fact both directors were in attendance at the meeting in person
7. The chairman tabled the following documents:
(i) The share Transfer of Shares in Cummings Engineering Pty Ltd
(ii) A letter of advice from Websters Sols
(iii) A letter of termination of employee services of JM Cummings and Mrs RG Cummings
...
9. The chairman tabled the letter from Webster's solicitors and discussed the closure of the business and the long service of employment since 1972 of Mr JM Cummings and the company and then he put forward to the board that since the company had ceased trading Mr JM Cummings and Robyn G Cummings be terminated and their positions become redundant and a termination payment of $250,000.00 be paid to Mr JM Cummings
IT WAS RESOLVED TO AUTHORISE the termination payment of $250,000.00 to JM Cummings
IT WAS RESOLVED THAT THE termination services of JM Cummings and RG Cummings as employees of the company be ratified and authorised Mr Cummings to provide the appropriate documentation and make the payments
The letter of termination, to which the minutes refer, was addressed to Michael and Robyn, dated 26 April 2012, signed by Michael as managing director, and in the following terms:
As you are aware the closure of the business has necessitated that all staff and employees have been terminated, there is no further use of a General Manager and the position has been made redundant therefore with regret we give you notice to have your employment contact [sic] terminated effective immediately. We understand that the company is required give you six (6) months notice of such intention, however we hope that you see your way clear to accept the termination payment without notice.
The company will make all the payments for your Long Service leave and Annual leave as calculated by our accountants and further we will make a termination payment of $250,000.00 for the loyal services you have provided for the last 40 years.
On 7 May 2012, Michael sent a letter to Wendy, Sandra and Diane which stated:
The company has paid a redundancy amount of $250,000.00 as part of the termination and acceptance of not requiring six months [sic] notice. ... The Long Service Leave and Accrued Annual Leave amount of $157,484.00 has been paid ...
The letter went on to say that there was $377,858 available for distribution, but:
As explained previously these funds will be distributed after the Deed of Release and Indemnity is signed by all parties, with a small amount withheld for any incidental payments to be made.
The reference to $157,484 for long service leave and annual leave may, by reference to Mr Amargianitakis' evidence and calculations, be deduced to reflect $58,366 annual leave, and $98,781 for long service leave. However, another calculation by Mr Amargianitakis suggests that $104,731 was paid by way of long service leave.
The issues
Originally, an important element of the plaintiffs' case was an allegation that the defendants had breached their fiduciary duty by failing to sell the business of Holdings as a going concern, thus sacrificing its value. The plaintiffs obtained leave to adduce expert evidence of the value of the business, but none was adduced. The evidence adduced by the defendants, from Michael and Mr Amargianitakis, was unchallenged and uncontradicted, to the effect that continuation of trade was unviable; that sale of the real property and separate sale of the business assets was most likely to produce the best result in the prevailing market conditions; and that the assets were in fact sold for reasonable prices in arms length transactions. Ultimately, the plaintiffs made no submission in respect of this issue.
Although the plaintiffs' written submissions suggested that there was an issue as to the legitimacy of the $157,484 termination payment to Michael in respect of his leave entitlements, this was never impugned in the pleadings, and ultimately was not pursued. Had it been, it would have failed, for reasons which appear from the below discussion of the cross-claim in respect of annual holidays and long service leave: Michael was entitled to at least as much as he received on account of those entitlements.
That leaves, as the only matter for resolution on the plaintiffs' claim, their claim to recover from the defendants, for the benefit of Holdings, compensation for the $250,000 "redundancy" payment, on the basis that it was made in contravention of the defendants' statutory and/or general law duties. The defendants submit that the legitimacy of the $250,000 redundancy payment is inter-related with the cross-claim (for underpaid remuneration, leave entitlements and bonus), such that to the extent that Holdings was indebted to Michael in those respects, there was no breach of duty in making the payment. In the event that the plaintiffs otherwise succeed on their claim, the defendants cross-claim to be relieved from liability pursuant to Corporations Act, s 1318.
Accordingly, the issues can conveniently be arranged as follows:
(1)whether the $250,000 redundancy payment to Michael was made in contravention of the defendants' statutory and/or general law duties, and (subject to the question of s 1318 relief) the defendants are liable to compensate Holdings for it;
(2)whether, as at the date of termination in May 2012, Michael was entitled to pay in lieu of notice;
(3)whether Michael has been underpaid remuneration by reason of failure to apply the correct index, and if so what amount he can now recover, having regard to limitation issues;
(4)whether Michael has been underpaid in respect of his annual holidays entitlement;
(5)whether Michael has been underpaid in respect of his long service leave entitlements;
(6)whether Michael is entitled to a bonus under clause 3.4 of the 1998 management agreement in respect of FY2011/12, and if so in what amount;
(7)in the light of the foregoing, whether the defendants should be relieved under s 1318 from any liability they may otherwise have in respect of the $250,000 redundancy payment.
The $250,000 redundancy payment
The plaintiffs impugn the $250,000 redundancy payment on two grounds: first, that it was a benefit given by Holdings in connection with Michael's retirement from managerial or executive office in Holdings in contravention of Corporations Act, s 200B; and secondly, that it was made and received in contravention of the directors' statutory and general law fiduciary duties, to act in good faith for the benefit of the company as a whole.
As to the first, the burden of the plaintiffs' case is that the payment was in contravention of Corporations Act, s 200B, as there was no member approval under s 200E, and it was not within the exception provided by s 200G; accordingly, pursuant to s 200J, the whole amount of the payment was taken to be received on trust for, and was immediately repayable to, Holdings.
Section 200B has the effect that a company must not give a person a benefit in connection with that person's retirement (including loss of office) from a managerial or executive office in the company, unless there is member approval under s 200E. There is no doubt that the redundancy payment - described in letter of 7 May 2012 as "a redundancy amount of $250,000.00 as part of the termination and acceptance of not requiring six months' notice", was a benefit in connection with Michael's loss of office as managing director, and that member approval under s 200E was not sought, let alone obtained. However, pursuant to s 200G, s 200B does not apply to a benefit if (a) it is a payment in connection with a person's retirement from an office or position in a company, (b) it is for past services rendered to the company, and (c) its value, when added to the value of all other benefits given in connection with the person's retirement, does not exceed the amount calculated in accordance with the section.
The plaintiffs submitted that, as the payment was at least in part in respect of pay in lieu of notice, it was not "for past services". I do not agree. First, a payment in lieu of notice is a payment for service during the notice period, and therefore connected with retirement, within s 200A. While, in Randall v Aristocratic Leisure Ltd [2004] NSWSC 411, the view was expressed (at [508]), that a payment of three months' salary and benefits in lieu of notice pursuant to a contract of employment was not in connection with the employee's retirement, but a payment required to be made under the contract to bring about effective termination of employment at the option of employer, it is not easy to see why that characterisation prevented it from being a payment connected with retirement, as the authors of Austin & Black's Annotations to the Corporations Act point out and, in any event, Corporations Regulations reg 2D.2.03(1)(C) now prescribes that a payment made to a person in lieu of the giving of notice of termination is a benefit given in connection with the person's retirement from office. Secondly, while the notion of "consideration for past services" poses challenges for contractual analysis, as the law does not recognise "past consideration", it is clear enough that the object of s 200G was to permit, but only within limited parameters, the provision of benefits to officers in connection with retirement from office which would otherwise be prohibited by s 200B, in recognition of their past services to the company. In this case, the termination letter of 26 April 2012 expressed the hope that Michael would accept the redundancy payment and not seek a payment in lieu of notice, and it may be assumed that he acceded to that request, thereby foregoing pay in lieu of notice in favour of the "redundancy" payment. It is manifest, having regard to the circumstances and the terms of the termination letter, that the payment was sought and proffered in recognition of Michael's past services and was, in the relevant sense, in consideration of those services. That conclusion is reinforced by the conclusion, reached below, that by May 2012 Michael had no remaining entitlement to pay in lieu of notice.
The defendants abandoned reliance on s 200G, apparently because it was thought that the payment exceeded the threshold worked out under that section. Since 24 November 2009, the section has contained a threshold for member approval - if the person's service with the company exceeds three years - of the person's annual base salary during the last three years of service. This "one times" limit was substituted by the Corporations Amendment (Improving Accountability on Termination Payments) Act 2009. Under the previous provision, a payment for past services in connection with retirement from a board or managerial office was permissible, without shareholder approval, if the value of the benefit, when added to the value of all other payments already made or payable in connection with the retirement, did not exceed the relevant payment limit which, for a long-serving eligible employee, was essentially seven times the average total annual remuneration for the last three years of service - the "seven times" limit. However, item 43(1) of Schedule 1 Part 3 to the amending Act provides that the amendments apply in relation to a retirement from an office, or position of employment, held under an agreement entered into, or an agreement renewed or extended, or an agreement for which a variation of a condition of the agreement happens, on or after the commencement of Part 1 of the amending Act, which was the date after the day on which it was assented to, on 23 November 2009. Thus the transitional provisions have the effect that the former "seven times" threshold continues to apply in respect of employment under contracts made before, and which have not been renewed, extended, or materially varied since, 24 November 2009. The 1998 management agreement was not extended, renewed or materially varied after 2009; it simply continued in operation. The redundancy payment of $250,000, even when added to the termination payment of $157,484, did not approach seven times Michael's final average salary, which would have been in the order of $700,000. It therefore seems to me that there was no contravention of s 200B, as that section did not apply because the payment was within s 200G, in its application to Michael's employment. Accordingly, despite the defendants' eschewing the argument, the plaintiffs' case, in so far as it depends on contravention of s 200B, fails.
As to the contention that the payment was nonetheless in contravention of Michael's and Robyn's duties as directors to act in good faith in the best interests of the company, it was submitted for the defendants that, if the payment were within the parameters defined by s 200G as permissible, there could be no question of its being in contravention of directors' duties. However, s 200E(4) expressly provides that member approval under s 200E does not relieve a director from any duty to the company, whether statutory or not and whether fiduciary or not. While there is no equivalent provision in s 200G, it is not apparent why, if directors are not relieved of such duties by member approval, they would be so relieved in respect of transactions not requiring member approval. In my opinion they are not. In my view, just as directors are not relieved of their duties by member approval, they are a fortiori not relieved if s 200B does not apply - whether because the benefit in question does not fall within the scope of being given in connection with retirement from an office or position at all, or because it is exempt under s 200F, or permissible under s 200G. The parameters established by s 200G are boundaries which limit what the directors can do without member approval, but they do not permit directors to exhaust those limits other than consistently with their duty to the company as a whole.
Often, "golden handshakes" may be justified in the interests of the company on the footing that they preserve goodwill, avoid disputation, and encourage continuing employees. The reconciliation of such benefits with the interests of the company as a whole was eloquently explained by Mahoney JA, as he then was, in Woolworths Ltd v Kelly (1991) 22 NSWLR 189 (at 226), as follows:
I do not mean by this that a director must ensure that, in its dealing with its directors and with others, his company must be mean or cheeseparing. A company may decide to be generous with those with whom it deals. But - I put the matter in general terms - it may be generous or do more than it need do only if, essentially, it be for the benefit or for the purposes of the company that it do such. It may be felt appropriate that the company acquire the reputation of being such. Similarly, it may be generous to its directors, in providing large fees or attractive pension funds or the like, but essentially only if it be the means adopted by it of attracting good directors to its service or securing the best performance by them or if otherwise it is for the benefit of the company that it do so. To adapt what was said long ago, the directors may have cakes and ale and, now, jet planes, but they may have them only if it is for the benefit of the company that they have them. And, of course, only to the extent that it is so.
In the present case, the context is that the company was closely held, with the four siblings each holding 25% of the shareholding; management had always been drawn from the family, so there was little occasion to develop a reputation of generosity to attract external directors; there had been previous disputation between the siblings, culminating in the 1993 settlement deed, under which Michael was obliged to notify his sisters of any proposal to expend more than $40,000 on a single item; the company had not been profitable in the last few years; his sisters had indicated opposition to a "golden handshake" of $250,000, but indicated that they would agree to $50,000; the payment represented about 25% of the equity in the company; and the business had been closed and the assets sold, so that there was no question of sustaining a reputation of generosity to attract quality personnel in the future. In the context of a private family company, where the business had concluded, and had not been profitable in recent years, and Michael would in any event receive 25% of the equity by reason of his shareholding, it is impossible to see any benefit for the company in making a redundancy payment to him equivalent to 25% of the equity. The considerations to which Mahoney JA referred as potentially making generosity to a retiring director consistent with the interests of the company as a whole were entirely absent. The redundancy payment cannot, in the circumstances in which it was made, be reconciled with the best interests of the company.
Moreover, even if the redundancy payment was not inconsistent with the best interests of the company, Michael was instrumental in procuring it, for his own benefit; and Robyn sanctioned a payment to her husband from which she stood to benefit, at least indirectly. Again, the general law position was described by Mahoney JA in Woolworths Ltd v Kelly, as follows (at 226-7):
It is sufficient to conclude that there was a conflict between his duty and his interest. His duty as a director and as chairman of the directors was to ensure that the Company, in entering into engagements affecting its assets, gave away no more than, in the relevant sense, it was for its benefit to give. That duty was in conflict with his personal interest in obtaining the benefits which would accrue to him under the proposal for the variation of the
pension scheme which he sought....
In the present case, it has not been contested that it would or could have been proper for the Company to provide the relevant pension rights for a valued officer: it would no doubt have been in the interests of the Company to promote amongst its officers and employees the expectation that service would be appropriately rewarded. It could provide pension rights, at least to the extent that the Company, by its board, bona fide concluded that the provision of the pension rights would help to achieve that or other appropriate results. But if the person to whom the benefit is to be provided is in a fiduciary position in relation to the Company, then that person is subject to the restrictions incident to that position and such benefits, if they are to be provided, may be provided only in the proper way. To that matter I shall come subsequently.
In my opinion, the benefit that was to be obtained from the variation of the pension scheme was also a benefit which was obtained because of the position that he had as chairman of the board. As I have said, the variation was evolved by him and was brought forward to the board by him. In the relevant sense, the benefit came from the fact that, as chairman, he was able to do what he did.
The transaction was therefore voidable at the option of the Company.
That analysis is, in my judgment, directly apposite to the circumstances of this case. The "redundancy" payment was in contravention of Corporations Act, ss 181 and 182, and of Michael and Robyn's general law fiduciary duties. It is voidable at the option of Holdings, and Michael and Robyn are liable (unless relieved pursuant to s 1318) to compensate Holdings for the loss, pursuant to s 1317H and in equity. The amount of the loss is the amount of which Holdings was deprived by the improper payment, namely $250,000.
Payment in lieu of notice
Michael claimed that, at least in the event that the redundancy payment was set aside, he was entitled to six months' pay in lieu of notice, which he had waived in connection with the receipt of the redundancy payment.
I accept that if Michael had an entitlement to pay in lieu of notice which he forwent because of the redundancy payment, he should - if the redundancy payment be set aside - be entitled to revive the claim. However, I do not accept that, as at May 2012, Michael was entitled to six months' notice. The purpose of notice provisions in employment contracts is to enable the recipient of the notice to make alternative arrangements - in the case of an employee, to find alternative employment. In this case, the recipient employee - Michael - had day-to-day control and management of the employer Holdings. He knew, from about October 2011, that the business would close by Christmas 2011, as it in due course did. All other employees were terminated before Christmas 2011. Yet Michael continued to draw remuneration, for apparently doing nothing, until May 2012. He effectively had six months' notice. Alternatively, his failure to cause Holdings to give himself notice by about November 2011, when he could and should have done so, was a breach of his duty of care (under s 180) to the company, causing it unnecessarily to incur the ongoing cost of his employment long after he was, in every practical sense, redundant, for which cost (representing salary for the six month period) he would be liable to compensate Holdings.
Accordingly, in my judgment, Michael's claim for pay in lieu of notice fails.
Underpaid wages
Under clause 3 of the 1998 management agreement, Michael was entitled to a remuneration package for the year ended 30 June 2000 of $66,101, and in the event that he was engaged beyond 30 June 2000, then with effect from 1 July 2000 to the same remuneration as received in the previous year, adjusted annually in accordance with any increase in AWE with a base date of 1 July 1999.
However, instead of the AWE index, historically the CPI was used to calculate annual increments in Michael's salary. A comparison of the amounts in fact paid to Michael in each year, compared with the amounts which should have been paid had AWE been applied, revealed that while there had been an overpayment in the first couple of years, there was an underpayment in subsequent years, with a net underpayment of $73,159.52, as set out in the following table.
| Year | Discrepancy |
| 2000/01 | 1674.12 |
| 2001/02 | 4414.62 |
| 2002/03 | -7576.27 |
| 2003/04 | -627.14 |
| 2004/05 | -3940.37 |
| 2005/06 | -7040.45 |
| 2006/07 | -6901.70 |
| 2007/08 | -9851.39 |
| 2008/09 | -7420.14 |
| 2009/10 | -11736.02 |
| 2010/11 | -13642.15 |
| 2011/12 | -10512.63 |
| TOTAL | -73159.52 |
There were some surprising aspects of this, not least that the "actuals" in 2002/03 were only $70,095 - a reduction from $77,309 in the previous year; this was unexplained. However, Mr Amargianitakis gave evidence, without objection, that he sourced the "actuals" from the financial statements, which he had prepared each year from the primary records, and although that is sub-optimal evidence of what was actually paid, it is some evidence and, in the absence of contradiction or challenge, I accept it. Accordingly, I accept that, at the time of his termination, Michael had been underpaid remuneration by $73,159.52.
The plaintiffs submitted that so much of this underpayment as was attributable to the period before February 2008 (being six years before the cross-claim was filed) was barred by (NSW) Limitation Act 1969, s 14(1)(a), which provides that an action on a cause of action founded on contract, not being a cause of action founded on a deed, is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff. The defendants submitted that the management agreement was a deed, and that the 12-year limitation period referred to in Limitation Act, s 16, was applicable; and alternatively, that if the six-year period applied, it ran from the institution of the proceedings rather than from the institution of the cross-claim.
Is the 1998 management agreement a deed? It is entitled "This Agreement". After the identification of the parties, and the recitals, the operative part is introduced with the words "whereby it is agreed". There are numerous internal references to "this Agreement"; there are no references to "covenants", nor to "this Deed". The testimonium reads "In witness whereof the parties hereto have hereunto set their hands on the day and year first hereinbefore written" - it contains no reference to "seals". Execution by corporations was expressed in terms "The common seal of ... was hereunto affixed by authority of Directors in the presence of:". Execution by Michael was expressed in the terms "Signed sealed and delivered by the said Jeffrey Michael Cummings in the presence of". The backsheet bore the description "Deed of Agreement".
On the same day, the parties executed the agreement varying the 1993 Settlement Deed. It too was entitled "This Agreement", but Recital A referred to the "Deed dated 20 October 1993 ("the Deed")", and the operative part was introduced with the words "Now this Deed witnesses". Execution by individuals was expressed as "signed sealed and delivered"; and execution by corporations as by affixation of the common seal.
The 1993 management agreement was also entitled "This Agreement". The operative part commenced: "Whereby it is agreed", and while expressed to be sealed by the corporate parties, it was merely "signed" - not sealed and delivered - by Michael. In distinction, the 1993 settlement deed, of the same date, was entitled "This Deed of Agreement"; the operative part commenced "Now this deed witnesses"; and execution was expressed to be sealed and delivered, as well as signed, by the individual parties.
The essential requirements of a deed include that it be executed and intended to operate as a deed. The mere affixation of a seal is insufficient to render an instrument a deed; there must be some evidence (which may be found in the deed itself, or may be parole evidence) from which it can be concluded that the instrument was intended to operate as a deed. Thus, that the affixing of a seal does not render a document a deed, but actual words to show the intention of the parties that the document be executed as a deed may suffice [Xenios v Wickham (1866) LR 2 HL 296 (Blackburn J)]; and an instrument executed by a corporation under seal is a deed only where it is intended to be executed as a deed [Electricity Meter Manufacturing Co Ltd v Manufacturers' Products Pty Ltd (1930) 30 SR(NSW) 422; 54 ALJ 46, 48].
(NSW) Conveyancing Act 1919, s 38(3), provides:
Every instrument expressed to be an indenture or a deed, or to be sealed, which is signed and attested in accordance with this section, shall be deemed to be sealed.
However, this does not mean that every document that is expressed to be sealed is a deed, and of itself is insufficient to deem a document expressed to be sealed to be a deed [Rose v Commissioner of Stamps (1979) 22 SASR 84 (Zelling J); McKinlay v Dodds (1984) NSW ConvR ¶55-188]. It does not affect the requirement that, if a document is to operate as a deed, it must have been intended to do so.
In McKinlay v Dodds, a document which stated that the plaintiff recognised an entitlement in equity for the defendant in land of which the plaintiff was registered proprietor, and that the plaintiff agreed to hold the property as trustee for herself and the defendant, was expressed to be an agreement, but was "signed sealed and delivered" as if it were a deed. Cohen J held that the instrument operated as a deed. In the absence of any express evidence of intention, his Honour gave weight to the use of the words "and delivered" appearing before each signature as evidence of intention:
As I have said there is no evidence of intention before me other than what is contained in the document so I do not have to consider the question of whether the parties in fact proposed to execute a deed. The essentials of a deed are present, that is the document is in writing, it is by force of statute deemed to be sealed and it is stated by the parties to have been delivered and was executed in such apparent circumstances as would confirm that act of delivery. The instrument also appears to create an interest or right although the nature of that is yet to be determined. I am therefore of the view that the instrument operates as a deed.
No evidence was adduced before me of any express intention that the document operate as a deed. The backsheet is of little significance; it largely mirrors that from the contemporaneous deed amending the settlement agreement (and indeed bears a consecutive computer document identifying number). While, as in McKinlay, execution by Michael of the 1998 management agreement uses the terminology of delivery, in McKinlay, the testimonium also referred to the parties setting hereunto their hands and seals; that indication is absent here. Moreover, the instrument in McKinlay dealt with an interest in land, in which case one might far more readily infer that parties intended the document to have effect as a deed than in the case of an employment agreement. Given the history of the dealings (and in particular that the preceding, very similar, 1993 management agreement was on no view a deed), the context (including the manifest distinctions between the 1998 management agreement and the contemporaneous document amending the settlement deed, which was clearly enough intended to operate as a deed, not least because it amended an earlier deed; and that this was an employment contract, which are not typically recorded in deeds), I am satisfied that while the parties intended that the 1993 settlement deed, and the 1998 amendment of it, operate as deeds; they had no such intention in respect of the 1993 management agreement, or its 1998 replacement.
The 1998 management agreement was therefore not a deed, and the six-year limitation period imposed by Limitation Act, s 14, applies.
The cross-claim was instituted by the Further Amended Points of Defence filed on 24 February 2014, pursuant to leave granted that day. The plaintiffs submitted that this had the consequence that Michael's claim was barred in respect of arrears of wages accruing before 24 February 2008. However, Limitation Act, s 74, provides as follows:
74. Set off etc. Where, in an action (in this section called the principal action), a claim is made by way of set off, counterclaim or cross action, the claim, for the purposes of this Act:
(a) is a separate action; and
(b) is, as against a person against whom the claim is made, brought on the only or earlier of such of the following dates as are applicable:
(i) the date on which he becomes a party to the principal action; and
(ii) the date on which he becomes a party to the claim.Holdings - the party against whom the cross-claim is brought - became a party to the principal action when those proceedings were commenced by originating process filed on 20 February 2013. (It matters not that it was then a defendant, not a plaintiff [Nelson v Wyong Shire Council (1989) 68 LGRA 164, 167-9 (Giles J)]). Accordingly, pursuant to s 74(b)(i), the cross-claim is, for limitation purposes, deemed to have been brought against Holdings on that date. Michael's cross-claim is not barred in respect of arrears for the period of six years prior to that date, commencing on 20 February 2007. He is therefore entitled to recover underpaid wages in respect of FY2011/12, FY2010/11, FY2009/10, FY 2008/09, FY2007/08 and so much of FY2006/07 as is attributable to the period after 20 February 2007; the evidence does not enable this to be identified with precision, but approximate justice will be done if four twelfths of the amount underpaid in respect of 2006/07 is treated as being applicable to the four months after February 2007.
Accordingly, on this count, Michael is entitled to $55,463.
Annual holidays
Upon termination, Michael was paid $58,366 accumulated annual leave. This formed part of the termination entitlements payment of $157,484. He now contends that he was underpaid by $88,404 in this respect, because of a miscalculation of his accumulated leave. Although the admissible evidence is scant, so far as I can ascertain the payment made of $58,366 was calculated on the basis of 334.15 hours of accrued leave at $148.55 per hour, plus a loading of 17.5%. Michael contends that he should have received $146,770, representing 731.67 hours at $170.72 per hour, plus 17.5% loading.
Prior to 1984, there was authority that annual holidays could not be accumulated, and that upon termination of employment an employee who was not entitled to be paid in respect of any annual holiday not taken for over six months after the date upon which the right to such holiday accrued [Re A Forsyth & Co Pty Ltd (In Liq) and the Companies Act (NSWSC, Wootten J, 11 December 1975, unreported); Fletcher's Fotographics Pty Ltd v Patman [1982] 2 NSWLR 876 (McLelland J); affirmed Patman v Fletcher's Fotographics Pty Ltd (1984) 6 IR 471 (NSWCA); cf Proud Projects Pty Ltd v Plotkin [1977] AR 315 (Dey J, NSWIC)]. However, since amendments made to the (NSW) Annual Holidays Act 1944 in 1984, this is no longer the case [Rodenstock v Leahy [2002] NSWSC 957, [29] (Barrett J)].
Mr Amargianitakis said that his firm had been provided with a figure of 334.15 hours of accrued annual leave for Michael as at December 1998 many years ago. Although the evidence is slight, in circumstances where the plaintiffs do not seek to impugn the original payment of $58,366, which appears to be founded on it, I accept that Michael had an accrued entitlement as at December 1998 of that amount.
The difference between 334.15 hours and the 731.67 hours now claimed comprises three components.
The first is 338 hours, said to be the untaken balance of leave accrued for 13 calendar years from 1999 to 2010 inclusive, at the rate of two 13 hour weeks per year, on the basis that during that period he worked 13 hours per week and, whereas it had originally been assumed that Michael had taken his leave each year as it accrued, he said that he took only about two of the four weeks to which he was entitled each year, during the annual stand down of the business over Christmas, which was usually for about two weeks plus public holidays (though sometimes for three weeks plus public holidays). In fact, this period is only 12, not 13, years; so the claim should be reduced to 312 hours, representing half of the 624 hours 12 years x 4 weeks x 13 hours) that he would have accrued during that period.
The second is 42 hours (presumably a miscalculation for 52 hours), being 4 weeks leave at 13 hours per week in respect of 2011, in respect of which it is alleged that Michael took no leave. I accept that he would have accrued 52 hours leave in respect of that year; but there is no evidence that he took none; this too is further considered below.
The third is 17.52 hours accrued in respect of the period 1 January 2012 to termination in May 2012. I accept, as a matter of calculation, that he would have accrued leave of that amount in respect of that period; whether it was not taken is addressed below.
There was no clarity as to what leave Michael in fact took. There was no evidence as to when, or how frequently, the annual stand down was for three as opposed to two weeks. Moreover, Michael acknowledged that he was absent from the business for other periods, as when necessary he would work more than 13 hours per week, but then he would in a subsequent week work less - or not at all - to "make up" the difference. However, the fact that he might voluntarily work more than the prescribed 13 hours in one week does not entitle him under the contract to time off in lieu; indeed, the Memorandum of 30 May 2000 makes clear that he was not entitled to compensation for "overtime". Thus, when he was absent, he was taking leave. The evidence does not enable even a rough assessment, let alone a calculation, of how much time he took in this way. No leave register was maintained in respect of Michael (though one was for other employees). As managing director, this was under his control. Further, the evidence establishes that the business had closed down prior to Christmas 2011 and that there was no work for him to do thereafter, so in my view he must be regarded as being on leave during at least the five month period prior to termination - which itself represents 273 hours of leave (21 weeks x 13 hours). In my view, the evidence fails to establish that in respect of the period 1999 to date, Michael has any accumulated annual leave owing to him, in excess of the 334.15 hours accumulated as at December 1998.
The claimed rate of $170.72 per hour is the hourly rate of pay at termination in May 2012 derived from the annual contractual rate of remuneration, adjusted in accordance with AWE. It seems that the rate of $148.55 previously used was founded on the incorrect adjustment made in accordance with CPI rather than AWE, and may have been net after a salary sacrifice for superannuation. In any event, $170.72 appears to be the correct rate for the purpose of calculating entitlements upon termination.
As to the loading, Michael's contractual entitlement (under clause 5.2 of the management agreement) was to a statutory loading (if any) applicable to the position of a Managing Director of a company such as Holdings. Counsel was not able to identify any applicable statutory loading, nor for that matter any applicable award, under which Michael would have been entitled to a loading.
Accordingly, I conclude that Michael's entitlement to annual leave upon termination was 334.15 hours at $170.72 per hour, amounting to $57,046. He was paid $58,366, an overpayment of $1,320.
Long service leave
Michael's termination payment of $157,484 included a payment in lieu of long service leave. There are inconsistent calculations, which Mr Amargianitakis could not explain, as to whether this component was $98,781 or $104,731. Michael now contends that he was underpaid by $68,385 in respect of long service leave, because of a miscalculation of his entitlements.
The 1998 management agreement recorded that Michael had accrued long service leave since the commencement of his employment in 1972, none of which had been taken, and that this was to be calculated at 30 June 1998 and preserved until cessation of employment, with leave continuing to accrue pro rata from 1 July 1998 (clause 5.1). There is no suggestion that Michael took long service leave at any point.
In respect of the period to 30 June 1998, while Michael was a fulltime employee, his long service leave entitlement was 22.53 weeks which, at 38 hours per week, equates to 856.27 hours. In respect of the period from 1 July 1998 to May 2012, his entitlement is 12.13 weeks which, at 13 hours per week, corresponds to 157.73 hours. At the hourly rate of pay applicable at the time of termination in May 2012 (being $170.72), the total entitlement upon termination was $173,110.
Although it is not entirely clear, it appears that the original payment in May 2012 used a calculation of the dollar value of the "preserved" leave as at 30 June 1998, and not (in respect of that component) the rate of pay applicable at the time of termination. In any event, I am satisfied that Michael was underpaid in this respect by at least $68,379 (in the absence of evidence that shows otherwise, there is no reason to prefer the lower $98,781 to the higher $104,731 figure as to the amount already paid).
In a supplementary submission, forwarded without leave after judgment was reserved, the plaintiffs contended that it was inappropriate to apply Michael's hourly rate at termination, when he was working only a 13 hour week, to his preserved entitlement from 1998, until when he had worked a 38-hour week. I do not agree. Had he taken long service leave in 1998, he would have been entitled to 22.53 weeks, and he would have received pay for that period at his then rate of pay based on 38 hours per week. In my view, the intention of "preserving" his then entitlement until cessation of employment was that, upon cessation of employment, he would receive that payment, at the rate of pay applicable upon termination, plus whatever leave he had accrued since, while working lesser hours.
Accordingly, on this count Michael is entitled to $68,379, less the overpaid annual leave of $1,320.
Clause 4.3 Bonus
Under clause 4.3 of the management agreement, Holdings was obliged to pay to Engineering (the trustee of Michael's trust) a bonus of 6.67% of the amount by which the "Accounting Profit" for each financial year ending 30 June 2000 and thereafter exceeded $330,000, so long as Michael was Managing Director, reduced pro-rata if he was in office for less than the full year.
Although capitalised in the management agreement, there is no definition of "Accounting Profit". I can see no reason for using anything other than the profit for the year as disclosed by the annual accounts.
Michael claimed a sum of $45,587.88, calculated as 6.67% of the amount by which profit of $1,139,964 exceeded $330,000, pro-rated for 308 of 365 days (to May 2012).
Holdings' financial statements as at 30 June 2012, which were tendered by the plaintiffs, state a net profit of $816,164 for the 2012 financial year "from ordinary activities before income tax". (However, that included $1,202,966 profit on sale of assets). Mr Amargianitakis said that he added back the $250,000 redundancy payment, and deducted an insurance recovery of $44,255; but those adjustments do not fully explain the difference.
It seems clear that, if the $250,000 redundancy payment be set aside, it should be added back before profit is calculated. On the other hand, any increase in liabilities arising from the conclusions reached in this judgment about any underpaid entitlements should be deducted. Accordingly, commencing with the reported profit in the annual accounts of $816,164, there should be added back the redundancy payment of $250,000, but there should be subtracted the increased liabilities for underpaid remuneration of $55,463 and long service leave of $68,379, less overpaid annual leave of $1,320. This results in an adjusted accounting profit for the 2012 financial year of $943,282, which exceeded $330,000 by $613,282, 6.67% of which is $40,906. As Michael remained managing director only until May 2012, Engineering's entitlement is 308/365th of that amount, which is $34,518.
No reason was advanced as to why this contractual entitlement should not be satisfied by Holdings. However, it was a contractual entitlement of Engineering, not of Michael. Engineering was not a party to the proceedings and brought no cross-claim. However, given that the issue has been argued and that all the persons beneficially interested were before the court, and in order to resolve so far as practicable all matters in issue, I propose to join Engineering and to declare that it is entitled to receive that amount.
Relief from liability?
The defendant directors cross-claim for relief pursuant to s 1318, which empowers the court to relieve a person from liability as an officer of a corporation, if it appears that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly be excused for the default. A person seeking relief under s 1318 bears the onus of establishing facts that justify the grant of relief [ASIC v Vines [2005] NSWSC 1349; (2005) 224 ALR 499; 56 ACSR 528, [531]]. These include, first, that the person has acted honestly - in the ordinary meaning of that term - which involves acting without moral turpitude, deceit or conscious impropriety, without intent to gain an improper benefit or advantage, and without such imprudence as would demonstrate that no genuine attempt was made to carry out the relevant duties [ASIC v Vines, [22]; ASIC v Edwards (No 3) (2006) 57 ACSR 209, [8]-[10]; ASIC v Macdonald (No 12) [2009] NSWSC 714; (2009) 259 ALR 116; 73 ACSR 638, [20]]; and, secondly, that the person has acted honourably, fairly, in good faith and in a commonsense manner as judged by the standards of others of a similar professional background [Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 54 SASR 285; ASIC v Edwards (No 3), [10]]. The section reflects a broad policy of not inflicting unnecessary liability if a contravention is the product of honest error or inadvertence, so long as the court can do so without prejudice to third parties or the public interest [Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418, [29]].
In favour of granting relief in this case is that the directors sought and obtained legal advice, from Mr Mitchell, to the effect that a payment of the amount proposed was permissible within s 200G. It was also submitted for the defendants that it was relevant that they believed that Michael was owed in excess of $250,000 (for underpaid remuneration, and leave entitlements). It was submitted that while, in corresponding with his sisters, Michael referred to the $250,000 as a "redundancy" payment, it was his understanding that Holdings owed him money (being underpaid wages and leave entitlements) and he believed the amount of $250,000 represented a proper measure of what he was owed.
While I accept that the directors acted in accordance with legal advice, that advice addressed only the s 200G question, without considering the wider issues of the directors' duties to act in the interests of the company as a whole, and conflict of interest and duty. I do not accept that, when they authorised the redundancy payment, the directors believed that Michael was owed $250,000, over and above the termination payment of $157,484. It is clear that they intended that the redundancy payment be additional to his leave entitlements, and there is no hint in the contemporaneous documents - Michael's correspondence with his sisters, or the minutes of the directors meeting - that there was any belief at that time that there were any additional outstanding or underpaid entitlements. His claim to this effect emerged much later, and only well after the payment was challenged. Even when it did emerge, it was associated with suggestions that the payment was appropriate given the amounts that had been paid to his parents or to other valued employees on leaving employment.
I am not satisfied that the directors acted honestly, in the relevant sense, in authorising the redundancy payment. The conflict of interest and duty was, or at least ought to have been, obvious. In addition, their decision was made in the face of protests from the other shareholders, at a time when the correspondence suggested that they would be given an opportunity to see the legal advice before it was acted on. Moreover, it was in the context that there had been previous disputation between Michael and his siblings in respect of the company and trust, resolved by the 1993 settlement deed, under which the ongoing interest of the other shareholders in management and major decisions was recognised.
Even if I were satisfied that they had acted honestly, I would still not be satisfied that they ought fairly be excused from liability: for the reasons referred to above in connection with honesty, because those matters also bear on the considerations of fairness and commonsense; but more fundamentally because relieving the directors would prejudice the plaintiffs. This is not a case of a contravention which has had no detrimental impact on the company or the other shareholders; it has depleted the equity, which ought to have been available for distribution among them. That of itself is a compelling and sufficient reason for concluding that the directors ought not fairly be excused [cf Re Wave Capital Ltd, [29]].
Conclusion
The $250,000 redundancy payment to Michael was permitted without shareholder approval under s 200G in the form applicable to his contract, but was made in contravention of the defendants' statutory and general law obligations to act in good faith in the interests of the company as a whole, and involved a conflict of interest and duty. Subject to the question of s 1318 relief, the payment is voidable and recoverable by Holdings, and the defendants are liable to compensate Holdings for it.
As Michael was aware from not later than November 2011 that the business would close by Christmas that year, yet continued to receive remuneration until termination in May 2012, he was not entitled to pay in lieu of notice.
Michael is entitled to recover underpaid remuneration for the period from 20 February 2007 of $55,463, and long service leave of $68,379, less overpaid annual leave of $1,320. Engineering is entitled to a clause 4.3 bonus of $34,518.
I am not satisfied that Michael and Robyn ought fairly be excused under s 1318, particularly because that could not be done without prejudice to the plaintiffs.
It follows that there should be:
(1)on the plaintiffs' claim, judgment that the defendants pay Holdings $250,000 and interest;
(2)on the cross-claim, judgment that Holdings pay Michael $122,522 and interest;
(3)an order that Engineering be joined as third defendant, and a declaration that Holdings is liable to pay Engineering the sum of $34,518 by way of clause 4.3 bonus for the year 2011/12.
As there is not identity between the parties liable and the parties entitled on the claim and the cross-claim, it does not seem that the judgments can be set off.
As to costs, the plaintiffs have succeeded on their claim, but an aspect that originally formed a large part of it was not pressed. Although the defendants obtained a substantial amount of success on the cross-claim, it was raised very belatedly, and was only necessary because of their own failure properly to calculate remuneration and leave entitlements when they were due. Prima facie, I think that justice will be done if the defendants are required to pay half the plaintiffs' costs of the proceedings, including of the cross-claim. However, I shall afford the parties an opportunity to address the form of the orders and the question of costs before the orders are formally made. This will also permit the arithmetic to be checked, and any matters of fact that I may have misapprehended (as a number of issues considered in this judgment were not the subject of any or significant argument) to be addressed, by leave.
THE COURT DIRECTS that the plaintiffs bring in short minutes at a time to be fixed to give effect to this judgment.
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