Compensation For Loss Of Office – Board Members Beware!

Author:Mr Séamus Given and Mchael Doyle
Profession:Arthur Cox
 
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The recent controversies over exit packages paid to former Chief Executives has called into question the duties and responsibilities of Board directors who approve exit packages for departing directors. In this article we focus on sometimes forgotten provisions of the Companies Acts that govern the payment of termination payments to Board members.

Section 186 of the Companies Act 1963 ("Section 186"), in conjunction with Section 189(3), provides that compensation for loss of office as director or, while director, of any other office in connection with the management of a company's affairs (except any bona fide payment by way of damages for breach of contract or by way of pension in respect of past services) is unlawful, unless it is pre-approved by the shareholders of the company in general meeting.

Failure to ensure compliance with Section 186 could leave Board members exposed, on a joint and several basis, to the company in respect of any payments made in breach of the section.

SECTION 186 OF THE COMPANIES ACT 1963

Section 186 provides as follows:-

"Approval of company necessary for payment by it to director for loss of office

It shall not be lawful for a company to make to any director of the company any payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, without particulars relating to the proposed payment (including the amount thereof) being disclosed to the members of the company and the proposal being approved by the company in general meeting."

Section 189(3) of the Companies Act 1963 provides as follows:-

"It is hereby declared that references in sections 186, 187 and 188 to payments to any director of a company by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, include payments to him by way of compensation for loss of office as director of the company or for the loss, while director of the company, or on or in connection with his ceasing to be a director of the company, of any other office in connection with the management of the company's affairs or of any office as director or otherwise in connection with the management of the affairs of any subsidiary company but do not include any bona fide payment by way of damages for breach of contract or by way of pension in respect of past services, and for the purposes of this subsection "pension" includes any superannuation allowance, superannuation gratuity or similar payment."

These sections, when read together, relate to any payments of compensation for loss (including retirement):

of office as Director, or while a Director or on or in connection with ceasing to be a Director, of any other office in connection with the management of the company's affairs. In other words, Section 189(3) brings under the ambit of Section 186 payments by way of compensation for loss of a management office (e.g. the post of CEO or Finance Director) where the individual losing that office is also a director of the company. Section 186 exists to protect members of a company from the company's directors. The section recognises an inherent conflict of interest where directors propose making a payment as compensation for loss of office to one of their number. The legislature has ordained that, so obvious and significant is this conflict of interest, mere disclosure to the members is an insufficient means of addressing it. Section 186 excludes from the directors' powers the power to decide whether or not to make such a payment, and confers that power instead on the members/shareholders acting by majority in general meeting. In the absence of approval of the members in general meeting, any payment made in breach of Section 186 is unlawful and liable to recovery.

CASE LAW FROM AROUND THE WORLD

IRELAND

Somewhat surprisingly, and particularly in circumstances where this provision has existed on the statute books for over 50 years, there is no decided authority on Section 186 in Ireland. The High Court recently came close to delivering the first judgment on the section in the proceedings taken by a non-executive director of Independent News and Media (INM), Paul Connolly, over a termination payment paid to INM's former chief executive1. In that case, which was heard over three days in July 2012, the Plaintiff sought a declaration that the termination payment paid was unlawful...

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