In this case, the Full Federal Court found that there were sufficient ‘practical benefits’ received by an employee director as consideration for his agreement to a reduced salary in circumstances where the company was likely to become insolvent. The case provides useful guidance on how the Court approaches the question of practical benefits as consideration for a contract variation.
Mr Hill, who was an employee director of Forteng Pty Ltd (Forteng) claimed that Forteng had breached his employment contract for non-payment of salary in circumstances where he and the other employee directors had agreed to a lower salary because of ongoing financial difficulties that Forteng was experiencing. The question was whether there had been sufficient consideration to vary the contract.
The primary judge found in favour of Forteng, and found consideration to support the variation in the form of a ‘practical benefit’ (as applied in Musemeci v Winadell Pty Ltd (1994) 34 NSWLR 723) to Mr Hill who was able to:
- keep his employment with Forteng;
- improve his business investment as a shareholder (by allowing Forteng to keep employees and pay creditors) and increase his chances of being paid dividend in the future; and
- avoid detriment Forteng being wound up and, as a director, being at risk of insolvent trading claims.
In upholding the trail judge’s decision, the Federal Court of Australia found that:
- the diversion of Mr Hill’s salary (and the salary of the other directors), as well as the improvement in Forteng’s financial position was certain, defined and immediate in its effect, and put him in a better financial situation than the alternative he was facing (i.e. termination for any reason on 4 weeks’ notice (meaning a maximum payout of $10,000 on a contract value of $120,000 per annum):
- on the basis of Mr Hill’s own evidence that he treated his roles as director, shareholder and employee interchangeably, there was no merit to the argument that he only benefitted from the contract variation in his capacity as a director and shareholder, not as an employee;
- a practical benefit is more likely to be found where the relevant contract is executory (i.e. where the terms are predictive and involve promises as to future events, conduct and anticipated outcomes) including contracts for good or services; and
- variations involving a practical benefit are different to cases involving debt or loan agreements where the nature of the variation is unilateral forbearance (e.g. accepting less than a debt’s full value and agreeing not to sue for the balance).