THE board of Independent News and Media (INM) was within its legal rights to make a €1.87m payment to Gavin O'Reilly to secure his agreement to stand down as chief executive, senior counsel for the company told the Commercial Court today.
But lawyers for a non-executive director of INM, who has brought a legal challenge to the payment, said the law is clear that payments of this type are prohibited.
The arguments were made on the final day of an action by Paul Connolly, a Denis O'Brien-nominee to the INM board, who says the payment should first have been put to a general meeting of shareholders in accordance with Section 186 of the Companies Act 1963.
He sought declarations from the court that the payment was unlawful.
Mr Justice Brian McGovern reserved his decision.
In his submissions, Paul Gallagher SC, for INM, argued the payment to Mr O'Reilly was in compliance with the law because it had been approved on the basis of settling an employment dispute and in order to avoid litigation.
The court heard Mr O'Reilly had threatened legal proceedings and the board directed negotiations take place with him to avoid having to fight time-consuming litigation.
Mr Gallagher said the directors of a company are empowered to enter into a bona fide compromise of legal, and in particular contractual, claims and have a broad discretion when doing so.
The law does not remove this entitlement and it is well established that such agreements are outside the scope of Section 186 of the Act.
Even if it did (fall within Section 186), there was also an exception to such payments provided by Section 189(3) of the Act which allows the payment for damages for breach of contract entered into on foot of legal advice and in the best interests of a company, Mr Gallagher said.
Mr Gallagher also said Mr Connolly's claim that such an exception did not apply because the payment was partly for loss of office was based on a misunderstanding and a failure to appreciate that the position of CEO is "an office",
INM were also challenging Mr Connolly's standing in bringing his action.
He could not bring proceedings of this type in his capacity as a shareholder, having regard to case law which established the principle that where a company has been wronged, it is the company, and not its shareholders, that can bring the case, Mr Gallagher argued.
In his submissions on behalf of Mr Connolly, Michael Cush SC said the €1.87m included "payment in respect of loss of office".
While Mr Connolly did not dispute the bona fides of the directors in their view that the agreement with Mr O'Reilly was in the best interests of the company, it did not mean the payment to him escaped the ambit of Secton 186 of the Act, counsel said.
This provision seeks to prohibit compensation to directors for loss of office unless such payments have been disclosed and approved by shareholders. Mr Cush also disputed INM's claims the law exempted such payments because Section 189(3) only did so where they are payments "by way of damages for breach of contract" not, as happened in this case, a payment which was also for "loss of office."
Mr Connolly had proper standing in bringing the case because this was about the usurpation of power of shareholders by directors, counsel argued. Mr Connolly is under an explicit statutory duty to ensure the requirements of the Companies Act are complied with and it would be strange if he was prevented from taking steps to comply with that duty, he added.