NHS South East Coast and the Department of Health were aware a pay-off was under discussion with Maidstone and Tunbridge Wells trust chief executive Rose Gibb - but they failed to intervene to stop it from being signed, a court heard last week.
Instead, the trust's remuneration committee agreed a deal giving Ms Gibb£250,000 just days before the publication of a damning Healthcare Commission report into two outbreaks of C difficile.
On the day the report came out, DH director general of finance, performance and operations David Flory - who had been told a potentially contentious deal was being discussed nine days before - ordered the trust not to make the payment.
Mr Flory said in court that he phoned a director at the strategic health authority after receiving a briefing around 2 October to ask about the proposed deal - but took no other action.
"The response was words to the effect we will get back to you. The next thing I was aware of was that the agreement had been signed," he said.
"I was under the impression that the SHA would be aware of the proposed agreement before it was signed and at that stage I would have the opportunity to review it and take a view."
Under cross examination, Mr Flory agreed Ms Gibb had been "unjustly deprived" of her right to make an unfair dismissal claim and Glenn Douglas, who succeeded Ms Gibb as chief executive, said her treatment had "not been as fair as it could have been".
The High Court in London heard that Ms Gibb believed the necessary approvals for the payment - from the Treasury and the DH - had been obtained before it was signed. An officer from her union, Managers in Partnership, said he had been assured "all the ducks had been lined up".
She said former trust chairman James Lee told her the payment was approved by the SHA but had been capped at£250,000.
But the SHA denies it approved the payment, and the court heard approval had not been obtained from either the Treasury or the Department of Health.
Ms Gibb is suing the trust for breach of contract after it refused to pay her the full£250,000.
The trust has only agreed to pay£75,000 - six months' pay in lieu of notice - claiming the former remuneration committee acted beyond its powers in signing the deal because it was "irrationally generous" and therefore the agreement is not enforceable.
Ms Gibb claims that if that is the case she should still receive some payment because the trust's actions had given her a "legitimate expectation" that she would be paid.
She said that she had originally wanted to remain at the trust and only left when she had no other option.
By the time it was confirmed she would not get the payment, she had lost her right to go to an employment tribunal.
Judgement in the case will be announced later.
Healthcare Commission is asked to investigate C difficile outbreaks at Maidstone and Tunbridge Wells trust.
April and July Trust board sees commission's draft report but remains supportive of chief executive Rose Gibb.
17 September Third draft of the report is seen by trust chair James Lee. Ms Gibb's future is thrown into doubt.
28 September Remuneration committee decides Ms Gibb has to go.
1 October Ms Gibb meets Mr Lee and is offered a severance package.
2 October SHA contacts David Flory about the plans. He asks for more information but takes no other action.
5 October Ms Gibb and the trust sign an agreement giving her a year's pay and benefits plus six months' pay in lieu of notice. She leaves the trust.
11 October The damning Healthcare Commission report comes out. Mr Flory asks the trust to withhold payment.
4 January Ms Gibb's right to go to an employment tribunal expires.
Late January Ms Gibb is told she will only get six months' pay in lieu of notice. She later issues a writ against the trust.
What they said
David Flory: "Part of the informal deal of taking on these roles [NHS chief executives] is that there are circumstances in which you simply need to go"
Rose Gibb: "I was hounded, victimised and demonised by the press, the local NHS and the secretary of state"
Glenn Douglas: "Proper process was not followed and approval was not given up the line... it would seem unlikely that the Department of Health would have sanctioned such a payment"
James Lee (in a document read out in court): "We knew our case for dismissal was weak and that Ms Gibb would fight and fight hard. She had amassed a significant audit trail"