What is a liquidator to do in circumstances where a company in liquidation is ostensibly bound by a court order which, if complied with, is likely to give rise to a voidable transaction? The answer (aside from the more general “apply to the court for directions”) may be found in the recent decision of Strazdins & Anor v Clarke & Ors [2015] SASC 134.

In Strazdins, liquidators were appointed to Micden Pty Limited (in liquidation) (Micden) by a resolution of Micden’s sole director in September 2013.  Prior to the appointment of a liquidator, orders had been made in Supreme Court of South Australia proceedings in connection with the administration of the deceased estate of Micden’s former director, Mr Edwards.  Mr Edwards’ children had, in the previous proceedings, sought further provision out of the deceased estate.

Whilst Micden was not a party to the previous proceedings, the Court made orders in accordance with terms of settlement agreed by the parties (which included the sole director an shareholder of Micden) requiring, inter alia, the sale of two blocks of land belonging to Micden with the proceeds to be paid to Mr Edwards’ children as part of the additional provision out of the estate.  The orders in the previous proceedings also required Micden’s director to cause Micden to transfer the relevant properties to Mr Edwards’ children in the event that the properties were not sold within 12 months of the orders being made.

Prior to the sale of the properties, Micden was placed into liquidation and the children of Mr Edwards registered caveats on the titles of the properties claiming an equitable interest arising out of the orders made in the previous proceedings.

The liquidators were, understandably, troubled by what had occurred prior to their appointment and applied to the Supreme Court of South Australia for directions as to whether or not Micden was bound by the orders made in the previous proceedings given that Micden was not a party to the proceedings.  Ultimately, the Court’s answer to that question was “yes”.  The liquidators further contended that, if Micden was bound by the orders in the proceedings, there was no commercial benefit to Micden in its director consenting to the orders and so the transactions contemplated by the orders would be voidable pursuant to Part 5.7B of the Corporations Act 2001 (Cth) (the Act).

The initial issue considered by the Court was whether any issue arose out of the orders being made by consent rather than following a trial.  It is well established that a consent judgment receives the same treatment as a judgment given after a contested hearing (see Kinch v Walcott [1929] AC 482 at 493), however, the liquidators were of the view that there was no contract between Micden and the other parties to the previous proceedings and the common law of contract would require that Micden be provided with consideration before the agreement reflected in the orders could become enforceable.  Further, the liquidators were of the view that the orders could not have been intended to bind Micden as they were not recorded in the books and records of the company, nor was there any board resolution.

The Court held that there was “a degree of artificiality” in the second argument as the sole director and shareholder (being a party to the proceedings) consented to the orders being made.  The judge held that:

The obligations of the director in respect of recording the agreement in the books and records of Micden [pursuant to section 248B(1) of the Act] are of little moment in deciding the relevant question as to whether it is bound by the orders.

The Court noted that there were two possibilities arising out of the orders: firstly that the director and shareholder of Micden was giving a personal undertaking to the other parties and to the Court to cause Micden to give effect to the orders or, alternatively, that the director and shareholder intended to bind Micden as a party to the orders and was, in consenting to the orders, acting as Micden’s agent.  The Court also considered that the beneficiaries of the orders were entitled to assume that the director had authority to bind Micden.  Judge Dart considered that the same rules for interpreting contracts applied to interpreting orders of the Court and stated that:

It is the objective intention of the parties, rather than the subjective intention, that is under consideration. The relevant question to be asked is what is the meaning of what the parties have said; not what did the parties mean to say?

The Court is concerned with determining what a reasonable person in the position of the party to whom the words were addressed would regard as the other party’s intention. It is necessary to consider what is called the factual matrix.

Ultimately, the Court held that, in considering the surrounding circumstances of the orders and the fact that the orders impacting upon Micden had been expressly consented to by its sole director and shareholder, being the only person with authority to bind Micden, the orders of the Court made in the previous proceedings did, in fact, bind Micden and Micden was required to comply with the orders.  All parties to the previous proceedings would have understood this to be the case and the orders were drafted to give effect to this common intention.

Having established that Micden was bound by the orders, the liquidators contended that complying with the orders would give rise to a voidable transaction and that the transfer of the properties could give rise to relief including that the agreement (i.e. the orders) are unenforceable.  Whilst the Court acknowledged that a transaction arising out of a court order could be an uncommercial transaction, the issue could not be dealt with summarily on an application for directions, particularly in the absence of evidence as to Micden’s insolvency.

Strazdins is clear authority that it is necessary in determining the effect of court orders made by consent to look at all circumstances surrounding the entry of the orders – one cannot simply assume that a non-party to litigation will not be bound by the orders in the face of a clear intention by parties to do so.  Whether the orders will survive the subsequent foreshadowed application to have them set aside as a voidable transaction remains to be seen.