No checks, big consequences: a cautionary tale in enforcing securities

A recent decision of the Federal Court of Australia in Patel v Pleash [2025] FCA 77 acts as a reminder for insolvency practitioners before accepting a formal appointment pursuant to a security instrument that:

(1)          there are risks in blindly accepting that a creditor’s right to appoint a voluntary administrator pursuant to section 436C of the Corporations Act 2001 (Cth) (Act) has arisen, without making proper enquiries (including adverse cost orders); and

(2)          the mechanisms found within Part 5.3 of the Corporations Act cannot be used for an ulterior purpose.

Facts

Mr Patel and Mrs Lakhani were the directors of Jubilee Infrastructure Pty Ltd (Jubilee). Jubilee was a company incorporated for the purpose of purchasing and developing a property in South Australia (Property). Jubilee entered into an agreement with a finance brokerage company called iLend Capital Pty Ltd (iLend), for the purpose of securing finance to facilitate the purchase and the development of the Property.

The essential terms of the agreement between Jubilee and iLend were that iLend would secure a loan for the amount of between $10m and $15m, with the following conditions:

(1)    a term of 3 years;

(2)    an interest rate of 7.9% per annum;

(3)    a security interest over the Property, only granted if the finance was secured; and

(4)    Jubilee would pay iLend a brokerage fee of around $260,000 (Brokerage Fee), payable in the event that iLend secured suitable finance, (the iLend Agreement).

Subsequently, iLend sourced and provided a finance offer from ProLend Solutions Management Pty Ltd (ProLend), in the following terms:

(1)    the amount of $3.5m;

(2)    a term of 3 months; and

(3)    an interest rate of 11.99% ,increased to 24% on default, (the ProLend Offer).

The ProLend Offer was rejected by Jubilee as it was substantially different from what was agreed under the iLend Agreement. iLend did not broker any further offers of finance.

Approximately 8 months later, Jubilee received an email from iLend, alleging that Jubilee had failed to pay the amount of $293,370 (the Brokerage Fee plus associated costs) pursuant to the iLend Agreement. iLend also registered a security interest over “all present and after-aquired property.”

Jubilee subsequently received a finance offer separate to the iLend Agreement, from Angas Securities, which was due to settle on 2 December 2024 (Angas Offer). Jubilee accepted the Angas Offer.

On 2 December 2024, iLend appointed Mr Pleash as the voluntary administrator or Jubilee, purportedly pursuant to section 436C of the Act.

As a result of the appointment of Mr Pleash as voluntary administrator, the Angas Offer fell through.

Decision

The Court determined in respect of the iLend Agreement that iLend did not perform its obligations and as a result Jubilee was not obliged to pay the brokerage fee, nor was the security interest enforceable, meaning that there were no grounds for iLend to seek to appoint an administrator, under section 436C of the Act.

Perhaps more importantly the Court noted that the requirement for voluntary administrators to consent to their appointment creates an important “guardrail” to help prevent creditors using the mechanisms within Part 5.3A of the Act improperly. The requirement for a voluntary administrator to consent in writing implicitly draws on the expertise and experience of a registered liquidator to only consent to being appointed in a situation where the creditor actually has a right to appoint them.

The consent requirement creates a duty that the proposed appointee must exercise reasonable care and take steps to ensure that they are satisfied, based on the available information, that the creditor is entitled to make the appointment given the scope of section 436C and the overall purpose of Part 5.3A of the Act.

It was held in this respect that Mr Pleash had failed to take the appropriate steps to be satisfied that iLend was entitled to appoint a voluntary administrator pursuant to section 436C of the Act. It was accepted by the Court that the iLend Agreement and the ProLend Offer documents provided to Mr Pleash to base his consent upon, created a number of obvious anomalies. These discrepancies pointed to the fact that iLend did not in fact have a right to appoint a voluntary administrator, which demanded a basic level of scrutiny be applied before satisfying himself that he should consent to an appointment under section 436A.

Considering the above, it was held that the appointment was invalid, and an order was made that Jubilee’s costs be paid by iLend, the sole director of iLend, and the administrator.

Key takeaways

(1)          Insolvency practitioners should ensure that they exercise reasonable care and diligence when determining if a party purporting to appoint them pursuant to a security instrument is entitled to do so under section 436C of the Act. It is usually appropriate for the proposed appointee to take independent legal advice before doing so;

(2)          A voluntary administrator should not be appointed to a company for an ulterior or improper purpose; and

(3)          Failure to ensure that the power to appoint an Administrator under section 436C of the Act is validly available can lead to adverse costs orders being made against the insolvency practitioner, as was the case here.

Please reach out to our Restructuring & Insolvency team should you have any queries regarding the contents of this article, or by emailing us at hello@pragma.law.