Administrators, take caution! The dangers of acting blindly—Patel v Pleash

Key takeaways

• Administrators must verify that there is a valid basis for their appointment under s 436C of Corporations Act (the Act) before consenting to that appointment.  It is incumbent upon a potential administrator, in considering a request to consent to appointment, to form an independent view on whether there is a current and enforceable security interest capable of triggering the appointing creditor’s appointment right under that section.
• Since s 436C grants a power to a third party to make an appointment that has serious consequences for the subject company, undertaking the verification is particularly important. 
• If the requirements of s 436C are not met, then the appointment power under s 436C is not enlivened and the appointment will be invalid.
• Appointing an administrator under s 436C for the purposes of recovering a debt from the subject company is an abuse of process, which may justify a court declaring the appointment invalid. 

Facts

On 26 October 2020, Jubilee Infrastructure Pty Ltd (Jubilee) was incorporated for the purpose of purchasing and developing a property in Hillcrest, South Australia (Property). Mr Patel and Mrs Lakhani, the plaintiffs, were appointed as Jubilee’s directors and shareholders. 

On 10 February 2022, the plaintiffs sought financing between $10-$15 million to assist Jubilee with the purchase and development of the Property. They consulted a former Jubilee director, Mr Khoja, who referred the plaintiffs to Mr Salim from iLend Capital Pty Ltd (iLend). Mr Salim, in his capacity as iLend’s sole director, informed Mr Khoja that he could source an offer of finance for up to $12 million initially at 6% to 8% per annum with a private lender with a view to the plaintiffs later refinancing with a “bigger bank” at an interest rate of around 3% per annum.

Upon reviewing the agreement received from iLend, the plaintiffs raised concerns regarding the terms, which differed from Mr Khoja’s discussions with Mr Salim. Relevantly, the agreement granted a security interest over all of Jubilee’s property and assets, along with an immediate liability to a brokerage fee. Mr Salim assured the plaintiffs and Mr Khoja that no brokerage fees would be payable unless the loan was secured by iLend, and that security was only required to demonstrate to lenders that the property and assets were owned by Jubilee.

Based on the representations from Mr Salim, the plaintiffs signed the agreement on 11 February 2022 (Mandate Agreement). However, on 18 February 2022, Mr Salim procured an offer of finance sourced from ProLend Solutions Management for $3,573,337 with a substantially higher interest rate.

The plaintiffs rejected the offer and terminated the Mandate Agreement.

On 31 October 2022, iLend demanded payment of brokerage fees of $293,370, and, on the same day, registered a security interest against all present and after-acquired property of Jubilee. The brokerage fees were not paid.

On 2 December 2022, iLend appointed Mr Pleash, a registered liquidator, as administrator of Jubilee pursuant to s 436C of the Act, which allows a person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company’s property to appoint a registered liquidator, who consents to the appointment, as administrator of the company under the Part 5.3A regime.

The appointment effectively froze Jubilee’s bank accounts and caused the plaintiffs to lose an alternative financing offer from Angas.

The plaintiffs then contacted Mr Salim, Mr Pleash, and iLend, demanding confirmation of the invalidity of Mr Pleash’s appointment. They subsequently commenced proceedings in the Federal Court of Australia against Mr Pleash, iLend and Mr Salim seeking, among other orders related to the conduct of iLend and Mr Salim, a declaration under s 447C of the Act that the appointment of Mr Pleash as administrator of Jubilee was invalid.

Findings

In relation to the power to appoint an administrator under s 436C of the Act, the Court noted the following:

• The appointment of an administrator can have a significant and potentially detrimental impact on the company’s business and property.
• An appointment made by a secured party of an administrator under s 436C, which involves an external third party, differs from an appointment of an administrator by the company’s directors under s 436A.
• The exercise of that appointment power by a third party secured creditor is subject to that creditor being presently entitled to enforce a security interest over the whole, or substantially the whole, of the company’s property. 
• The requirements for an administrator appointed under s 436C to be a registered liquidator and to consent to that appointment act as a guardrail on the secured creditor’s ability to exercise that power.
• The administrator’s statutory function under s 436C includes an obligation to take reasonable steps to be satisfied, before giving consent, that the appointer is entitled to make the appointment under s 436C based on the information available to the administrator.
• The extent of this obligation will depend on the particular facts of each case. 

The Court determined that iLend was not entitled to the brokerage fee because it failed to meet its obligation to secure a loan offer substantially in accordance with the terms of the Mandate Agreement. Since iLend did not meet these terms, it was not entitled to the payment of the brokerage fee and lacked an enforceable security interest over Jubilee’s property.

Regarding the appointment of Mr Pleash as the administrator of Jubilee, the Court found that Mr Salim had sought Mr Pleash’s advice on using the administration process as a means of debt recovery. The Court also found that Mr Pleash understood the primary purpose of his appointment to be the recovery of the debt that Mr Salim asserted was owed to iLend, despite acknowledging that debt recovery is not part of the permitted purposes of the administration regime under Part 5.3A of the Act.  He apparently believe it was sufficient that Jubilee had the relevant appointment power under s 436C.

The Court found that Mr Salim had provided various documents to Mr Pleash prior to his appointment, purportedly to substantiate iLend’s entitlements as against Jubilee.  However, Mr Pleash did not in any substantive way question these documents or the anomalies within them. He acknowledged that a review of the Mandate Agreement against the terms of the offer of finance from ProLend Solutions Management clearly indicated a mismatch, but he maintained that the discrepancy was not obvious to him at the time, as he assumed the offer formed part of a larger transaction. He further acknowledged that he did not seek additional instructions or information for clarification. 

The Court concluded that Mr Pleash acted in accordance with iLend’s directions without applying a basic level of scrutiny to the information provided to him, despite the obvious anomalies in the documentation, which should have promoted him to apply at least a basic level of scrutiny to ensure that it was appropriate for him to accept the appointment.

Another issue arose concerning the basis for Mr Pleash’s appointment. In the deed of appointment entered into between Mr Pleash and iLend, the security interest claimed by iLend was described as a security interest over all of Jubilee’s property and assets, pursuant to the provisions of both the Mandate Agreement and a personal property securities registration over Jubilee’s property, said to be enforceable against the whole, or substantially the whole of Jubilee’s property. However, in the notice to ASIC following Mr Pleash’s appointment, only the PPSR registration was referred to.

The difficulty was that the PPSR interest had not been registered within the time frame permitted by s 588FL(2)(b) of the Act, and therefore had vested in Jubilee at the date of Mr Pleash’s appointment, pursuant to s 588FL(4) of the Act, rendering it unavailable as a basis for his appointment. Mr Pleash testified that he understood this at the time of his appointment but nevertheless considered that his appointment was supported by a charge over real property arising from the Mandate Agreement. The Court did not accept this evidence, concluding from the contemporaneous documents that Mr Pleash had primarily relied on the PPSR registration as the relevant security interest for his appointment under s 436C.

The Court concluded that:

• Before consenting to his appointment, Mr Pleash was required to satisfy himself that iLend was a creditor with a debt currently due and payable, and secured over the whole, or substantially the whole, of Jubilee’s property.  He had not done this, instead deferring to Mr Salim.
• Mr Pleash accepted his appointment primarily based on the PPSR registration, but would have realised, had he reviewed the documents, that this registration could not be relied on.
• Regarding the alternative basis for his appointment, which was the enforcement of a charge over real property, Mr Pleash did not take steps to confirm whether iLend was entitled to enforce that interest or whether it covered the whole or substantially the whole of Jubilee’s property.  Once again, he uncritically relied on Mr Salim’s assurances.
• Given the circumstances, a reasonably diligent registered liquidator would have questioned whether iLend was entitled to make the appointment.  It should have been apparent from the documents that Jubilee was not obliged to pay the fee claimed by iLend. 
• The use of the s 436C power to appoint a receiver solely for the purposes of debt recovery constitutes an abuse of process.  The appointment of Mr Pleash was therefore a result of misusing the legislative scheme. It was clear that iLend and Mr Salim were acting with the intent of collecting a debt, being an extraneous and impermissible purpose.
• As a consequence of this misuse, and because s 436C was not enlivened, Mr Pleash’s appointment as administrator was invalid.