Patel v Pleash - Case Update

The Federal Court of Australia has ruled that an administrator’s appointment was invalid due to defects in the security arrangement and a creditor’s improper use of the administration process as a debt-recovery mechanism.

iLend, a finance brokerage firm, had entered into a finance broking agreement with Jubilee, which was seeking funding for a property development project. Under this agreement, iLend was to act as an intermediary to secure a loan for Jubilee, and in return, iLend was entitled to a brokerage fee upon obtaining an acceptable loan offer.

When iLend presented an offer from ProLend Solutions, Jubilee rejected it on the grounds that it did not meet the agreed terms—it was for a substantially lower amount and carried higher interest rates. Despite this, iLend demanded payment of its brokerage fee and, when Jubilee refused, iLend asserted that it had a security interest over Jubilee’s assets and purported to appoint the administrator.

Jubilee’s directors challenged the appointment on the basis that iLend lacked a valid and enforceable security interest. The directors argued that the security interest was not properly perfected, the brokerage fee was not a validly secured debt, iLend had no enforceable claim over Jubilee’s assets, and the appointment was made for an improper purpose — namely to pressure Jubilee into paying a disputed debt rather than to pursue a legitimate administration process aimed at company restructuring or rescue.

The Court agreed, finding that the ProLend finance offer iLend presented did not meet the finance broking agreement’s terms, and that iLend had no entitlement to demand fees. The Court criticised the administrator for failing to satisfy himself that iLend was a creditor with a debt that was presently due and payable and secured over Jubilee's property. As an experienced registered liquidator, the administrator would have recognised, if he had reviewed the relevant documents, that the purported security interest had not been perfected and could not be relied on to support his appointment.

In addition, the Court ruled that the appointment of the administrator was a debt-recovery tactic inconsistent with the statutory purpose of Part 5.3A of the Corporations Act. To use the power under s 436C for debt recovery is an abuse of process which is analogous to using the statutory demand procedure as a lever to obtain the payment of a debt which is bona fide in dispute. Consequently, the Court declared the appointment invalid.

The Court also found that iLend and its director engaged in unconscionable, misleading or deceptive conduct by misrepresenting the nature of the brokerage agreement, the enforceability of security interests, and their ability to secure financing. The director’s threats to enforce security and appoint an administrator to pressure payment were particularly egregious, leading the court to rule that both he and iLend had contravened s 12CB and s 12DA of the Australian Securities and Investments Commission Act 2001. The Court awarded the plaintiffs damages of $108,875.10 to compensate for the unlawful conduct of iLend and its director. The Court also ordered iLend, its director and the administrator to pay the plaintiffs’ legal costs.

The decision can be found here.