TGIF 7 March 2025 – Administrators must exercise diligence before accepting an appointment under section 436C of Corporations Act

This week’s TGIF considers the recent decision of the Federal Court of Australia in Patel v Pleash [2025] FCA 77 which held that a proposed administrator must take reasonable steps to be satisfied as to the basis of their appointment before accepting an appointment.

Key takeaways

• Registered liquidators should exercise appropriate care and diligence in satisfying themselves that the power, under section 436C of the Corporations Act 2001 (Cth), has been engaged before consenting to act as an administrator.
  
  
• Recovery of a debt is not a proper purpose to appoint administrators to a company and a potential administrator must satisfy themselves the appointer is not seeking to appoint administrators for that improper purpose.
  
  
• An administrator may open themselves up to a costs order where they have failed to exercise the appropriate care and diligence in giving consent under section 436C of the Act, even where they may have believed they were acting within the scope of their statutory duty.

Background  

Mr Patel and Mrs Lakhani (Plaintiffs) were the directors of Jubilee Infrastructure Pty Ltd (Jubilee), which was incorporated for the purpose of purchasing and developing a property in South Australia (Property).

In February 2022, the Plaintiffs sought to obtain financing to assist Jubilee in purchasing and developing the Property. The Plaintiffs entered negotiations with the sole director of iLend Capital Pty Ltd (iLend), Mr Salim, who operated iLend as loan broker business facilitating offers of finance.

The Plaintiffs signed the Brokerage Agreement provided to them by iLend on 11 February 2022 (iLend Agreement). The iLend Agreement provided that iLend would source an offer of finance for Jubilee substantially on the following terms:

• a loan amount of $12 million;
  
  
• for a term of three years;
  
  
• with an interest rate of 7.9% per annum; and
  
  
• with security requirement guarantees, charges or mortgages as required by the lenders.

The iLend Agreement also provided that Jubilee would pay iLend a brokerage fee of 2.2% or $264,000 based on the borrowing of $12 million.

iLend provided an offer of finance to Jubilee for a loan of $3.5 million for a term of three months with an interest rate of 11.99% or a higher interest rate of 24% in the event the loan went into default. The Plaintiffs rejected that offer on 19 February 2022. iLend did not provide any further offers of finance to the Plaintiffs.

On 31 October 2022, the Plaintiffs received an email alleging Jubilee had defaulted in making payment of the brokerage fee to iLend totalling $293,370. On the same day, iLend registered a security interest on all present and after acquired property of Jubilee.

On 2 December 2022, iLend appointed Mr Pleash (the Administrator) as the administrator over Jubilee under section 436C of the Corporations Act 2001 (Cth). On 16 December 2022, the Federal Court ordered the administration of Jubilee to be ended.

The issues 

The issues considered by the Court were whether the appointment of the Administrator to Jubilee by iLend was valid and whether a costs order should be made against the Administrator.

Decision

Cheeseman J held that iLend did not perform its obligations under the iLend Agreement and was not entitled to the brokerage fee. As such, iLend did not have an enforceable security interest against Jubilee and could not appoint an administrator under section 436C of the Act.

In considering the role of the Administrator in his appointment, Cheeseman J commented that the requirement for consent of an administrator, who is a registered liquidator and is accordingly experienced in corporate insolvency and regulated by ASIC, is an important guardrail on a secured creditor’s ability to appoint an administrator under section 436C of the Act.

Cheeseman J held that an administrator’s statutory function in respect of the section extends to taking reasonable steps to be satisfied, based on the information available to the administrator, that the appointor is entitled within the confines of section 436C to make the appointment before consent is given to accept the appointment.

Additionally, the Administrator was required to exercise care to satisfy himself that the power under section 436C was properly engaged and being deployed for a proper purpose before he consented to the appointment. Cheeseman J restated the position of the courts that debt recovery is not a proper purpose for the appointment of an administrator.

The Court concluded that, but for the Administrator’s acceptance of the appointment without exercising appropriate care and diligence to satisfy himself that the power of section 436C of the Act was engaged and had been engaged for a proper purpose, Jubilee would not have been placed in administration and the proceedings would not have arisen. The Court ordered the Plaintiff’s costs were payable by the Administrator as well as iLend and Mr Salim.

Comment

This case provides an important caution to registered liquidators who are approached by a third party offering to appoint them as administrators under section 436C of the Act.

While this case only led to costs being awarded against the Administrator, it raises the question as to whether an administrator could be found liable for damages where the administrator does not exercise the appropriate care and diligence in determining whether the power under section 436C is properly engaged and is being used for a proper purpose.