Case offers insights for insolvency practitioners being appointed by alleged secured creditors

In the case, two directors and shareholders of Jubilee Infrastructure Pty Ltd sought to finance the purchase and development of a property located in Hillcrest, South Australia in February 2022, by obtaining funds of between A$10 to A$15 million (approx. US$6.36 to US$9.54 million).

Following enquiries, the directors were introduced through mutual connections to the sole director of iLend, a loan broker business, which facilitated offers of finance. Jubilee entered into an agreement with iLend to procure finance of A$12million for three years at an interest rate of 7.9% per annum and, if finance was offered, a broking fee of A$250,000.

The agreement also created a charge over the property that was contingent on iLend performing its obligations under the agreement.
iLend was only able to obtain an offer of finance for Jubilee outside the parameters of the agreement, in the form of a short-term line of finance from ProLend of A$3,573,337 for three months and at an annual interest rate of 11.99%.

Jubilee rejected the ProLend offer and terminated the agreement with iLend in February 2022. Despite a failure to deliver on the terms set out in the agreement, iLend issued an invoice to Jubilee for A$293,370 in October 2022, claiming a mandate fee and legal fees. 

iLend then proceeded to register a security interest against Jubilee’s ‘all present and after acquired property’ on the Personal Property Securities Register (PPSR), which iLend claimed was under the terms of the agreement.

On 2 December 2022, on the basis that iLend was a secured creditor, iLend appointed an administrator to Jubilee as dictated under section 436C of the Corporations Act 2001 (Cth) (Act). Around this time, Jubilee’s pre-approved financing arrangement with another lender was unable to be completed and the commercial development did not progress.

As a result, in December 2022, the directors of Jubilee commenced legal proceedings against iLend and the appointed administrator, seeking both urgent interlocutory relief and substantive relief to end the external administration of Jubilee, and sought damages and costs arising from the appointment of the voluntary administrator.

Consequences of invalid appointments for insolvency practitioners

The Court determined that the appointment of the voluntary administrator by the alleged secured creditor was invalid because iLend did not have a present and enforceable security interest, alongside that the PPSR registration was inadequate in validating the appointment under section 436C of the Act.

In its findings, the court observed that the voluntary administrator had failed to make the necessary enquiries of the status of Jubilee’s property and had failed to meet his obligations to ensure that section 436C of the Act had been met before proceeding with the appointment.

As a consequence, the Court awarded a successful damages and costs claim against iLend and the voluntary administrator because of the appointment, with the costs claim against the administrator being a personal costs order without recourse to any available indemnity.

Secured creditor appointments of voluntary administrators

Beyond ensuring that the underlying security interest is valid and enforceable prior to taking a voluntary administration appointment, insolvency practitioners should be aware of the Court’s findings that section 436C is not designed as a method of debt recovery and, if the appointment has been enacted for that purpose, the Court will deem the appointment invalid. 

Insolvency practitioners should also note that different considerations arise for appointments made by a third party to a company, as opposed to directors. Where insolvency practitioners are considering taking a voluntary administration appointment by a third party, they must take reasonable steps to ensure there is a proper basis for the appointment. 

Relevant considerations for insolvency practitioners

Insolvency practitioners should take note of several considerations that emerge when considering whether to take an appointment as voluntary administrator by secured creditors:

• Identifying that there is an outstanding debt that is due and payable by the debtor to the secured creditor;
• Ensuring that there is an underlying (and valid) security interest based on contractual documents between the secured creditor and the debtor beyond a mere registration on the Personal Properties Security Register; 
• Ascertaining the purpose of the secured creditor’s appointment to ensure that it does not offend the part 5.3A objectives set out in section 435A of the Act;
• Taking reasonable steps to satisfy yourself that there is a proper basis for the appointment to be made; 
• Taking legal advice on the validity of the security registration prior to providing a consent to act as voluntary administrator for a secured creditor; and 
• Ensuring the adequacy of an indemnity provided by a secured creditor in respect of a contemplated voluntary administration appointment, including challenges to that appointment.

Co-written by Robert Merrillees-Larsen of Pinsent Masons.