Court confirms VA’s priority over law firm partners

A judge of the Supreme Court of Western Australia yesterday delivered a useful decision in respect of questions of indemnification and priority against assets when a voluntary administrator is appointed to a legal partnership.

In this case Worrells Perth principal Mervin Kitay had been appointed administrator of Dwyers Legal Pty Ltd, a law firm that previously traded as Dwyer Durack.

“To the extent that they are reasonably incurred, expenses incurred for the care, preservation and realisation of the Partnership property should be borne by that property.” Justice Jenni Hill.

In Dwyer Durack (A Firm); Ex Parte Mervyn Jonathan Kitay as administrator of Dwyer’s Legal Pty Ltd (Administrator Appointed) [2024] WASC 77 the judge recounts how after being appointed Kitay applied to the court for orders that he’d be acting properly “and would be justified in conducting the voluntary administration of the Partnership on the basis that he is entitled to an indemnity secured by equitable lien against the assets of the Partnership”.

Further the judge said the indemnity extended to those assets which include the proceeds and ongoing proceeds of realisation of those assets and that Kitay should rightly be indemnified “for all costs and expenses, including remuneration, reasonably incurred in caring for, preserving and realising the assets of the Partnership”.

The partnership is governed by two trust deeds establishing the MLK Practice Trust (MLK Trust) and the PLF Practice Trust (PLF Trust).

Dwyers Legal Pty Ltd is the corporate trustee of both trusts and Kitay told the court he believes that the the Partnership comprised of the Company as trustee for the trusts as equal partners.

Kitay was appointed VA of Dwyers on February 2, 2024 and on 8 February 2024, the Legal Practice Board appointed managers to the Partnership.

Kitay wants to explore a possible sale, potentially through a DoCA but needed the court to endorse his proposed course of action, including in respect of his indemnification and priority over other claimants, such as the practice partners.

“Mr Kitay’s evidence is that the Company did not trade or hold any assets other than in its capacity as Trustee and that the Trusts did not trade or hold any assets, other than their respective interests in the Partnership,” judge Jenni Hill said.

“His evidence is that there is some added complexity in relation to the administration of the Company given the complex nature of the Partnership, as well as the fact that the Partnership operated a legal practice.

“Each of the Trust Deeds includes a clause entitling the Company to be indemnified out of the assets of the Trust for any liabilities incurred in the performance of the trust, with the exception of fraud or wilful default.”

In summing up the judge agreed that Kitay’s costs and expenses, including remuneration, incurred whilst caring for and preserving the assets of the partnership be “recouped from the Partnership property in priority to the claims of the Partnership creditors and the partners themselves.

“To the extent that they are reasonably incurred, expenses incurred for the care, preservation and realisation of the Partnership property should be borne by that property,” she concluded.