Dealing with Insolvent Estates
Insolvent or potentially insolvent estates present a real headache for anyone who is named as an executor in the deceased's Will. Similar considerations apply to close relatives who would be entitled to act as administrators when the deceased dies intestate without leaving a Will.
Executors faced with this situation have a number of options. The easiest is to either formally renounce or simply take no action, effectively leaving it for someone else to address the problem. That may have attractions for someone who does not stand to benefit from the Will but if, for example, there is some money in the estate and the executor, or a close relative or friend, is a beneficiary unless a grant is obtained from the Probate Registry the estate would be delayed, perhaps indefinitely.
The named executor has three other potential ways forward. The first option is to proceed informally along bankruptcy lines. This has the attraction of keeping the costs down but leaves the executor at risk of personal liability if they fail to distribute the estate as required by the Insolvency Act. That can be a particular danger where the actual extent of liabilities is not known at the time of death.
Executors may instead prefer to act under the jurisdiction of the court after an administration order has been made. This adds to the costs of dealing with the estate but means that the executors are protected from potential personal liability provided they abide by the court order.
The final option available to executors is to obtain an insolvency administration order. Under this, the Official Receiver, or more usually an insolvency practitioner acting as trustee in bankruptcy, is appointed to deal with the deceased's affairs. Again, this relieves the executor from potential personal liability, although increasing administration costs. A further advantage of this procedure is that the trustee in bankruptcy has power to recover assets not available to executors, such as applying to clawback the deceased's interest in property jointly owned with a third party at the date of death or applying to set aside a transaction at an undervalue. These powers mean that an insolvency administration order can also prove very effective procedure for creditors of an insolvent estate.
Executors need to bear in mind that if they are dealing with an insolvent estate, they owe a duty to both beneficiaries and creditors. Estate assets need to be distributed in order of priority as required by the insolvency legislation, that is:
- Secured creditors;
- Bankruptcy expenses;
- Funeral, testamentary and administration expenses;
- Preferential creditors;
- Ordinary creditors;
- Statutory interest;
- Deferred debts, for example debts due to the deceased's spouse or civil partner.
If, after distribution in this order, any estate assets are left they would be distributed as provided for by the deceased's Will.
The case of Re Vos (deceased) is a cautionary tale of how not to deal with an estate that might be insolvent. For nine years following his death, the solicitors acting for the estate of Mr Vos carried on protracted negotiations with Lloyd's of London. Lloyd's eventually issued proceedings and obtained judgement. They appointed a trustee in bankruptcy under an insolvency administration order. Such an order is effective from the deceased's date of death. The solicitors who acted for the estate had to repay the extensive costs they had incurred over the nine year period, as their actions had reduced the value of the estate available to creditors.
I have personal experience of how effective an insolvency administration order can be. In that case the deceased had many properties and a business. The named executors in his Will were reluctant to obtain a grant of probate because of concern regarding the extent of his liabilities and the risk of being personally liable for those. At the same time, there was a concern that if mortgagees sold the various properties then reduced values for these would be obtained. Also, the deceased's former business was left in a wholly unsatisfactory limbo. An insolvency administration order was obtained by a family member who was owed money by the deceased, together with the early appointment of an insolvency practitioner as trustee in bankruptcy. As a result, satisfactory sales of the various properties and of the business at a higher value were obtained in early course, resulting in improved returns for the estate and a substantial burden removed from the deceased's family, representing a very successful outcome.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.