Consideration for personal representatives, creditors and insolvency practitioners
This article focuses on the considerations that may arise within insolvent estates of deceased persons. It outlines points to note for creditors and personal representatives and may also be of interest to insolvency practitioners. In so doing, some of the chief potential advantages and disadvantages of the making of an Insolvency Administration Order will be discussed.
What legislation is relevant to insolvent estates of deceased persons?
There are three principal pieces of insolvency legislation immediately relevant to the dealing with insolvent estates of deceased persons. These are the (1) Insolvency Act 1986; (2) Administration of Estates of Insolvent Deceased Persons Order 1986; and (3) Insolvency (England and Wales) Rules 2016.
However, this is not quite the end of it for there is ample scope for issues to arise within a deceased insolvent estate that come more squarely within the Non Contentious Probate Rules 1987 and other probate related legislation. Moreover, numerous common law provisions will have some bearing on deceased estates. The Civil Procedure Rules may also have some application.
When is the estate of a deceased person insolvent?
The answer is not surprising and is found at s.421(4) of the Insolvency Act 1986. This says: “the estate of a deceased person is insolvent if, when realised, it will be insufficient to meet in full all the debts and other liabilities to which it is subject”.
There are two fairly obvious things to note as to this provision. First, an estate is not technically insolvent merely because it cannot immediately meet its debts as they exist upon death. It will be insolvent if it will not be able to pay such debts owed to creditors after realisation of the assets. Secondly, legacies within a will do not represent liabilities. Thus, merely because the estate will not be able to pay all or any legacies it does not follow that the estate is insolvent.
What happens or might happen if a deceased estate is insolvent or might be insolvent?
In many or even most situations, not a huge amount will happen merely because an estate is insolvent. In tiny impecunious estates it is common for there to be no will let alone a grant of probate or letters of administration. Modest creditors may not be predisposed to taking any determined action and anyone in the position of a personal representative (or potentially so) may have little vested interest in taking any positive steps.
However, there are quite often instances wherein the estate has, or could have been expected to have had, appreciable assets, but with the available assets seemingly outweighed by the debts. Creditors might be adversely affected or benefited by the way the administration of the estate unfolds. Both creditors and personal representatives may thus have a keen interest in things being done properly and fairly.
What are the options and considerations for personal representatives?
A person appointed as an executor under a will or who may be in line to take up such a role pursuant to intestacy provisions, is of course under no obligation to take up such a role. A nominated executor is entitled to renounce formally the role and a close relative with rights to seek a grant can be under no compulsion to do so. Accordingly, if such persons are worried as to the time, cost or risks of dealing with an insolvent estate, those concerns will generally not arise if an appointment is not taken up and formal renunciation document is signed and witnessed by a suitable person. A decision to renounce is best made promptly. If even rudimentary steps such as closing down bank accounts are taken to deal with the estate they may constitute so-called intermeddling resulting in the right to renounce being lost.
If a personal representative does take up a grant, they are at liberty to deal with an insolvent estate irrespective of the scale of the estate’s assets and liabilities. No insolvency practitioner need be involved. The estate has to be administered for the benefit of the creditors, at least until all debts and expenses have been paid. The personal representatives will of course have to have regard to all the rules, such as those concerning priority, in almost exactly the same way as a professional trustee in bankruptcy would in relation to the treatment of the assets and in determining creditors’ claims. So, for example, secured creditors have priority to the extent of their security. One slight difference is that, reasonable funeral & testamentary expenses have priority over the preferential debts listed in the Insolvency Act 1986. Accordingly, if the deceased had employees remaining unpaid, they would rank behind funeral and administration costs.
In simple situations, personal representatives, especially if in receipt of some suitable professional advice clearly to the benefit of creditors, might feel sufficient comfortable about taking up a grant and dealing with the estate. In practice, they could delegate a large part of the work and, if there were sufficient uncharged assets, recover the costs.
There will also be instances wherein personal representatives may be very keen to deal proactively with what on the face of things seems like an insolvent estate. Thus, imagine if personal representatives suspect that what was expected to be a highly solvent estate has been deprived of significant monies or other property by a confidant or family member, perhaps taking advantage of an aging dependent parent with or without questionable capacity. Such personal representatives are in theory at liberty to take up action on behalf of the estate. In doing so, they would be advised to make what is sometimes referred to as a Beddoe application wherein the court can authorise personal representatives to take or defend court proceedings at least to a certain stage so that the personal representatives can look to the remaining assets in the estate to indemnify them if things do not work out as intended. And in so far as personal representatives wish to recover (from the estate) incurred advisory costs - such as those arising upon giving an opinion on the merits of a claim, it would be prudent to seek the court ratification for such incurred expenditure not least because of the provisions of section 284 of the Insolvency Act 1986 (for which see below).
However, with or without suspected misconduct amongst those close to a deceased, there will be many reasons why a personal representative may choose not to take any proactive steps for the benefit of the estate and instead seek the appointment of a professional Licenced Insolvency Practitioner pursuant to an Insolvency Administration Order. Here are four potential reasons for such a decision.
First, the personal representatives may feel that the scale of the estate and its liabilities would make taking up an appointment unduly onerous. If an estate has significant assets but is insolvent with the likelihood of there being no distributions to beneficiaries and only distributions to creditors, personal representatives may feel that it is altogether easier to apply for an Insolvency Administration Order to formally put the administration in the hands of a Licenced Insolvency Practitioner.
Secondly, quite apart from any botheration factor, personal representatives may be rightly concerned about the risks of directly dealing with an insolvent estate even if suitably advised. The relevant insolvency legislation is detailed and at times complex and a failure to deal with the estate competently and with proper regard to the interests of creditors, and the priority of the same, could give rise to a claim. Indeed, as shall be explained in due course, long after an estate has seemingly finished been administered, a creditor may seek an Insolvency Administration Order and this could lead to the actions of the personal representatives being investigated and impugned. Claims for maladministration or negligence could be made them concerning, for example, payments to creditors or others, the correct level of distributions / calculations and the diligence shown by the personal representatives in realising assets and preserving value. Unlike a trustee under an Insolvency Administration Order there is no statutory release for a personal representative. Accordingly, for example, if a creditor surprisingly comes forward after the personal representative has finished making distributions to creditors, then a personal representative may be exposed to a claim.
Thirdly, quite apart from the risks involved surrounding the thoroughness shown administering an insolvent estate, personal representatives (and their professional advisors) should rightly think twice about them incurring professional costs and expecting them to be paid from the estate. Pursuant to section 284 of the Insolvency Act 1986, in the event of an Insolvency Administration Order subsequently being made, expenditure out of the deceased’s estate by personal representatives including expenditure on professional costs will be deemed void save to the extent that it is made with the prior consent of, or subsequent ratification of, the court. Unless the court is satisfied that such payments were clearly to the benefit of creditors, such ratification may be refused. In Re Vos Deceased  BPIR 348 the court refused to subsequently ratify £135,000 of expenditure on solicitors. The result was that the solicitors were ordered to pay such sums plus interest to the subsequently appointed trustee under an Insolvency Administration Order. Personal representatives could thus easily find themselves liable for professional costs with no recourse to the estate.
The fourth, and arguably most interesting, reason why a personal representative may be advised to seek an Insolvency Administration Order rather than act directly is that the powers (not available to personal representatives) bestowed on a trustee under an Insolvency Administration Order may have the result of increasing the size of the estate. There are many examples of such powers and they include investigative and other evidence gathering powers, numerous substantive powers concerning property, and particular rights of action. Three examples of substantive powers and rights of action are as follows:
- The causes of action under sections 339 and 340 of the Insolvency Act 1986 are, with limited modification, expressly made available to trustees acting under an Insolvency Administration Order. A trustee can thus seek orders from the court against third parties said to have received something at an undervalue or by way of a preference to other creditors. A personal representative bringing an action on behalf of an estate cannot utilise such provisions. So for example, if shortly before death a deceased gifted money or valuable chattels to a family member or to a spouse or trust, then outside of issues such as undue influence, capacity or breach of fiduciary duty (fertile ground within contentious probate actions), there may be little that personal representatives could do about it even if they were so minded. Whilst in practice it may be rare for personal representatives to want action to be taken against a family member solely for the benefit of creditors, not only may family relationships be complicated but it does happen that family members can be creditors or otherwise interested in the estate making significant realisations. Imagine, for example, that a deceased was in business with sibling family members with all of them having given personal guarantees to a lender. And imagine that, before death, the deceased gifted most of his /her assets to a new spouse. It could easily be within the interests of the sibling family members to want action taken to claw back the money gifted away. An action against the spouse by a trustee under an Insolvency Administration Order to the effect that the gift (a transaction at undervalue) rendered the estate insolvent may be far more straightforward than common law (or statutory) causes of action available to personal representatives.
- Pursuant to section 421A(2) of the Insolvency Act 1986, a trustee under an Insolvency Administration Order can seek to claim an interest in jointly owned property. In normal circumstances jointly owned property, most typically a jointly owned house or flat in circumstances wherein it is not owned as tenants in common, will pass by survivorship. Thus, irrespective of what a will may say or what the rules of intestate estates deem, the deceased’s interest in the jointly owned property will pass to the surviving owner. As in a pure bankruptcy situation, under section 421A of the 1986 Act, a trustee under an Insolvency Administration Order can claim the deceased’s interest in joint property, with an important clarification being that it is the property owned jointly at the date of death, not the date of the Insolvent Administration Order, that counts. Although in many cases it may be profoundly unlikely that a personal representative will be emotionally predisposed to assisting creditors at the expense of someone who would otherwise have the right to obtain an interest by survivorship, this may not always be so. There will be instances wherein, as with the above example of personal guarantees, a personal representative or close family members may have a financial (or other) interest in seeking an interest in a jointly owned property returning to the estate.
- The third example of a substantive power enjoyed by a trustee under a Insolvency Administration Order not available to personal representatives does not so much relate to gaining assets that otherwise may be beyond reach but instead preserving value. Thus, as with a trustee in bankruptcy, a trustee under of a deceased insolvent estate has the power to disclaim onerous property. This can sometimes limit the value of claims on the estate or even lead to money coming into the estate that would not otherwise be realisable.
Can an Insolvency Administration Order lead to beneficiaries of an estate being advantaged?
In theory the utilisation of the powers and rights of a trustee could result in estate beneficiaries receiving legacy income or property that they otherwise would not gain. However, in practice, this will be rare for a multitude of reasons even if successful claims are made against persons with significant assets. First, the trustee’s costs of administering the estate may not be inconsiderable and, whilst legal costs in advancing litigation may be recoverable from a defendant, the trustee’s costs are not so recoverable. Secondly, although in a bankruptcy situation a trustee’s rights over jointly owned property can on rare occasions sufficiently enrich the bankruptcy estate so as to enable a return of monies to the bankrupt, in dealing with jointly owned property within a deceased estate, the courts are unlikely to exercise their discretion sufficiently to benefit estate beneficiaries at the expense of the party with a right of survivorship.
What are the options and considerations for creditors?
A creditor of a deceased person’s insolvent estate may have more or less options depending on the circumstances. In some rare instances, a creditor have may have the right to take the bold and unusual step of seeking a grant of letters of administration under the Non-Contentious Probate Rules 1987 or section 116 Senior Courts Act 1981. However, in the normal course of events, a creditor of an insolvent estate seeking a proactive administration in the interests of creditors would consider applying for an Insolvency Administration Order. Such an application can be done before or after a personal representative has obtained a grant. It can be done reasonably promptly or months or up to 5 years after death and even if the estate administration has seemingly finished.
There may be many reasons why creditors with or without sufficient knowledge and involvement might take such a view that an Insolvency Administration Order is an appropriate measure and one that will better serve their interests. Here are some common reasons:
- A creditor, especially if previously closely connected to the deceased, may have reason to believe that the estate has a cause of action against someone, possibly a personal representative, in relation to conduct occurring prior to or after the deceased death and whether concerning money, physical assets or a business or otherwise. Personal representatives may be not be predisposed to remedying their own wrongdoing (or declaring and discharging their debts to the estate) and an Insolvency Administration Order may be an effective means of replenishing the estate.
- Whether or not a personal representative (or a close associate of the same) is suspected of wrongdoing, a creditor may similarly feel that professional expertise combined with the investigative and substantive powers available to a trustee of an Insolvency Administration Order will give the best possible chance of significant realisations being made. Thus, as discussed in the context of personal representatives, trustees have the ability to recover assets paid away as transactions at undervalue or actionable preferences even if such things were done with the full view and informed consent of the deceased prior to death.
- Creditors may feel that the administration of the estate has not really been conducted with full and proper regard being taken to the interests of the creditors as a whole. Thus, if for example as occurred in the case of Re Vos Deceased  BPIR 348 significant professional costs have been spent in dealing with the estate an Insolvency Administration Order may have the effect of recovering such unauthorised expenditure for the benefit of creditors. Especially if the expenditure was in reality undertaken in the hope that it would enrich the estate sufficiently for the benefit of beneficiaries, there may be some advantage in seeking an Insolvency Administration Order and thus activating the provisions of section 284 of the Insolvency Act 1986 as duly modified by the Administration of Estates of Insolvent Deceased Persons Order 1986.
What has to be done to obtain an Insolvency Administration Order?
An application for an Insolvency Administration Order is made under section 265 of the Insolvency Act 1986 as duly modified by the Administration of Estates of Insolvent Deceased Persons Order 1986. In addition to the legal costs of preparing the petition, a court fee together with a deposit for the Official Receiver will have to be advanced. A petition needs to be brought within 5 years from the date of death.
A personal representative applying for an Insolvency Administration Order will need to complete a statement of affairs and demonstrate that the estate is actually insolvent. A creditor can seek an order if the debt is £5,000 or is a substantial unliquidated sum. On a creditor’s petition, the court will need to be satisfied that there is that there is a reasonable probability that the estate will be insolvent. Accordingly, mere proof that a debt has not been repaid may not be sufficient especially if a personal representative or other interested party presents evidence to the court to the effect that the estate is not likely to be insolvent.
Can a petition for an Insolvency Administration Order be used by a creditor as a means to force payment of a debt?
As anyone familiar with insolvency and debt collection will attest, procedures leading to bankruptcy are sometimes used, whether correctly or otherwise, in an attempt to force payment of a debt. Such an approach in relation to Insolvency Administration Orders may be particularly problematic for at least two reasons. First, unlike with a bankruptcy during someone’s lifetime, there is no requirement to serve a statutory demand as a precursor to an Insolvency Administration Order. A creditor cannot thus serve a statutory demand to try to force payment. The creditor will have to go straight to the petition and incur a court fee (currently £280) and a deposit payment of £990 on top of the legal costs of drafting and serving the petition. Secondly, as stated above, the creditor will also have to satisfy the court not only is the debt due and has not been paid, but that there is a reasonable probability of the estate being insolvent. If it is simply a case of the creditor demanding to be paid promptly rather than waiting for personal representatives to sell a property, the petition would fail. The courts will not be happy for a creditor lacking patience to seek to abuse the system to force payment of a debt that is likely to be paid in due course once assets have been realised.
What happens if a bankruptcy process is already underway upon death?
This question is answered in quite straightforward terms under the legislation. If the deceased died after the making of a bankruptcy order, the bankruptcy will continue in much the same way as if he or she were still alive. If a trustee if bankruptcy (as opposed to the Official Receiver) is appointed, they will have the same powers and rights as in a normal bankruptcy situation. If on the other hand the deceased died after the presentation of a bankruptcy petition but before it is heard, then the bankruptcy process will continue with a few modifications. The personal representatives will be required to provide a statement of affairs and, in the event that an order is made, it will be a bankruptcy order and not an Insolvency Administration Order.
Administration of Estate under direction of the court
Finally, mention should be made of the courts’ power to order that the administration of an estate take place under the directions of the court. This will be rare and is most likely to occur during or after litigation surrounding the conduct of the administration of the estate.
About the author:
Edward Saunders is a partner at Moon Beever LLP conducts a wide range of litigation including commercial and insolvency litigation and contentious probate proceedings.
If you have any questions regarding the article or would like some advice, please contact Edward on firstname.lastname@example.org.