Think twice: might the estate be insolvent?

24 September 2020

When someone dies, it is not always clear whether or not their estate is insolvent. It can take time, particularly with complex estates, for assets and liabilities to be identified and claims by creditors to be brought. Personal representatives (“PRs”) and their advisors need to be alive to the prospect of an estate being insolvent and take action swiftly to ensure their financial exposure is minimised and consider how best to administer the estate for the benefit of estate creditors rather than beneficiaries.  

This blog focuses on two practical considerations that should be borne in mind when dealing with an estate where there are any suspicions that the value of the assets when realised may be insufficient to meet all debts and liabilities in full.

  1. Ratification

PRs and their advisors need to be aware that any disposition made after death will be void unless the court consents before it is made or subsequently ratifies it 1. This means that if a PR instructs a solicitor to assist with the administration of the estate and later a creditor applies for an insolvency administration order (“IAO”), any professional fees paid from the estate will be void and need to be repaid if the court does not ratify them and prior consent was not obtained (Re Vos, Dick v Kendell Freeman [2006]).

PRs can apply for ratification under section 284 of the Insolvency Act 1986 (the “1986 Act”) however it is important to act promptly as the courts will apply a more rigorous test after the PRs are on notice that claims against the estate could render it insolvent (National Westminster Bank plc v Luke Lucas [2013]).

A sensible alternative is for solicitors fees to be paid out of the PR’s funds rather than directly by or out of the estate and for the PRs to seek a personal indemnity from the estate.

  1. Appointment of a trustee in bankruptcy

Whilst PRs can administer insolvent estates themselves, they should also consider whether an IAO should be sought and trustee in bankruptcy appointed in order to benefit from the much broader powers available to them to investigate insolvent estates and seek to recover estate assets. For example, trustees in bankruptcy can:

Summons to appear

Under section 366 of the 1986 Act, trustees in bankruptcy have the power to apply to court to require any person who appears to be able to provide information about the deceased’s dealings, affairs or property to submit a witness statement to the court providing such information or to produce relevant documents.

 

Recover property held as joint tenants

Under section 421A of the 1986 Act, trustees in bankruptcy can apply for an order requiring the surviving party to the joint tenancy who has received the deceased’s interest by way of survivorship, to pay an amount not exceeding the value lost to the estate. The court will have regard to all of the circumstances however the court must assume the interests of creditors outweigh all other considerations, including those of the surviving party. This is a very broad power which can be invoked provided the trustee in bankruptcy applied for an IAO within 5 years from the date of death.

 

Challenge transactions at an undervalue/preference

Trustees in bankruptcy also have the ability under sections 399 and 340 to seek to challenge reviewable transactions and have the court restore the position of the estate to what it would have been if a transaction at an undervalue or preference had not occurred. There are specific time limits for seeking to challenge such transactions however no time limit applies if the purpose of the transaction was to put assets beyond the reach of creditors or to prejudice their interests.

 

 

Key take-away

It is crucial for PRs and their advisors to be aware of the prospect of insolvency and regularly review the solvency of the estate to avoid potential disputes arising. If the estate is or may be insolvent, you should act quickly to obtain advice to ensure appropriate steps are taken to both protect creditors’ interests and protect yourself in respect of liability for any fees paid from the estate before the insolvency came to light.

Further information

If you have any questions or concerns regarding the topics covered in this blog, please contact  any member of our Wills, Trusts and Inheritance Disputes team or our Insolvency Litigation team.

 

About the author

Emily Greig is an associate in the Dispute Resolution team and works on a broad range of disputes including general commercial disputes, multi-jurisdictional fraud cases and contentious trusts and probate matters.

 

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We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

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