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Deceased estates - there are only two things guaranteed in life... birth and death

19 July 2010

Frequently, the insolvency of a Deceased Estate may only become apparent following a Grant of Representation. In those circumstances, application can be made to the Court for an Order that the Deceased Estate is to be administered with some modifications in bankruptcy. The Administration of Insolvent Estates of Deceased Persons Order 1986 (S.I. 1986 No.1999) applies part of the Insolvency Act 1986 to the Estates of Deceased Persons.

A petition can be presented by the deceased’s Personal Representatives, one or more creditors or indeed the Supervisor of any IVA.

The Court draws a distinction between petitions presented by creditors where a Court may make an Order if there is a reasonable probability that the Estate will be insolvent but if the petition is presented by the Personal Representatives, the Court must be satisfied that the Estate is insolvent.

Assuming that the Court is satisfied then it will make an Insolvency Administration Order.

Once the Order is actually made, payments out of the Deceased Estate must be paid under the statutory order of priority set down by the Insolvency Act 1986 as slightly modified to accommodate Deceased Estates. The priority in which the debts should be paid is:-

  • Secured Creditors
  • Bankruptcy Expenses
  • Funeral, Testamentary and Administration Expenses
  • Preferential debts
  • Ordinary (unsecured) debts
  • Interest on preferential and ordinary debts
  • Deferred debts

As we are all aware, Section 284 of the Insolvency Act 1986 provides that where a person is adjudged bankrupt, any disposition of property between the presentation of the bankruptcy petition and the date upon which his assets vest in his Trustee is void except to the extent that it is ratified by the Court.

Section 284 is applied to the administration of the Deceased Insolvent Estate by modifying the same to the extent that it relates back to the date of death of the deceased debtor, rather than to the date of presentation of the petition. The relating back to the date of death has potentially significant implications for any Trustee in Bankruptcy appointed to administer such deceased insolvent estate.

A Trustee would be well advised to consider any payments made by the personal representatives out of the deceased estate after the deceased’s death including payments made to solicitors acting in relation to the deceased estate. These payments may in fact be considered void unless they are actually ratified by the Court. This was considered in the landmark case of Re Vos (deceased) [2006] BPIR 348.

In particular, a Trustee in Bankruptcy should seek to establish the date upon which the solicitors dealing with the deceased estate first became instructed and thereafter when they realised, or ought to have realised, that the estate was insolvent and therefore administered it accordingly. A Trustee should consider what payments have been made to the solicitors after that particular date with a view to challenging such payments and seeking recovery thereof for the benefit of the Insolvent Estate. This, of course, is in addition to any funds held by the solicitors dealing with the deceased estate at the date of the Order, which funds automatically vests in the Trustee upon his appointment.

Whilst there are, as with all Insolvent Estates, a number of lines of enquiry and investigation, the Trustee, upon appointment, would be well advised to obtain the files of papers from all solicitors previously dealing with the deceased estate in order to consider such matters as referred to above, particularly for the purpose of greater realisations within the Deceased Insolvent Estate.

In dealing with deceased estates, there is the potential for professional advisors to proceed with regard to the realisation of assets and distribution in terms of defraying expenses, including professional fees, without firstly having thoroughly considered and appraised the full financial position in relation to the deceased estate, more particularly in relation to liabilities. As a consequence, a Trustee should consider carefully whether the payments in question should properly have been discharged by the deceased estate at all on ordinary administration of deceased estate principles and assuming that the Trustee establishes that such payments were proper expenses of the estate, the Trustee should then secondly consider whether the payments should in fact be ratified having regard to the fact that the estate was actually insolvent. This clearly will turn upon the facts of each individual case.

As the effect of the Insolvency Administration Order dates back to the date of the deceased’s death, there are also implications in relation to the deceased’s interests in property where such interest was held on a joint tenancy basis, with practical implications in terms of the realisation of the same for the benefit of the deceased’s insolvent estate.

Upon the making of a bankruptcy order, any joint tenancy in relation to title to land is automatically severed, creating a tenancy in common with the bankrupt’s interest in such property automatically vesting in the Trustee in Bankruptcy upon appointment for the benefit of the bankruptcy estate. Where the estate however, is the subject of an Insolvency Administration Order, whilst the Order dates back to the date of death, title to such property which was held by the deceased and any third party as joint tenants, passes to the joint tenant under the right of survivorship. Potentially then, such interest is lost to the deceased insolvent estate.

Section 421A of the Insolvency Act 1986 empowers the Court to make an Order requiring the survivor to pay to the Trustee an amount not exceeding the value lost to the insolvent estate. In quantifying this, the Court will consider what amount is required to restore the position to what it would have been if the deceased had been made bankrupt immediately before his death.

This section largely negates the decision of the Court of Appeal in Re Gavin Palmer (deceased) [1994] Ch 316 which decision was seen to favour spouses in particular, at the expense of creditors.

Whilst Section 421A provides the Court with a discretion, the interest of creditors will prevail unless the case is exceptional (Section 421A(3)).

Practitioners however should be aware that Section 421A can only be of assistance if the petition for an Insolvency Administration Order was brought within 5 years of the date of death and after coming into force of the said section on 2 April 2001.

The practical implication of course is that the surviving joint tenant in whom the property has vested by survivorship may not have the resources available to discharge any “compensation” payable to the Trustee in relation to the value lost to the estate. This therefore, may result in a sale of the property in question in any event in order to allow such compensation monies to be paid.

Moreover, given the present economic climate and the reduction in house values generally, it is of course quite possible that the equity currently available in a property may be insufficient to discharge the value lost to the estate. Alternatively, the Court, when considering the amount which is required to restore the position may exercise its discretion in limiting the amount to be paid to one half of the current available equity in the property so that the surviving joint tenant interest is not prejudiced. This, of course, will turn on the individual facts of each particular case.

Given the present economic environment, insolvency practitioners who take appointments as Trustees in Bankruptcy may find themselves being approached either by creditors or possibly by the Insolvency Service to accept an appointment in relation to a Deceased Insolvent Estate.

If approached to consider accepting such an appointment, it is hoped that this article may assist you in asking appropriate questions and/or undertaking some initial enquiries prior to accepting such appointment as well as assisting post appointment in the administration of the estate.