In Ancient Greece it was believed that the final journey of the deceased to the underworld was over the river Styx. Payment of the boatman named Charon was imperative for a safe crossing. There was therefore a tradition, in the ancient world, of placing a silver coin on the mouth of the deceased to pay the boatman.
Whether we can ‘pay the boatman’ in modern times is the responsibility of the deceased’s Personal Representatives (‘PRs’). Their role is to collect in the assets of the deceased, pay all debts, and distribute the balance to the beneficiaries of the estate. This is either by the Executor in accordance with the terms of the Will, or if there is no Will, by the Administrator under the terms of the Intestacy Rules.
Insolvent Estates – the role of the PRs.
Issues can arise, however, where there are insufficient assets to pay the debts of the deceased. This is known as an Insolvent Estate.
If an estate is insolvent, the responsibility of the PRs changes, and instead of administering the estate for the benefit of the beneficiaries, they must administer the estate for the benefit of the creditors (that is to say those to whom money is owed by the deceased).
If there are insufficient assets in the estate to pay all of the debts, the PRs do not have to make up the shortfall from their own personal funds. Instead, the debts are repaid in part, and in proportion to, the assets available in the estate. Like bankruptcy during lifetime, there is a strict order of priority which must be followed when settling the debts of the deceased in an Insolvent Estate.
The PRs are responsible for ensuring that all of the assets of the estate are collected, any wasting assets are discarded and the strict order for the payment of debts is followed. If the PRs fail in their duties then they may be personally liable for any loss caused to the creditors, which could result in the PRs paying the debts from their own personal monies.
Insolvent Estates – assistance for PRs
PRs can administer an Insolvent Estate themselves, and there is no formal requirement for the estate to be declared ‘insolvent’.
However, to protect their position the PRs can apply to Court for direction about how to administer the estate. If the PRs have any concerns about debts which have not be confirmed then they can also apply to Court for direction on how much money should be retained in the estate to meet the debt.
Alternatively, the PRs can seek the expertise of an Insolvency Practitioner (“IP”) who will usually act as a Trustee in Bankruptcy. Not only will the IP ensure that the Insolvent Estate is correctly administered, they also have wider powers with which to realise assets of the estate, challenge transactions which may have been at an undervalue or to a preferred creditor during lifetime, disclaim onerous property and even obtain Court authority to use assets held jointly by the deceased and another person.
The appointment of an IP to deal with an Insolvent Estate not only protects the PRs, it can also be beneficial to creditors who may receive more from the estate due to the correct recovery of any assets which are available.
Any PRs who are acting in the administration of an Insolvent Estate can appoint an IP even after the Grant of Representation has been issued.
If it is evident that an estate is insolvent, then the PRs can renounce their appointment (that is to say step down). However, this cannot be done if the PRs have taken certain steps to deal with the estate, which is referred to as ‘intermeddling’.
If a PR does renounce their appointment, then a creditor of the estate can apply to deal with the administration of the estate, or seek the appointment of an IP to administer the estate as Trustee in Bankruptcy on behalf of the creditors.
Insolvent Estates – why take the risk?
As the PRs will not receive any benefit from the estate, it begs the question, why take the risk?
The financial affairs of the deceased are not often known by the PRs at the outset of the estate administration. As such, PRs can quickly find themselves in difficulty if administering an Insolvent Estate without assistance.
For example, when reviewing the personal papers of the deceased, it may appear to the PRs that the assets of the estate outweigh the debts and that the estate is solvent. They may therefore arrange for some debts to be paid in full, or for monies to be distributed to beneficiaries before becoming aware of other debts.
This can particularly be the case if the deceased had their own business or was a farmer. An estate which appears to have sufficient assets to pay creditors and make distributions to beneficiaries can easily become insolvent in light of unknown invoices or a tax bill which are outstanding at the date of death.
In such circumstances, if the proper order of payment of creditors has not been followed, then this could result in the PRs being personally liable for the debts which later come to their attention. Whilst the PRs may be able to negotiate with some creditors to settle a reduced debt, this will be difficult if the monies are due, for example, to H M Revenue and Customs in the payment of taxes.
When an estate is insolvent, questions can also arise regarding the proper valuation of assets and whether they were sold for the correct price during the administration period. Questions can also be raised about the conduct of the deceased during their lifetime, especially if any transactions or loans involved family or a business of the deceased during lifetime.
If you are appointed as a PR and have any concerns about whether there will be enough money to pay the debts of the deceased, it is therefore imperative to obtain legal advice before dealing with the deceased’s estate.
At Hay & Kilner, our Partner and Insolvency Practitioner, Neil Harrold, works closely with the team of expert Private Client lawyers in relation to advising PRs and creditors involved with Insolvent Estates.