Under s.421 (4) of the Insolvency Act 1986 an estate is insolvent if, when realised, it will be insufficient to meet all of the debts and liabilities to which it is subject in full. In such cases, the creditors of the estate will not receive the full amount owing to them and the beneficiaries under the Will or rules of intestacy will receive nothing. The duty of the personal representatives is to act in the best interests of the creditors, rather than the beneficiaries.
The procedure for administering insolvent estates is governed by particular legislation and the estate can either be administered by the personal representatives outside of formal bankruptcy, or in formal bankruptcy pursuant to an Insolvency Administration Order.
Where personal representatives administer an insolvent estate outside of formal bankruptcy they remain personally responsible for the administration of the estate and for any errors they may make due to their unfamiliarity with insolvency legislation. Such errors can easily occur where, for example, the personal representatives pay an inferior debt before all superior debts of which they have notice have been paid in full, or if they pay one debt in a category in full rather than ensuring that all debts of equal standing abate and are paid proportionately.
Personal representatives of an insolvent estate would, therefore, be well advised to obtain the consent of all creditors before making any distributions from the estate and, if they remain in any doubt, to seek protection against incorrect distributions by applying to the court for directions.
Administering the estate in formal bankruptcy involves applying to court for what is essentially a bankruptcy order in respect of someone who is deceased. The petition for the Insolvency Administration Order may be brought by either the personal representatives or by one or more of the creditors.
Once the Order is made, the estate vests in the Official Receiver until a trustee in bankruptcy is appointed to administer the estate and make the distributions. Although the personal representatives have a duty to co-operate with the Official Receiver, the element of control, and therefore the risk of personal liability, is removed from them. The granting of the Order has the added advantage of providing certainty as to how the estate should be administered.
The expenses associated with the granting of the Order may be paid as an expense of the insolvency if such a course is agreed by the creditors or assessed by the court. In addition, the expenses of the bankruptcy are payable out of the estate before any payments to unsecured creditors are made.
Personal representatives of an insolvent estate should consider their position very carefully and should protect themselves by taking early professional advice as to their obligations and the options open to them. Failure to do so may lead to them being personally liable in a way which they had not envisaged when they originally agreed to take on the role.
For further information or advice, please contact Alice Clewes, Partner at Hay & Kilner.
Call: 0191 232 8345