When a person dies, the debts and liabilities they owe are not discharged on death and in most cases, must be repaid from their estate. This can have consequences for executors or personal representatives (“PRs”) should they distribute funds incorrectly, or for family members in the event transactions have been made to them which may not escape challenge. From a creditor’s perspective there are also mechanics in place to protect their position as much as possible.
In cases where an individual is insolvent on death and where the deceased is not already the subject of bankruptcy, the rules set out in the Administration of Insolvent Estates of Deceased Persons Order 1986 (“the Act”) come into play.
A trustee in bankruptcy can administer an insolvent estate upon the making of an Insolvency Administration Order (“IAO”).
PRs or creditors would need to present a petition to court seeking an IAO, the requirements of which differ depending on who is presenting the petition. The estate would then be administered in a very similar way to a personal bankruptcy. The benefit of an IAO however is that a trustee can use their statutory powers to investigate transactions prior to the deceased’s death and recover assets belonging to the estate.
Why it is important to seek advice
Unlike solvent estates, insolvent estates must be administered for the benefit of the estate’s creditors and not for the benefit of the estate’s beneficiaries, until the debts and liabilities are paid. Accordingly, it is easy to understand why a creditor would wish to seek an IAO.
It is however important for PRs to also seek advice in order to mitigate the risk of administering an insolvent estate improperly. Where an estate is insolvent but the PRs have disposed of estate property prior to an IAO, those dispositions could be classed as void. In those circumstances, PRs could face personal liability to reimburse the estate unless they were made with the court’s consent or are subsequently ratified by the court under s284 of the Insolvency Act 1986.
- The PRs of a deceased estate should consider applying for an IAO as soon as possible if the estate is insolvent. Failure to do so could mean they face personal liability to reimburse the estate if they have improperly disposed of estate property
- PRs concerned with an estate’s solvency should seek advice and withhold making distributions until they have certainty regarding the solvency of the estate
- If you are a creditor of a deceased estate and you believe the estate is insolvent, you can present a petition to apply for an IAO to ensure the administration of the estate is conducted properly under the bankruptcy regime, in the interest of all creditors.