In this article, new tenant Abigail Collier, considers the position where a deceased person’s estate is found to be insolvent, in circumstances where no bankruptcy petition had been presented before the deceased’s death.
Introduction
Acting as a personal representative is rarely straightforward. Even relatively simple estates can present unexpected difficulties, but matters become significantly more complicated where the estate may be insolvent. Death does not extinguish a person’s debts; instead, responsibility for dealing with them falls to those administering the estate. Determining which creditors should be paid, in what order, and whether a personal representative may incur personal liability are all questions that require careful consideration.
This article explores some practical issues and considerations for personal representatives wishing to limit their liability.
Is the estate insolvent?
A useful starting point is the statutory definition. S.421(4) of the Insolvency Act 1986 (“IA 1986”) provides that a deceased’s estate is insolvent where the realised assets are insufficient to satisfy all debts and liabilities. Liabilities include contingent and future liabilities (s.382 of the IA 1986).
Where an estate is already or is likely to become insolvent, the administration shifts away from preserving beneficiaries’ inheritances and instead focuses on satisfying creditors. Beneficiaries are therefore not entitled to receive anything until the estate’s debts and administration expenses have been dealt with. If the estate contains sufficient realisable assets to discharge all liabilities, it is not insolvent simply because insufficient funds remain to satisfy every gift under the will. In those circumstances, the gifts abate rather than the estate being treated as insolvent.
Although s.284 of the IA 1986 is aimed primarily at bankrupt estates, it reflects a broader policy of preserving assets pending the proper administration of the estate. In the context of a deceased person’s estate, if insolvency is on the horizon, the interests of both the beneficiaries and creditors must be balanced[1]. If a personal representative is unsure about the solvency of an estate, it is always better to err on the side of caution and proceed as though it is insolvent, following the statutory order for the payment of debts[2].
The consequences of getting the administration wrong can be significant. A personal representative who distributes assets to beneficiaries before settling debts risks personal liability for devastavit and may be required to compensate creditors personally.
Protective measures for Personal Representatives
A personal representative can take steps to mitigate their liability. An example of this is by a personal representative giving notice of their intention to distribute by way of an advertisement pursuant to s.27 of the Trustee Act 1925 (“the TA 1925”). Such protection is however limited and will be of no assistance in claims where a personal representative had notice.
A personal representative may also decide to retain part of the estate rather than distributing it immediately. Alternatively, beneficiaries may be asked to provide indemnities, or the personal representative may choose to obtain insurance to cover potential claims. These measures reduce, but do not eliminate, the risk of personal liability. For example, obtaining inadequate insurance may leave the personal representative exposed.
Applications under CPR 64
Where there is a question about the solvency of an estate, a personal representative can apply to the Court for an order pursuant to CPR 64, under which the Court would give directions as to how the administration of the estate should be carried out (CPR 64.2(b)). This is beneficial for a number of reasons: most importantly, provided that they have made full disclosure, a personal representative who follows the direction will be protected[3]. This protection extends even to circumstances where the insurance taken out at the behest of the court in respect of a certain asset, is inadequate (note how this differs to the position where a personal representative takes out inadequate cover of their own accord). In practice, this is often the safest course. Where there is genuine doubt about an estate’s solvency, an application under CPR Part 64 can provide invaluable protection because a personal representative who follows the court’s directions will generally be shielded from personal liability.
Obtaining an Insolvency Administration Order (“IAO”)
Another option available to a personal representative is to petition the court for an Insolvency Administration Order (“IAO”). It is important to note that an application for an IAO cannot be made where proceedings have already been commenced under CPR Part 64, although the court may transfer those proceedings to a court with insolvency jurisdiction if it concludes that the estate is insolvent. The receiving court may then make an IAO as though a petition had been presented in the first instance.
The effect of an IAO is to bring the estate within the insolvency regime established by the IA 1986. From that point onwards, the estate is administered in substantially the same way as the estate of a living bankrupt, with creditors taking priority over beneficiaries. Responsibility for administering the estate passes to the Official Receiver or a trustee in bankruptcy, while the personal representative’s role becomes one of providing information and assistance in relation to the deceased’s assets and liabilities. The estate is then distributed in accordance with the statutory order of priority for insolvent estates.
Dealing with late claims from creditors
Whether a late creditor can still recover their debt depends largely on how far the administration has progressed. If the estate is being administered without the involvement of the court and assets remain available, a late claim will usually still be paid. If nothing remains, the creditor may instead pursue the beneficiaries who received the estate, although equitable defences such as laches may apply.
A different position applies where the estate has been administered by the court. A creditor who comes forward after the court has ordered distribution may lose priority and cannot seek recovery from a personal representative who has acted in accordance with that order or who has relied on the statutory protection under s.27 Trustee Act 1925. In those circumstances, any remaining claim must usually be pursued against the beneficiaries.
Conclusion
Insolvent estates present one of the greatest litigation risks for personal representatives. The statutory framework is technical, the order of payment is unforgiving, and mistakes can expose a personal representative to personal liability. Where there is any uncertainty about the estate’s solvency, early legal advice—and, where appropriate, directions from the court—can avoid costly mistakes and provide valuable protection for everyone involved.
This article reflects the law as of the date it was published. Whilst every effort has been taken to ensure that the law in this article is correct, it is intended to give a general overview of the law for educational and/or informational purposes. It is not intended to be a substitute for specific legal advice and should not be relied upon for this purpose. This article represents the opinion of the author and does not necessarily reflect the view of any other member of St Philips Chambers.
[1] Wedgwood v Hosein & Anor [2024] EWHC 1836 (Ch)
[2] Williams, Mortimer & Sunnucks – Executors, Administrators and Probate, 22nd Edn, para 42-42
[3] Re Yorke [1997] All E.R. 907
