Administration Of An Insolvent Estate

What is an insolvent estate?

When looking at the Assets and Liabilities (debts) in a deceased persons Estate, if the Liabilities exceed the Assets then the Estate is classed as insolvent. The Personal Representatives (the person or people administering the estate i.e Executors in a Will or Administrators if there is no valid Will) must comply with the requirements of the Administration of Insolvent Estates of Deceased Persons Order 1986 (Insolvent Estates Order).

What does the 1986 order say?

The Personal Representatives must distribute the estate for the benefit of the creditors, this meaning that ultimately the beneficiaries under a Will or the rules of Intestacy (where there is no valid Will) will not receive anything from the Estate.

What is the order or priority when paying creditors? 

Set out in the Insolvency Act 1986, the order of priority is as follows:

1. secured creditors (provided the asset is available in which the debt is secured against)
2. funeral, testamentary and administration expenses
3. preferred debts and Preferential debts
4. unsecured creditors
5. interest due on secured loans
6. deferred debts

All liabilities in a category must be settled before moving down to the next category in the list. If for instance there are insufficient funds to settle one category in full, Personal Representatives will need to apportion equally the Assets available to each creditor within that same category. This means working out how many pence in the pound each creditor should receive. Personal representatives must adhere to that order or they may be personally liable for costs. It is possible to obtain an Insolvency Administration Order to establish the order of payment.

Is there anything else that needs to be considered?

• If a Bankruptcy Petition has already been presented to the deceased before they died, the matter continues as normal bankruptcy with some amendments to the Petition.
• Some debt may be covered by an insurance policy for instance mortgages under a life insurance policy.
• If the debt is in joint names, such as a joint bank account with an overdraft, the debt may be taken over by the surviving person.
• If there is a third party guarantee then that third party may be liable for the total remaining debt.
• If the deceased person gifted sums within 7 years prior to their death, then this can be viewed as avoidance of creditors and may be set aside.

Some debts may be unknown to the Personal Representatives, especially if the estate is complex. The Personal Representatives may want to consider placing a Section 27 Notice under the Trustee Act 1925, which is a notice placed in The Gazette (and possibly a local paper) whereby any creditors have a minimum of 2 months to contact the Personal Representatives to inform them of the debt before it is absolved.

If you have any concerns about administering an Estate, or suspect the Estate may be insolvent it is important to take legal advice. For matters of Estate Administration, contact Wilson Browne Solicitors on 01536410014 and we can tell you how we can help.