Personal representatives and insolvent estates

17 October 2017

Insolvent deceased estates

In this doubly unfortunate area, KSA has achieved recognition for the kindness of its delivery and its excellent technical expertise. Our lead insolvency practitioner in this area, Eric Walls, has worked with lawyers, creditors and most importantly of all, family members and personal representatives (PRs) on a number of insolvent deceased estates. Eric is supported by two other KSA licensed insolvency practitioners (IPs), Wayne Harrison and Grant Jones

Grant Jones has written widely on the area of family trusts, including his latest book on the trusts and alternative dispute resolution. Our team of specialists can therefore offer the best of support through this most difficult of areas. 

Whilst KSA accepts appointments generated by the Insolvency Service, its main avenue of assistance is to PRs, through Insolvency Administration Orders (IAOs). IAOs are a highly specialised area with competing duties, which can unfortunately impact detrimentally on PRs.

Personal Representatives


PRs who find themselves in control of an insolvent estate, risk personal liability if they do not apply for an IAO. IPs acting as bankruptcy trustees have substantial protection from personal liability, unlike PRs of a bankrupt estate. 

If the PR, whose duty ordinarily is to the beneficiaries of the estate, benefits beneficiaries over and above creditors, they will suffer personal liability. It is possible for a PR to manage an insolvency estate without an IAO, but it is a risky process (regardless of whether the PR is an unpaid layman like a family member and beneficiary, or a professional and paid PR, such as a family solicitor). 

It is unlikely that a layman PR and indeed a professional PR, understands the relevant insolvency legislation, especially as to the admitting and valuing of creditors of an insolvent estate. If as is often the case, the deceased's estate was not an incorporated company, but a sole trader (a classic case being a publican and the estate needs to be traded on to maximise returns), the risk to the PR can become enormous. 

Often, without the expert involvement of an IP, it is hard for the PR to ascertain whether the estate is in fact insolvent. If there is any doubt whatsoever as to the estate solvency, an IP should be instructed, at the cost of the estate, as soon as possible in order to minimise PR potential liability. 

The IP, especially an IP experienced in trust and insolvent estate matters, should be asked to prepare a statement of affairs based on insolvency accounting. The IP can then advise the PR as to personal liability within a detailed context. If a PR does not instruct an IP to effect a solvency valuation immediately, personal liability may flow for payments made prior to any insolvency order and certainly in the case of a professional PR, all paid fees and accrued fees, are either repaid and/or lost. 

Sadly it is often upon death that previously unknown creditors and liabilities appear. Debtors may have been leading a double life. Frightened to tell their nearest and dearest the full extent of their financial dilemmas, these may only become apparent upon death. A review of the potentially insolvent estate requires empathy, kindness, as well as financial and accounting expertise.

Starting the ball rolling


An Insolvency Administration Order application (IAO), under the Administration of Insolvent Estates of Deceased Persons Order 1986, is made by either the PR or a creditor (and that term may include a beneficiary) including the HMRC. A creditor, especially HMRC, may have issued a 'statutory demand'. 

A statutory demand is an insolvency form requiring immediate payment or else the instigation of a compulsory insolvency process. High value estates (in terms of gross, if not in terms of net assets) may have involved a degree of tax planning. 

The exact timing of any IAO application should always be considered within the context of tax planning. If an application is marginally delayed for the purposes of tax planning, the PR should always be advised by an IP in the interim period. The IAO application is to the court and the application is heard by a master and/or judge.

Once granted, the IAO is retrospective. It is backdated, not to the date of the petition application, but the date of death. Consequently, all actions of the PR will be open to scrutiny and potential personal liability. Pending the appointment of an IP, the Official Receiver acts as the Receiver and Manager of the estate and the PR must account to the Official Receiver for his actions to date, the estate and all books and records. Unless the Official Receiver appoints immediately an IP, a creditors meeting is called. If appointed at a meeting of creditors, or indeed directly by the Official Receiver, the estate's assets will vest in the IP immediately. 

Once Insolvency Practitioners are appointed


Once an IP is appointed as the trustee in bankruptcy of the insolvent estate, he or she will act, for all intents and purposes, as would any trustee in bankruptcy. The IP will gather in the assets and seek creditors to prove their claims as well as investigate whether the debtor incurred any antecedent transactions (such as transactions at an undervalue) which can include gifts and preferences. 

Unfortunately the assets of the estate, may well include the matrimonial home. If the surviving spouse has a legitimate interest in the matrimonial home, this of course will be recognised. Given that any surviving spouse with a legitimate interest in the matrimonial home, has rights in that home, then notwithstanding any rights of the trustee in bankruptcy to place a charge over the property or order a sale of the property, a sensible trustee in bankruptcy (especially mindful of any children's interests) will seek an empathetic cost-effective solution.

If the deceased ran an unincorporated business, the trustee in bankruptcy will consider the onward trading options.

Whilst any PR has a duty to the trustee in bankruptcy, it may well be recognised by the trustee in bankruptcy that the PR has expertise and knowledge and could be of great assistance to the estate. Any trustee in bankruptcy has the power to appoint agents to assist in the administration of the estate and that power can extend to employing of the former PR.

If you would like advice on a specific matter, please contact Eric Walls on 0191 482 3343 or Grant Jones by email on gmj@gmjones.org or 07815 873370.