Insolvency Administration Orders – Applications by Personal Representatives

Introduction

Where a deceased person’s estate is found to be (or is likely to become) insolvent, it must be administered for the benefit of the estate's creditors.

Providing that no bankruptcy petition was presented to the court (or application made online to the adjudicator) before the individual died, a deceased person’s insolvent estate can be administered in the following three ways:

• out of court, and otherwise than in bankruptcy, by the deceased’s personal representative (PR);
• under the court’s direction, pursuant to CPR 64; or
• in bankruptcy, following the making of an insolvency administration order (under the Administration of Insolvent Estates of Deceased Persons Order 1986 (SI 1986/1999) (the Administration of Insolvent Estates of Deceased Persons Order)).

This article focuses on the latter, specifically applications made by PRs. Essentially, the Administration of Insolvent Estates of Deceased Persons Order applies the formal bankruptcy regime outlined in the Insolvency Act 1986 (IA 1986) applicable to living debtors, subject to specific modifications to render them applicable to a deceased insolvent’s estate. Once an Insolvency Administration Order is made, the deceased insolvent's estate will be administered by a trustee in bankruptcy for the benefit of the deceased insolvent's creditors. If an estate is insolvent, but the PRs do not promptly apply for an Insolvency Administration Order, they risk incurring personal liability for any fees they have drawn from the estate, including interest, as from the date of death. They may also be required to compensate the estate for any payments they sanctioned out of the estate to a creditor or beneficiary otherwise than in accordance with the insolvency legislation. It is therefore vital that PRs are aware of Insolvency Administration Orders and the situation in which such an order should be sought.  

Who can apply for an Insolvency Administration Order and why might a PR petition?

Various parties can petition the court for an Insolvency Administration Order on certain grounds including (but not limited to) a creditor (or creditors jointly), the PR or a liquidator appointed in insolvency proceedings.

A petition by the PR may only be presented on the grounds that the estate of a deceased debtor is insolvent (section 265, IA 1986 as modified by paragraph 1A, Part II, Schedule 1, the Administration of Insolvent Estates of Deceased Persons Order); prospective, potential or possible insolvency is insufficient. A deceased person’s estate is insolvent “if, when realised, it will be insufficient to meet in full all the debt and other liabilities to which it is subject” (section 421(4) of the IA 1986).

A PR should consider applying for an Insolvency Administration Order if they consider it likely that further assets will be made available if the estate is administered in bankruptcy or they might risk facing personal liability to creditors in respect of fees that they have drawn down from the estate (including interest) as from the date of death, for example.

How to make an application

In order to make an application for an Insolvency Administration Order, the PR will need to file a petition, the template for which can be found in Schedule 3 of the Administration of Insolvent Estates of Deceased Persons Order (Form 6). Given the date on which the Administration of Insolvent Estates of Deceased Persons Order came into force, certain amendments may be required to the form to ensure it is in line with the Insolvency (England and Wales) Rules 2016. In order to complete the petition, various details will need to be provided, including (but not limited to) the name and last known address of the deceased debtor, name and address of the petitioner and date the will was proved / letters of administration granted.

The petition is usually accompanied by a statement of affairs, the template for which is found in Schedule 3 of the Administration of Insolvent Estates of Deceased Persons Order (Form 7). This includes details as to any debts due to the estate, any bank accounts held by the deceased debtor and any creditors of the estate. If the statement of affairs is not completed at this stage of the process, it may be required after the making of an Insolvency Administration Order.  

The Insolvency Administration Order petition should be presented to the court within the jurisdiction where the debtor resided or carried on business for the greater part of the six months immediately before death. As Insolvency Administration Order petitions are not particularly common, the petition may be transferred to a larger court outside of the area within which the petition was presented so that it can be listed before a special insolvency judge. This can cause delays.

Provided the legal requirements are satisfied, an Insolvency Administration Order should be made at the hearing of the petition.

Impact of an Insolvency Administration Order

An Insolvency Administration Order commences on the day it is made but its effect is that debts and liabilities owed at the date of the death of the deceased debtor are to be dealt with under the Insolvency Administration Order. On the making of an Insolvency Administration Order, the Official Receiver (OR) is appointed trustee of the deceased debtor’s estate which has the effect of removing control of the estate from the PR. The PR is likely to be contacted soon after the making of an Insolvency Administration Order to provide further information and certain documentation regarding assets, liabilities and affairs of the deceased debtor and copies of the death certificate and the deceased person’s will, for example.

The Technical Guidance for Official Receivers (Sections 56.2-56.36) provides a helpful overview of the process and effect of an Insolvency Administration Order being made (although it is important to note that this covers applications generally and is not focused specifically on applications by PRs).

The trustee has statutory powers to recover assets or reduce liabilities of the estate, including avoiding transactions which occurred in the period before death and in the period between the date of death and the Insolvency Administration Order. The trustee also has power to disclaim onerous property. The making of an Insolvency Administration Order also means that any proceedings which have been issued or commenced against the deceased’s estate are stayed.

The order of payment of debts and costs is the same as in bankruptcy, with the exception of funeral and testamentary costs being a pre-preferential debt. The OR, as trustee, must have regard to any claim by the PR for reasonable funeral, testamentary and administrative expenses incurred, provided the estate has sufficient funds in hand. These claims have priority over the preferential debt.

The administration in bankruptcy of a deceased’s insolvent estate commences on the day on which the Insolvency Administration Order is made and continues until the estate administration is complete and the trustee has vacated office. If there is any surplus remaining after payment in full (with statutory interest) of all of the deceased debtor’s estate debts and expenses, this will be paid to the PR unless the court orders otherwise.

PRs should be aware of Insolvency Administration Orders and their importance in the context of an insolvent estate. Dealing with an insolvent estate can be complex; an Insolvency Administration Order has the effect of relieving PRs of such complexities so the estate can be dealt with and managed by an OR (or registered insolvency practitioner) who are experienced in such scenarios. Petitions for Insolvency Administration Orders are not common and it is therefore advisable for PRs to seek legal advice in the event that they want to present a petition or think one may be necessary.  

Protections for PRs

As noted above, if an estate is insolvent but PRs do not promptly apply for an Insolvency Administration Order they expose themselves to the risk of personal liability for fees they have drawn from the estate and any payments made out other than in accordance with insolvency legislation for example. There are however certain protections for PRs in these circumstances. One such protection may arise if it can be said that the PR paid the debt in good faith and at a time when they had no reason to believe that the estate was insolvent. Provided the debt which they have paid is not their own, if the estate subsequently appears to be insolvent, they may be protected against other creditors of the same class of priority as the creditor whose debts they have paid. They are not however protected against those creditors with a higher priority. PRs could also look to apply to court for an order validating payments made if the work done has been reasonable or necessary for the due administration of the estate.

If a PR has any doubt as to the solvency of an estate, they should seek advice as to next steps to ensure their position is protected.