Chris Ward

Published 22 October 2021

Insolvent Estates: What Happens if the Deceased’s Debts Outweigh Their Assets?

With insolvent estates, there are a number of different options and both creditors and beneficiaries may be affected (adversely or beneficially) depending on the approach that is taken.  The deceased’s personal representative can wind up the estate (although this can be complex and not without risk), or a creditor can apply for the estate to be administered under the directions of the court (although this method is rarely used).

A third, more common approach is for a creditor or the personal representative to apply for an Insolvency Administration Order. This results in the administration of the estate being treated in a similar way to a bankruptcy, with a qualified insolvency practitioner acting as trustee to administer the estate.

Why opt for an Insolvency Administration Order?

One of the things that makes this option attractive is the powers that are available to a trustee that are not available to a personal representative. For example, the trustee may seek orders against third parties said to have received something at an undervalue or by way of a preference to other creditors (pursuant to sections 339 and 340 of the Insolvency Act 1986) (IA). If appropriate, the trustee may also claim an interest in jointly owned property which ordinarily (when not owned as tenants in common) would pass by survivorship (pursuant to section 421A (2) of the IA).

Can an Insolvency Administration Order lead to beneficiaries receiving a legacy they wouldn’t otherwise have received?

Yes and no. In theory, the use of some of the powers outlined above could mean that beneficiaries receive a legacy that they otherwise would not have acquired. However, it is rarely this straightforward and there are two factors in particular that counterbalance the attractiveness of this approach:

Costs. The legal costs of litigation by the trustee may be recoverable from a defendant, but the trustee’s costs of administering the estate are not. These can be very considerable and could eliminate any gain that the estate has acquired by way of litigation.

Risk. When dealing with jointly owned property within a deceased estate, the courts rarely exercise their discretion in a way that benefits beneficiaries at the expense of the party with a right of survivorship.

Therefore, the risk that the estate will not be significantly enriched to benefit the beneficiary and the risk of the costs involved are often a powerful reason for not pursuing this approach.

Does an Insolvency Administration Order help creditors?

Creditors of insolvent estates concerned about the administration can also apply for an Insolvency Administration Order and there may be a number of reasons for doing so.

Most obviously, this approach may result in the trustee exercising their powers with a view to recovering assets (such as those given or sold at undervalue) or seeking an order in respect of the personal representative of the estate (for example, in the event that they are suspected of some wrongdoing).

A creditor may also consider this option if is suspected that significant professional costs have been spent dealing with the estate which could be recovered as unauthorised. Clearly, this could potentially enrich the estate sufficiently to enable the estate to meet its liabilities.

Takeaway point  

There is no one size fits all when it comes to dealing with insolvent estates (particularly one where the assets were expected to be considerable) whether you’re the creditor or the beneficiary. In each case, the particular merits and circumstances will need to be considered carefully although parties should be sure to act swiftly (and in the case of a personal representative) not take any action towards the administration of the estate such as dealing with bank accounts before a decision as to the best approach has been taken. 

If you’d like more information about how to deal with an insolvent estate, please get in touch.

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