Dealing with Insolvent Estates for Probate

One of the less obvious effects of the recession is the impact it has had on deceased estates due to the continuing depression of property prices.


Also, as elderly people struggle to make ends meet and seek to cover their expenses by taking out equity release schemes or by borrowing from banks and credit cards, at the time of death many properties are no longer free of mortgages.


Values of shares have also been affected and often dividends which were being used to supplement income have virtually vanished over night.


Personal representatives obtaining a grant of probate and the administration of the estate are sometimes left in a difficult position. The estate might take years to conclude and during that period the value of the assets may well have diminished to such an extent that the estate becomes insolvent. If the value of the property falls, there may be insufficient funds within the estate to meet all the liabilities. Personal representatives need to tread carefully in determining whether a deceased's estate is insolvent.


If it is they can either seek to administer the estate in accordance with bankruptcy law or an application can be made for an Insolvency Administration Order.


Anybody administering the estate will need to have a detailed knowledge of bankruptcy proceedings as there are many pitfalls for the unwary. As soon as it is determined that the estate is insolvent it is essential that the parties administering the estate should make no distributions to ensure that the estate is protected.


The alternative route is to seek an Insolvency Administration Order. If made by the Court the estate will be managed initially by the Official Receiver, and often then by a trustee who would either be appointed by the Secretary of State or by the creditors. The trustee would seek to administer the estate, essentially as a bankruptcy, by realising the assets and making a distribution to the creditors.
The Insolvency Administration Order is often the preferred route for solicitors and personal representatives who have been left in this difficult position. Although the personal representatives or executors will be asked to complete a statement of affairs in relation to the deceased estate, they have no further involvement in administering the estate. If an Insolvency Administration Order is made, it is deemed to have been made on the date of the debtor's death and takes effect retrospectively from that date.


From a practical perspective, this means that any payments made out of the estate by the solicitors/personal representatives are likely to be void under Section 284 of the Insolvency Act 1986 unless they have been ratified by the Court. To avoid falling into this trap, seek advice immediately once it becomes apparent that the deceased estate is likely to become insolvent, even if there is an impending sale of a property.


We can only hope that the property market recovers quickly, although current predictions seem to indicate that this is unlikely to return to 2007 levels for some time (albeit various commentators are already talking about green shoots of recovery). Certainly, in ordinary bankruptcies, we are not seeing an upturn in property values and most insolvency practitioners acting as Trustees are still faced with dealing with a huge number of properties which have negative equity.
To avoid making expensive mistakes where insolvency might threaten the deceased estate being dealt with, seek expert and timely advice.