Tackling insolvent estates
As the recession bites more and more estates will be insolvent. Insolvent estates present significant risks for the probate practitioner. However, if the risks are understood and managed there is no reason that there should not also be significant opportunities.
There are two problem areas, and they are potentially huge. The biggest comes from the simple fact that any liability incurred by the executor or administrator with a third party in an insolvent estate will be void unless ratified by the court. That liability includes the contract between the executor and his solicitors and so means that your fees are at risk. Moreover, as the insolvency dates from death there is a potential trap where it is only realised much later that the estate is insolvent or where some later event causes the estate to become insolvent.
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The danger is well illustrated by the case of Re Vos, a case which should be seared into the memory of every probate practitioner. In that case significant fees were incurred in defending the estate (unsuccessfully) against Lloyds. An Insolvent Estates Order was made 8 years after the death of the estate. At the instigation of Lloyds a substantial proportion of those fees were held to be void and ratification was refused. The solicitors were left hugely out of pocket.
The second risk is that of paying creditors out of order. As the creditors must be paid according to their priority, ordinary creditors (those with no special priority and no security) must be paid last and in proportion to the other creditors. Paying one of these creditors the whole sum can cause the executor to become personally liable to pay all the other creditors in full. So paying a creditor early (perhaps without realising the estate was insolvent) can cause huge problems.
With all these dangers, what are the opportunities? Unique in insolvency, it is possible to administer an insolvent estate without appointing a insolvency practitioner. Although in some cases an Insolvent Estates Administration Order is inevitable (e.g. significant property passing by survivorship) in many cases it is an unnecessary expense and the whole thing can be dealt with by the probate practitioner. Just because there are more debts than assets does not mean there are not assets to pay your fees and those fees are themselves a priority debt (if ratified). Insolvent estates are frequently complex and give rise to challenging questions that can lead to applications to court. So this is a growth area with the potential for significant fees to be charged.
What to do when faced with a potentially insolvent estate?
The following are some key tips to bear in mind:
- Always assume until proven otherwise that the estate is insolvent. Do not distribute money or pay debts without very good reasons.
- Only carry out work you consider to be in the interests of the estate as a whole. Beware significant disputes with a (or the) major creditor if ultimately they may be entitled to all or most of their claim.
- Consider obtaining agreement from creditors regarding your fees and in respect of major decisions (e.g. as to not seek an Insolvent Estates Administration Order).
- Always consider the possibility of seeking court approval prospectively for your fees and in respect of significant decisions.
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