“How to manage the risks of administering a bankrupt estate”

Those acting for bankrupt estates take on a daunting task. They are involved in the complex task of dealing with all the problems of insolvency with an additional overlay of the difficulties of administration of an estate.  They are open to criticism and demands of creditors eager to recover what is theirs as well as beneficiaries, facing disappointment following a bereavement.

The difficulty in balancing the rights of the creditors against the expectations of the beneficiaries is illustrated in the case of the estate of Jimmy Savile.

The Nat West Bank, appointed a PR of the estate, took on the task of administration of what appeared to be an asset rich estate.  Little did they know that the estate will be faced with so many claims. The abuse claims had not at that stage been heard at trial, but the PR concluded that at many of the victims would succeed.  If successful, they would deplete the estate of all its worth, thus leaving nothing for the beneficiaries.  There would be a bankrupt estate. With that in mind, the bank entered into negotiations and proposed setting up a scheme from which the claimant victims could be paid.  The bank applied for the court to approve the terms of the scheme.  The application was strongly opposed by the beneficiaries of the estate, who accused the bank of bias towards the victims.  They asked for the Bank to be removed and replaced in their role as PRs.

The court looking at the application, criticised the beneficiaries heavily for the lateness of their arguments and made a hefty costs order against them.  The matter went to appeal.  At the Court of Appeal [2014] EWCA Civ 1632, the court upheld the approval of the scheme proposed by the bank.  The Court of Appeal was however not as critical of the beneficiaries and it set aside the costs order made at first instance.

The case reminds all how invaluable is the impartiality of PRs administering the estate.  It also shows how important it is that, whenever in doubt over a big decision or a risky action, the PRs apply to the court for a “blessing” of their intended action.  Though often unpopular expense with beneficiaries, the applications for a “blessing of the PRs decision” is can be invaluable further down in the administration process.

The other ways in which PRs may, post-factum, absolve themselves from criticism or even liability for what they have done in administering an insolvent estate are:

1. An application for retrospective approval of an action. For example, PRs can look to the Court for absolution of liability for payment of debts to creditors paid out of order (e.g. paying an unsecured creditor before a secured creditor).  The order will normally be granted only in exceptional circumstances.  The PRs must be able to show they did not realise the estate was insolvent and hence made the payment by mistake.
2. An application for validation of a transaction.  As mentioned in my earlier blogs on insolvent estates, an Insolvency Administration Order dates the bankruptcy to the date of death and hence invalidates all transactions carried out since death to the date of the order (including any agreement to pay the PRs costs).  The PRs can apply for validation for such a transaction, if they can show that the liability was incurred in benefit of creditors as a whole (i.e. for actions seeking to limit the estate’s liabilities or protect the assets in the estate).

Finally, if taken to court for a breach of trust, the PRs have the statutory defence set out in s61 of the Trustee Act, i.e. the court’s power to relief them of liability on the basis that they acted honestly and reasonably in the circumstances and hence ought to be fairly excused.

If you are a PR who has found themselves in hot water and criticism over your administration of a bankrupt estate, contact me or one of my team for advice.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*