What is an insolvent estate?
An insolvent estate is where someone dies and there is not enough money in their estate to pay off their debts. Essentially, it’s where the liabilities exceed the assets.
If an estate is insolvent, the beneficiaries under the Deceased’s Will, or anyone entitled under the intestacy rules, will not receive anything because the estate’s creditors will need to be paid off. This includes any gifts of value, such as jewellery, as these should be sold to help meet any liabilities that are due.
It is important that the correct procedure is followed when administering an insolvent estate, otherwise the Personal Representatives or solicitors acting in the administration of the estate can be held personally liable. The requirements can be found in the Administration of Insolvent Estates of Deceased Person Order 1986 (Insolvent Estates Order).
An insolvent estate can be administered in one of three ways:
- By the Personal Representatives of the Deceased;
- Under an administration order; or
- Under an insolvency administration order.
Unlike solvent estates where the estate is administered for the benefit of the beneficiaries, an insolvent estate must be administered in the interests of the creditors to the estate. This is because bankruptcy rules apply to insolvent estates.
Regardless of which administration method is used, there is a specific order of priority in which debts must be paid:
- Secured creditors;
- Funeral expenses;
- Testamentary and administration expenses;
- Preferential creditors;
- Unsecured creditors;
- Interest due on unsecured loans;
- Deferred debts.
All debts in each category must be paid off before any debt in the next category can be paid. If there is not enough money to meet all the debt in a category, the pari passu principle applies. This is where the assets are apportioned among the creditors, in proportion to the debts owed to each creditor (although this rule is subject to some specific provisions according to the category of debt).
Administering an insolvent estate can be complicated, and if it is not done correctly, a personal representative can be at risk of personal liability. If you are the personal representative of an insolvent estate we would therefore recommend you seek legal advice on your position. If you would like our assistance, please contact the Contentious Probate Department at Anthony Gold on 020 7940 4000. David Wedgwood and myself are also going to be presenting a in-person seminar, for professionals, on this topic taking place 24th November 2022.* 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.*