An estate is deemed to be bankrupt when the total value of its debts and liabilities (including conditional and future liabilities) is greater than the total value of its assets.   A bankrupt estate is often a very daunting prospect for the executors or administrators (the PRs).  The task of administering such an estate is challenging and often fraught with pitfalls.  What should the PRs look out for?

If I was to provide some top tips for those potentially faced with insolvent estates, I would say the following are my top 3:

1 –  Identify if the estate is insolvent early, so as to avoid problems later.

If you are put in charge of an estate that is being pursued by one major creditor, often the HMRC, check whether there are charges, particularly second and third charges over the deceased’s property and/or there are pending disputes as to the ownership of the deceased’s assets.  A debt to the tax man need not be the evidence that the deceased was bankrupt.  However, all factors listed above are signs of potential problems with solvency.  Do not ignore them!

2 –  Do not pay anyone anything, until you know what all the assets and liabilities of the estate are.

There is always an urge to pay a creditor or a beneficiary who is pursuing “what is theirs” a bit aggressively.  However, the approach of “I will get rid of problem one and deal with the rest later” will not pay off!

When the estate is insolvent, the PRs are obliged to pay the liabilities and debts in a specific order:

a)  Costs and expenses of administration are payable before any creditors

b)  Funeral expenses are payable as a priority debt, i.e. before payments to any unsecured creditor. Sometimes, the funeral expenses will be payable even before a payment to a secured creditor is made.  This is when e.g. the estate has only secured creditors.

c)  Secured creditors are those whose debt is secured by e.g. a charge on a specific asset. They get paid out of that asset.  If the value of the asset is not sufficient to satisfy the debt, any unpaid balance of the debt becomes an unsecured debt.

d)  Unsecured creditors are all the other creditors whose debts are not a priority or are not secured. If the assets of the estate are not enough to pay all, the unsecured creditors get paid on a pari passu  This means that if a debt to Mr X constitutes 70% of all unsecured debts, Mr X will receive 70% of what is left in the estate (after payment to the groups as set out above).

e)  Beneficiaries get their legacies only if there are assets left in the estate after payment to all secured and unsecured creditors. In other words, when an estate is bankrupt, the beneficiaries will get nothing!

The consequences of getting the above wrong may be catastrophic.  If a PR pays a debt to an unsecured creditor in full, he is obliged to pay the liabilities due to all the other creditors in full.  The liability is a personal one.  If you have paid out 100% of any debt, you may have to refund the balance over the % that should have been distributed. Hence, if the assets in the estate are not sufficient, the PR will be personally liable for any balance due to the creditors.

3 –  Do not incur costs and expenses, which are not recoverable

The bankruptcy of the estate takes effect at the date of death.  Hence, all transactions made from the date of death until the date of the Insolvency Administration Order are void.  This means all payments of the PRs’ costs are void, unless they are validated by the court.

As we know from case law, the court will not validate expenses which were not incurred for the benefit for all creditors and beneficiaries of the estate (i.e. increased the estate’s assets or reduced liabilities).

This may sometimes be tricky.  For example, it may be tempting to have an argument with a major creditor who makes exaggerated demands.  After all, if you win the argument, you will benefit the estate (and thus all its creditors and beneficiaries).  Well… true, but you must always consider the risks involved in such an approach as well.

In Re Vos [2006] BPIR 348the Lloyds Bank was pursuing an individual for debts.  The person died and his executor continued the fight.  He hired solicitors to do that and paid those solicitors for their service, as is usual, with the estate’s funds.  The estate was held insolvent.  How surprised were both the executor and his legal advisers, when the court held that the payments received by the solicitor were not “in return for beneficial services rendered to the estate”.  As such they ought to be paid back to the estate with interest.

For general advice on how to manage the risks involved in administering a bankrupt estate or for an article on what may be the alternative to administration of a bankrupt estate by the PRs, please look out for my further blogs on the subject.  If you need specific advice, please contact me direct.

* 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.*

When it comes to determining the issue of costs in contested matters, the general litigation rule is that the costs follow the event.  In other words, it is expected for the loser to pay the winner’s costs.  This is however not always the case in contested probate matters.

The Civil Procedure Rules (CPR) Rule Part 57.7(5) allows some family members or beneficiaries to insist on the Will being “proved”, without them setting out the reason for them refusing to consent to the Will being adopted. In other words, contrary to the usual practice in litigation, a defendant need do nothing, merely serves notice that although they are raising no positive case, they still require the claimant to prove the Will (a so-called “passive defence”).  This puts no obligations on the defendant.  The job of adducing evidence to convince the court that the Will ought to be pronounced is left to the claimant (normally the executor of the Will).

To add insult to the injury, CPR Rule 57.7(5) (b) provides that the court will not make a cost order against the defendant “unless it considers that there was no reasonable ground for opposing the Will.”  One can, therefore, say that not only does the claimant do all the work, but they must do so at their own expense.   The claimant proceeds expecting success, but extremely frustrated that the estate must waste tens of thousands of pounds incurred in legal fees.

The costs rule, can be used tactically, by those familiar with it, to force opponents into paying off weak challenges to the Will.  Such use of the CPR has many critics and quite rightly so.  However, does the tactical use of CPR always pay off? Not necessarily!

In the case of Elliott v Simmonds [2016] EWHC 732 (Ch) and [2016] EWHC 962 (Ch) the defendant, Ms Simmonds, did precisely what CPR 57.7(5) allowed her to do.  Ms Simmonds was an illegitimate daughter of Kenneth Jordan, a self-made millionaire.  Mr Jordan, having been admitted to a nursing home in which he later died, made a Will leaving his entire estate to Ms Elliot.  Upon his death, Ms Simmonds registered a caveat preventing a grant to the estate of her father being sealed.  She made various allegations against the Will but took no steps to produce evidence in support of any of those, let alone issue claims.  This left the executor of Mr Jordan’s Will with no choice, but to issue proceedings to prove the Will.

Ms Simmonds did not enter a defence raising the allegations as to the Will’s invalidity she previously insinuated.  Instead, she entered the “passive defence”, merely insisting the Will be proved.  By doing so she left herself the opportunity to cross-examine the witnesses who attested the Will, at trial.  The case then proceeded through usual procedural steps of disclosure, witness statements and then trial.

Mr Jordan’s medical records, care home notes and copies of various solicitors’ files (including the file of the solicitors who prepared the Will) were obtained.  At trial, the judge found nothing suggesting that Mr Jordan lacked capacity or knowledge and understanding of the Will.  The court ordered accordingly that the Will be pronounced in solemn form and Ms Simmonds caveat is removed.

Setting a precedent, and totally unexpectedly so for Ms Simmonds, the court ordered also that Ms Simmonds pays the claimant’s costs of the matter, such costs to be assessed if not agreed.  Pending the assessment process, Ms Simmonds was ordered to pay a sum of £65,000 on account of such costs.

The court made the costs order finding that Ms Simmonds acted unreasonably as she had in her possession all the evidence adduced by the claimant prior to the issue of the proceedings and still chose not to withdraw the caveat.

What lesson do we learn from this judgment?  It pays for executors to be cooperative, even towards those who are contesting the Will.  When executors find themselves in a situation that they should issue claim to prove a Will, they should disclose supporting evidence as soon as possible. They should also warn defendants on costs before issuing.  Then, even if the defendant enters a passive defence, assuming the evidence supporting the Will is strong, the executors look to get an order that their costs are paid.

* 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.*