Insolvent Estates and the Role of Executors

When someone dies and their liabilities are greater than their total assets, the Estate will be classified as “insolvent”.

It is the duty of the Personal Representative of an Estate to ensure the Estate is administered correctly and that the correct procedure is followed where an Estate is insolvent. The Estate will need to be administered in accordance with The Administration of Insolvent Estates of Deceased Persons Order 1986.

Where the Estate is insolvent, the Personal Representative will have a duty to administer the Estate in favour of the creditors, not the beneficiaries.

The Estate’s liabilities will need to be settled in order of priority, as set out in the Insolvency Act 1986, which is:

secured creditors (provided the asset is available in which the debt is secured against)
funeral, testamentary and administration expenses
preferred debts and Preferential debts
unsecured creditors
interest due on secured loans
deferred debts

All liabilities within one category must be settled before liabilities in another category can be settled.

The Personal Representative is personally liable should the administration of an Estate not be carried out correctly. If creditors are favoured over other creditors, there is a risk the Personal Representative will need to personally settle the liabilities that should have been paid under the insolvency rules.

If the Personal Representative has instructed a solicitor to administer the Estate on their behalf and the solicitor does not follow the insolvency rules when settling liabilities, the solicitor could face a claim in professional negligence. This is because the Personal Representative would have relied upon their advice.

There are steps that can be taken to reduce the risk of personal liability, such as:

If it is apparent at an early stage that an estate is at risk of being insolvent, the Personal Representative should take care to only incur expenses that are necessary to avoid any risk of personal liability.
The Personal Representative should obtain professional valuations for any assets.
Do not provide any beneficiaries with any belongings that could be of any monetary value until the solvency of the Estate is clear.
Do not settle any liabilities early until it is established that the creditor is entitled to be paid in full and there are enough assets in the Estate.
Contact creditors and explain that the estate is insolvent as they may be prepared to reduce the debt or write it off completely.
Before making a distribution to any beneficiaries, try to ensure that all creditors have confirmed in writing that the debt have been appropriately dealt with, either by write off, negotiation or full settlement.

If you are concerned as to the administration of an insolvent estate, please contact our Contentious Trusts and Probate team for advice, by clicking here.

The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.

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