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30 Jun 2021

When deceased estates and insolvency collide


4 min

How to navigate insolvent estates and protect yourself.

Solicitors acting as estate administrators often come to Worrells when the estate has insufficient funds to pay all its debts—i.e. the estate is insolvent. They may be appointed by the court or their clients acting as executors of deceased estates (let’s call this role a Legal Personal Representative or “LPR”). Occasionally, the deceased has also been acting as the sole director and shareholder of a company that is also insolvent. Naturally the LPR will begin to receive phone calls from all of those creditors (personally or of the company) who, no matter how sympathetic to the situation they are, will soon—quite rightly—be wanting their debts repaid.

In practical terms the approach should be similar to what was available to the deceased if they were still alive. The deceased estate is obligated to pay out all of the deceased’s personal debts. Quite often the estate’s creditors have competing interests and hold various positions of priority. In addition, the company will have its own creditors, potentially some with personal guarantees from the deceased, creating further complexity. To avoid taking on personal liability, the LPR must be very mindful of the distinction between the company and personal debts; when they suspect the estate and/or the company is insolvent, they should look to appoint a bankruptcy trustee to the deceased estate and a liquidator to address the company’s financial problems respectively. However, the primary issue is the LPR is unable to execute the appointment documents to commence these administrations.

So, what happens now?

The LPR can apply via an administrator’s petition to the Federal Circuit Court to make an order to appoint a bankruptcy trustee under Part XI of the Bankruptcy Act 1966. This application is made under section 247 of the Bankruptcy Act, using Federal Court Form 15 (administrator’s petition). The application must include a Statement of Affairs of the deceased and the LPR’s affidavit. Once the order is made, the estate’s divisible property will vest in the bankruptcy trustee for the benefit of creditors.

When the deceased held the role of sole director and shareholder of a company or multiple companies, the bankruptcy trustee handling the estate cannot simply ignore the separate company legal status or deal with the company’s assets and liabilities as part of their role over the bankrupt estate. Rather, it is incumbent upon the LPR to take steps to also appoint a liquidator over the company to appropriately deal with the company’s financial affairs.

To appoint the liquidator section 201F(2) of the Corporations Act 2001 provides some much needed assistance by allowing the LPR to appoint another person as company director. That person will then have all of the same powers as that of an ordinarily appointed director and may manage the company’s affairs until such time as the shareholding is transferred to the beneficiaries. Once actioned, the director and subsequent shareholder(s) can then pass the appropriate resolutions to appoint a liquidator.

The bankruptcy trustee’s and liquidator’s roles and duties are highly likely to be in conflict in several scenarios under each of these appointments. For example where the deceased is a debtor or creditor of the company; or where the deceased is potentially subject to a liquidator’s insolvent trading or voidable transaction claims.  For the insolvency practitioner to maintain their independence and indeed the perception of their independence (except in very rare circumstances) the bankruptcy trustee and liquidator should be separate practitioners and from separate firms/practices.

These two appointments will operate in a similar fashion to how they would if the deceased was alive. The two main notable exceptions being in the bankrupt estate where there is no standard three-year discharge of the deceased’s bankruptcy; and the bankrupt’s liability to make contributions to the bankrupt estate from income under sections 139J to 139ZIT of the Bankruptcy Act are not required. All income of the estate is property for the benefit of the estate.

Administrators or the LPR of deceased estates perform an incredibly important function. They often deal with complex debt issues and creditors with competing priorities who are all seeking payment for their debts, sometimes in an environment of insufficient divisible assets within the estate to cover those debts in full. Avoiding personal liability is paramount. And can easily arise from mistakes made under such circumstances when the wrong professionals are involved. Appointing suitably qualified professionals is the best way to mitigate that risk.

Your local Worrells contact has the appropriate expertise to discuss these matters and provide the professional support necessary to ensure the right steps are taken—and the resultant challenges are successfully and efficiently navigated.

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