Deceased Debtors – A Guide
Local Authorities often face the potentially complicated prospect of recovering council tax or business rates arrears from a deceased debtor.
Where a deceased individual’s estate is insolvent (in the sense that the estate’s assets are insufficient to meet its liabilities in full) there are three general ways in which the deceased’s estate can be administered. Being aware of these different processes, and how to play an active part in the administration of the estate, will assist local authorities to maximise recoveries.
The first and most common way in which a deceased’s estate can be administered is by a personal representative. The personal representative is appointed by way of a process known as the grant of representation. Where the deceased left a Will, the grant of representation is known as the grant of probate, and results in the appointment of executors. Where no Will existed, the grant of representation is known as letters of administration, and results in the appointment of administrators (it should be noted that in this context, the use of the term “administrators” has nothing to do with the administration process under the Insolvency Act 1986, which deals with insolvent companies).
The role of the personal representative (whether an executor or administrator) is to administer the deceased’s estate. This will involve identifying the assets and liabilities of the estate, collecting in the assets, and paying the debts and liabilities incurred by the deceased. Where the assets of the estate are insufficient to meet all liabilities in full, there is a statutory order of priority in which debts must be paid. For example, funeral expenses and secured debts will be paid in priority to unsecured debts such as local authority council tax debt. All creditors in the same class are required to be paid on a pro rata basis, taking into account the relative size of their debts.
As part of the process of identifying claims, the personal representative can file a notice under section 27 of the Trustee Act 1925, notifying creditors of their ability to make a claim in the estate. This also protects the personal representative from personal liability in the event that further creditors come forward after the assets of the estate have been distributed.
It remains possible for an individual creditor to bring proceedings against a deceased debtor’s estate. Where a personal representative has already been appointed the creditor may bring proceedings against the executor or administrator. Where no personal representative has yet been appointed the creditor may still bring proceedings against “the estate of” the deceased, however at the same time they must also apply to the court for an order appointing a person to represent the estate.
Where no personal representative has been appointed, there are two mechanisms available to creditors to move the matter forward.
Under the process known as citation, a creditor can require a potential personal representative to elect to either accept or renounce a grant of representation. The Non-Contentious Probate Rules 1987 set out a statutory order of priority of potential personal representatives. The highest ranking individual must be cited first. If the individual elects to accept a grant of representation, then the matter will proceed with the administrator or executor being appointed, at which stage the local authority can submit its claim in the estate in the ordinary way.
If the potential personal representative however renounces the grant of representation, then it is open to the creditor to then cite the next highest ranking potential personal representative. In this way, the citation process will proceed down the list of potential personal representatives. If all higher ranking individuals are cleared off, the creditor itself can potentially then seek a grant of representation.
Alternatively, rather than proceeding through the full list of possible personal representatives, the process known as passing over allows any creditor to apply to court to circumvent the order of priority and to appoint an alternative personal representative. It is necessary for the creditor to show special circumstances, such as a failure to act by the personal representative.
In appropriate circumstances, this allows the local authority to take matters directly into their own hands. It is possible for the grant of representation to be limited to, for example, deal solely in relation to a specific debt. It should, however, be noted that it would still be necessary for the local authority to apply the assets of the estate according to the statutory order of priority. The use of a section 27 notice in this situation would also minimise the risk of further unsecured creditors coming forward after the assets of the estate have been distributed.
Administration by the Court
As an alternative to the administration of the estate by personal representatives, any creditor can bring proceedings seeking that the estate instead be administered by the court. The court would issue directions as to the administration of the estate. Whilst proceeding in this manner would entail inevitable costs, it offers a means to progress matters with relatively low risk.
Insolvency Administration Order
A third means of administration of an insolvent deceased’s estate is by way of an insolvency administration order. This is effectively a bankruptcy of the deceased’s estate.
Any creditor can apply for such an order. It is necessary to show a reasonable possibility that the estate is insolvent.
If an insolvency administration order is made, a trustee is appointed in much the same way as a trustee in bankruptcy would be appointed for a living person. The assets of the deceased then vest in the trustee. The trustee will seek a statement of affairs from any appointed personal representative and the trustee will then administer the estate and distribute the assets accordingly.
A trustee under an insolvency administration order has the same powers as a trustee in bankruptcy. For example it is possible for the trustee to review and challenge pre-appointment transactions (such as transactions at undervalue and preference payments) in order to “claw back” assets into the estate. One notable difference between bankruptcy and insolvency administration orders relates to the timespan covered by the provisions dealing with void transactions. In bankruptcy, any disposition of an individual’s assets made after the presentation of a bankruptcy petition is automatically void, in the event that the bankruptcy order is made.
In the context of insolvency administration orders however, the relevant period begins not with the presentation of the petition, but with the date of death. As an insolvency administration order can be made some years after the death of the individual, the impact of this provision is potentially significant. The trustee will be able to review all dispositions of the deceased’s assets from the date of death onwards with a view to potentially demanding that the recipient return any assets or funds transferred.
Dealing with deceased estates is often not straightforward, and matters can easily become bogged down. However, as noted above, there are a number of options available to local authority creditors to either progress matters, or take matters into their own hands, in order to maximise recoveries.