Insolvent Estate

When a person dies, their assets and liabilities will form part of their estate and pass to the person named as executor in their will. Before anything from the estate can be distributed by the executor to the beneficiaries, the deceased’s debts need to be paid from the estate i.e. the executor must discharge the liabilities of the estate using whatever funds are available. The executor is authorised to realise both real and personal property to satisfy estate debts. They may also use the assets of the estate to pay for testamentary expenses, including funeral and administrative expenses.

Types of debts 

There are two types of debts:

  1. ​​​​​Secured debts – these are debts attached to a certain asset. For example, a home loan is secured against a property.
  2. Unsecured debts – these are debts which are not attached to any particular asset. For example, credit card debts or personal loans.

Order of discharging liabilities 

In New South Wales, the Probate and Administration Act 1898 (NSW) (the Act) regulates the process and order of discharging liabilities of an estate. The Act expressly reserves the priority rights of mortgagees and other secured creditors. It also notes that all unsecured debts stand in equal degree. Schedule 3 of the Act stipulates the order in which assets should be applied to debts.

Part 1 of Schedule 3 of the Act provides that where the estate is insolvent, then the funeral, testamentary, and administration expenses have priority, and the remaining debts and liabilities will be governed by the laws of bankruptcy.

Inadequate funds to meet estate debts 

If there is not enough money available to repay the debt, then property may need to be sold to help pay off debts. If there are not enough assets in the estate to meet all the estate debts, the executor may need to contact creditors to let them know that the debts cannot be repaid, and to ask for the debts to be ‘written off’.

A creditor petitioning to appoint a bankruptcy trustee

Creditors are not required to write off debts, and if the debt amounts to $5,000 or more (or an aggregate of debts owed to two or more creditors amounts $5,000 or more), the creditor/s may apply to court to have a bankruptcy trustee appointed to the estate pursuant to section 244 of the Bankruptcy Act 1966

Executor voluntarily petitioning to appoint a bankruptcy trustee

In more complex cases the executor can apply to appoint a bankruptcy trustee if they conclude that the estate is insolvent (that is, unable to pay the debts and other liabilities of the estate in full). In accordance with Part XI of the Bankruptcy Act 1966 (deceased estates) an application can be made for an independent expert to be appointed to deal with the deceased estate and relieve the executors from dealing with creditors. The administration of a deceased bankrupt estate is conducted in much the same manner to that of a normal bankruptcy i.e. the bankruptcy trustee has the same obligations and powers. Principally the trustee can recover any assets, investigate the affairs, and if appropriate, recover any voidable transactions. The distinct difference and challenge in deceased bankrupt estates is that the debtor is deceased, therefore unable to complete any documentation, nor provide any books and records, or assist the bankruptcy trustee. To assist a bankruptcy trustee, when first appointed, the deceased estate’s legal representative must lodge a Statement of Affairs within 28 days of being notified of the court order. This provides the bankruptcy trustee with the required information to administer the bankrupt estate and commence their investigations. At this point the executor’s powers cease. 

When an executor will incur personal liability

Before an executor makes a distribution of estate monies, under section 92 of the Probate and Administration Act 1898 (NSW), they must publish a notice of their intention to do so. The notice must:

  • be published in a publication circulating in the area in which the testator resided at the time of their death
  • provide the full name, occupation, and area of residence and date of death of the deceased
  • include the date on which probate or letters of administration was granted
  • provide a date on which the estate will be distributed which is no less than 30 days from the date of publication

Additionally the executor cannot make a distribution of the estate if less than 6 months has elapsed since the deceased’s death unless the executor is certain that following such interim distribution there will be sufficient funds to cover and debts or tax liabilities incurred by the estate. 

If the executor fails to give adequate notice of a distribution and fails to pay a debt the executor may become personally liable. However, if the executor has given adequate notice pursuant to s 92 of the Act, they will be free from liability for such claims. 

Contact one of our expert Wills and Estates lawyers to help you navigate through the complexities and potential pitfalls associated with your role as an executor and the responsibility of discharging liabilities of the deceased.  

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