An insolvent estate can be administered out of court by the deceased insolvent's personal representative, or by the deceased insolvent's personal representative under the Court's direction pursuant to CPR 64.
Alternatively, if neither of these options is viable or practicable (for example, if the personal representative does not want to administer an insolvent estate), an estate can also be administered by a trustee in bankruptcy following the making of an insolvency administration order (IAO). A personal representative isn't required to apply for an IAO if they determine that the estate is insolvent, but, practically, personal representatives are unlikely to want to administer an insolvent estate given the additional complexities and risk involved.
Here we consider the purpose of an IAO, the process of making a petition to the Court for an IAO and what happens after an IAO is made.
What is an IAO?
An IAO is the equivalent of a bankruptcy order for a deceased insolvent's estate. Once an IAO is made, the deceased insolvent's estate will be administrated by a trustee in bankruptcy for the benefit of the deceased insolvent's creditors.
What law governs an IAO?
The Administration of Insolvent Estates of Deceased Persons Order 1986 (DPO 1986,) the Insolvency Act 1986 (IA 1986) (as modified by the DPO 1986) and the Insolvency Rules 2016.
Who can petition for an IAO?
A petition can be brought by any of the following:
- The deceased insolvent's personal representative;
- A creditor of the deceased insolvent (or jointly by more than one creditor);
- A supervisor under an individual voluntary arrangement; or
- The Official Petitioner (if a criminal bankruptcy order has been made against the deceased insolvent).
What is the process of petitioning for an IAO?
A petition must be presented to the Court in the forms set out in Schedule 3 to the DPO. The specific form will vary depending on who is presenting the petition. If the background surrounding the petition is particularly complex, a supporting witness statement may also be required.
A hearing of the petition will be listed and, if the legal requirements are satisfied, an IAO should be made at the hearing. Note that in order for an IAO to be made, the Court must be satisfied that the deceased insolvent's estate is insolvent (section 273 of the IA 1986 as amended by the DPO).
When is an estate considered to be insolvent?
An estate is considered to be insolvent if, when realised, the realised assets will be insufficient to meet the estate's liabilities (section 421 of the IA 1986 as modified by the DPO 1986). If a creditor is bringing the petition, the creditor must also be owed a debt at the time of the petition equal to or exceeding the required bankruptcy level (£5,000) (section 267 of the IA 1986 as modified by the DPO). If there is no personal representative who can provide information on the asset and liability position of the estate it can be difficult for a creditor to establish that the estate is in fact insolvent, and so the petitioner may need to carry out their own investigations into the deceased insolvent's financial affairs (from any known contacts) in order to satisfy the Court.
What other issues may arise in a petition for an IAO?
a. Service
The DPO 1986 requires a petition to be served on the deceased insolvent's personal representative. However, in some circumstances there may not be any personal representative (often there is a reluctance to act as such if it is known that the estate is likely to be insolvent).
The issue of service was considered in the case of Re Ballard [2010] BPIR 149, in which a deceased insolvent died intestate with no next of kin, and no other person was willing to act as personal representative. The judge determined in Re Ballad that a court has discretion to dispense with service of a petition for an IAO on the personal representatives.
However, it should be noted that in Re Ballard the deceased insolvent's estate was very simple. Generally, the Court is reluctant to dispense with service entirely, particularly if an estate is more complex, and the Court may therefore require additional steps to taken before making such an order, such as advertisement in local or other publications and sending notice to any known contacts of the deceased insolvent.
b. Court
A petition for an IAO should be presented in the deceased insolvent's local county court. However, as IAO petitions are not common (and the law surrounding them is not well known), a county court judge may require the petition to be listed before a specialist insolvency judge and may therefore make an order for the petition to be transferred to a larger court outside the deceased insolvent's local area which has insolvency expertise. This can lead to some delay in the proceedings.
What happens after an IAO is made?
Once the IAO is made, the Official Receiver will be appointed as first trustee in bankruptcy (but a private insolvency practitioner can be appointed over the estate in place of the Official Receiver following the same process as in bankruptcy cases). The deceased insolvent's estate will vest in the trustee automatically and any appointed personal representative will no longer have control of the estate. As with a bankruptcy order, the trustee will be obliged to publish a notice of the IAO in the Gazette and advertise notice of the order in any other manner as the trustee thinks fit.
The trustee will investigate the deceased insolvent's affairs, including transactions that took place prior to the deceased insolvent's death. Crucially, the provisions of the IA 1986 relating to transactions at an undervalue, transactions defrauding creditors and preferences also apply to deceased insolvents, arming the trustee with the same tools that they would have in a bankruptcy matter. This can also apply to transactions that have taken place by operation of law, such as the transfer of a deceased insolvent's interest in a property to their spouse under the survivorship rules.
The administration of the deceased insolvent's estate will begin on the date that the IAO is made and continue until the administration is complete and the trustee has vacated office.
IAOs can ensure that an insolvent estate is administered in the interest of creditors, and any antecedent transactions can be investigated and challenged. As such, IAOs can be a useful tool to maximise any return to a deceased insolvent's creditors.
As IAO petitions are not common, you should seek legal advice before presenting a petition, particularly if there is no personal representative appointed over the estate, or if the estate is not a simple one.
