In the event of a collision between deceased estate and insolvency – Insolvency / Bankruptcy / Restructuring

Australia: When the estate of the deceased collides with insolvency

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Lawyers acting as estate administrators often come to Worrells when the estate does not have enough funds to pay all of its debts i.e. the estate is insolvent. They can be appointed by the court or their clients acting as executors (let’s call this role a Personal Legal Representative or “LPR”). On occasion, the deceased also acted as director and sole shareholder of an equally insolvent company. Naturally, the LPR will begin to receive phone calls from all those creditors (personal or corporate) who, no matter how sympathetic they are to the situation, will soon – and rightly – want to be paid off their debts.

Concretely, the approach should be similar to what was available to the deceased if he was still alive. The estate of the deceased is required to pay all personal debts of the deceased. Very often, the estate’s creditors have competing interests and occupy various priority positions. In addition, the business will have its own creditors, some with personal guarantees from the deceased, which will create additional complexity. To avoid incurring personal liability, the LPR must be very attentive to the distinction between company debts and personal debts; when they suspect the estate and / or the business to be insolvent, they should seek to appoint a bankruptcy trustee for the deceased estate and a liquidator to deal with the business’s financial problems, respectively. However, the main problem is that the LPR is unable to execute the appointment documents to start these administrations.

What shall we do now?

LPR may apply through an application by an administrator to the Federal Circuit Court for an order appointing a trustee in bankruptcy under Part XI Bankruptcy Act 1966. This request is made under section 247 of the Bankruptcy Act, using Federal Court Form 15 (Administrator’s Request). The request must include an inventory of the deceased and the LPR affidavit. Once the order has been issued, the divisible assets of the estate will devolve to the trustee in bankruptcy for the benefit of the creditors.

Where the deceased held the role of sole director and shareholder of one or more companies, the bankruptcy trustee managing the estate cannot simply ignore the legal status of the separate company or deal with the assets and liabilities of the company. the company as part of its role on the bankrupt estate. Rather, it is the responsibility of the LPR to take steps to also appoint a liquidator of the company to properly manage the financial affairs of the company.

Appoint the liquidator article 201F (2) of Companies Act 2001 provides much needed assistance by allowing the LPR to appoint another person as the director of the company. This person will then have all the same powers as those of an ordinarily appointed director and will be able to manage the affairs of the company until the transfer of the participation to the beneficiaries. Once the action is taken, the director and subsequent shareholders can then pass the appropriate resolutions to appoint a liquidator.

The roles and duties of the trustee in bankruptcy and the liquidator are very likely to conflict in several scenarios for each of these appointments. For example when the deceased is a debtor or creditor of the company; or when the deceased person is potentially the subject of an insolvent transaction or a voidable liquidator claim. In order for the insolvency practitioner to maintain and perceive their independence (except in very rare circumstances), the trustee and liquidator must be separate practitioners and from separate firms / practices.

These two appointments will work the same as if the deceased were alive. The two main notable exceptions being in the bankrupt’s estate where there is no standard three-year discharge from the bankruptcy of the deceased; and the liability of the bankrupt to make contributions to the bankrupt’s estate from the income under Sections 139J to 139ZIT of the Bankruptcy Act is not required. All income from the estate is owned for the benefit of the estate.

The administrators or LPR of deceased estates perform an extremely important function. They often deal with complex debt issues and with competing priority creditors all seeking payment of their debts, sometimes in an environment of insufficient divisible assets within the estate to fully cover those debts. Avoiding personal responsibility is paramount. And can easily result from mistakes made in such circumstances when the wrong professionals are involved. Appointing qualified professionals is the best way to mitigate this risk.

Your local Worrells contact has the appropriate expertise to discuss these matters and provide the professional assistance necessary to ensure that the right actions are taken and the resulting challenges are met successfully and effectively.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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