Insolvent Estates and Trusts Toby Bishop and Raj Arumugam 18 September, 2020 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts DISCLAIMER Neither these notes nor the talk based on them nor anything said in the discussion session constitute legal advice. They are simply an expression of the speakers’ views, put forward for consideration and discussion. No action should be taken or refrained from in reliance on them but independent professional advice should be taken in every case. Neither the speakers nor 5 Stone Buildings accept any legal responsibility for them. 2 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts INSOLVENT ESTATES “the estate of a deceased person is insolvent if, when realised, it will be insufficient to meet in full all the debts and other liabilities to which it is subject”. Section 421(4) of the Insolvency Act 1986 3 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts The sources The Insolvency Act 1986 • • The Insolvency Rules 1986 • The Administration of Insolvent Estates of Deceased Persons Order 1986 (the 1986 Order) Insolvency texts, for example: • Muir Hunter on Personal Insolvency – Sealy and Milman: Annotated Guide to the Insolvency Legislation – – Schaw Miller and Bailey Personal Insolvency Law and Practice 4 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts The implications of an estate being insolvent • The beneficiaries receive nothing. • The creditors receive only pennies in the pound. • Frequently acrimonious, sometimes litigious. 5 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts The timing of the insolvency • Death after petition: progress as though alive (art 5 1986 Order) • Death before petition: the focus of this talk. 6 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Action before a grant Creditors application for appointment of a receiver (s.37 • Senior Courts Act 1981) – Made where ‘ where it appears to the Court to be just to do so ’ – Analysis of the purpose: Aeroflot Russian Airlines' v Berezovsky and others [2013] EWHC 1209 (Ch). If administration will be by PRs out of court, grant ad • colligenda bona. 7 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts The three methods of administration PRs under the direction of the Court. Rarely used. • • Out of Court by the PRs, anecdotally most common. Requirement for a licensed IP (s.292(2)) disapplied by art 4(3). An insolvent administration order. • – PRs or creditor may apply. – Estate vests in OR then TiB when appointed (usually at creditors meeting) 8 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts The order of priority of creditors • Find it at Schedule 6 of the 1986 Act. • Adjusted by Art 4(2) reasonable funeral, testamentary and administration expenses have priority over preferential debts. • Secured creditors still take precedence (s.285(4)) 9 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Practical considerations in acting for PR • Any disposition after death (art. 12) is void unless sanctioned or ratified by the Court (s.284(1)). Your fees? – Apply for a section 284 order with or without an IAO – Personal indemnity for the PRs – Payment by the PRs personally 10 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Ratification • Re Vos, Dick v Kendall Freeman [2006] BPIR 348, [2005] WTLR 1619 • National Westminster Bank plc v Luke Lucas [2013] EWHC 770 (Ch) 11 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts INSOLVENCY TOOL CHEST 12 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Joint tenancies Section 421A (reversing Re Palmer [1994] Ch 316): • – Application for IAO presented within 5 years of death. – Immediately pre-death T entitled to interest as JT . – May make order requiring the survivor to pay the TiB an amount not exceeding the value lost to the estate. – Have regard to all the circumstances, but unless exceptional, the Court must assume the interests of the creditors outweigh all other considerations. 13 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Summons to appear: Pt 1 (s.366(1)) T’s spouse or former spouse; • Any person known or believed to have the estate’s property in • their possession or be indebted to the estate; Any person “ appearing to the court to be able to give • information concerning the bankrupt or the bankrupt’s dealings, affairs or property .” 14 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Summons to appear: Pt 2 • Compel them to submit a w/s or any document “ relating to the bankrupt or the bankrupt’s dealings, affairs or property ” • Long v Farrer & Co [2004] EWHC 1774 (Ch) 15 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Undervalue and preference • The Court may “ make such order as it thinks fit for restoring the position to what it would have been” if the transaction at an undervalue or preference had not occurred. 16 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Undervalue (s.399) • Gift or a transaction which provided for T to receive no consideration. • Transaction in consideration of marriage; • Transaction for consideration of significantly less value than that which T provided. 17 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Preference (s.340) T put a creditor, surety or guarantor in a better position in • the event of bankruptcy than he would have been in otherwise (s.340(3)). Only applies if T was influenced by the desire to produce • that effect (s.340(4)). If the preferred entity is an associate (other than • employee) the desire is presumed (s.340(5)). 18 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Associate (s.435) A broad definition, includes: • Present and former spouse; sibling, uncle, aunt, nephew, niece, lineal ancestor – and descendant. Includes half-blood, step children, adopted and illegitimate children. – – Partners, spouses and relatives of partners. Employees and employers. – – Trustees are associated with the beneficiaries and the beneficiaries associates. • T is assumed to have been insolvent at the time of the transaction or preference if it favoured an associate (s.341(2)) (important as we’ll see). 19 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts The relevant time: Part 1 (s.341) • Art 23 of the 1986 Order modifies the date of presentation of the petition to the date of death (considerably extending its reach). 20 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts The relevant time: Part 2 (s.341) Transaction at an undervalue: • – 5yrs if insolvent; – 2yrs if not. • Preference (otherwise than a transaction at an undervalue): only if T was insolvent or became insolvent as a result: – 2 yrs to an associate; – 6 months to anyone else. 21 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Availability of these tools • These tools are available only to TiBs, not to PRs 22 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts The irrelevance of time (s.423) No time limit if the purpose of a transaction at an undervalue was • to put assets beyond the reach of creditors or to prejudice their interests. It is not necessary to establish insolvency. • Re Butterworth, ex parte Russell (1882) 19 Ch D 588, 51 LJ Ch • 521 B v IB (Order to set aside disposition under Insolvency Act) [2014] 2 • FLR 273 23 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts INSOLVENT TRUSTS 24 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts “Insolvent Trust” Misnomer • (1) Trustees have incurred liabilities in their capacity as • trustees which exceed the value of the trust fund (balance sheet insolvency); or (2) Trustees have incurred liabilities which cannot be met • as they fall due out of liquid trust assets (cash flow insolvency) 25 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts “Insolvent Trust” • Personal liability of Trustees • “English law does not distinguish between his personal and fiduciary capacity” ( Investec Trust (Guernsey) Ltd v. Glenalla Properties Ltd [2019] 2 AC 271 at [59(iii)]) 26 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Mitigation of personal liability • Contractual limit on liability • Statutory limit on liability • Trustee’s right of indemnity • Trustee’s right of exoneration • Trustee’s lien • Creditors subrogated to right of indemnity/lien 27 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts What should Trustee do? • Directions from the Court - CPR Part 64 • Parties to the application – rule 64.4 • PD 64B • Compare NatWest Bank v. Lucas [2014] EWCA Civ 1632 with Rawlinson & Hunter v ITG Ltd (Gsy Royal Court, 30 Jan 2017) 28 www.5sblaw.com
18 September, 2020 Insolvent Estates and Trusts Matters requiring directions (1) • Procedure for determining what third party liabilities are to be satisfied out of the trust • Trustee’s administration costs • Trustee’s remuneration 29 www.5sblaw.com
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