Insolvency and deceased persons – Part 1

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At death, nearly everyone will have a few outstanding creditors, even if it is only for the last month’s bills and outstanding taxes. The executor or court appointed administrator (the “Personal Representative”) will generally pay the final bills in the course of the administration of the deceased’s estate, assuming there are funds in the estate. If the estate is insolvent, because there are not enough assets to pay all the debts and liabilities of the deceased, the Personal Representative of the deceased, or family members who may be deciding whether to become a Personal Representative, will need to consider how they will deal with the insolvent estate. 

Statutory Options

In British Columbia, there are two statutory options for dealing with an insolvent estate.

The Wills, Estates and Succession Act (“WESA”) addresses the administration of the estates of deceased persons. It provides for applications for probate (where there is a will and a willing executor) or for administration (where there is no will or a will but no willing executor). Sections 169 to 174 of the WESA deal specifically with insolvent estates. Of particular importance is section 170, which sets out the priorities for applying the proceeds realized in an insolvent estate. These distribution priorities mirror, to a substantial degree, the priorities set out in section 136 of the Bankruptcy and Insolvency Act (the “BIA”). Depending on the nature of the assets and the liabilities, dealing with the insolvent estate under the WESA provisions may be the most cost effective and efficient procedure.

In some cases, administration under the BIA may be more efficient. The BIA provides two alternatives for bankrupting the estate of a deceased person. The Personal Representative may apply for leave to make an assignment; or a creditor of the estate (where the requirements of the BIA are otherwise met), may make an application for a bankruptcy order. A Licenced Insolvency Trustee (“LIT”), in accordance with the provisions of the BIA, will then undertake the administration of the estate.

Which of the statutory options is appropriate for a dealing with the deceased’s insolvent estate will require specific consideration of the facts in each case.

Selecting the appropriate option for the administration of an insolvent estate

The will of a deceased person will generally name one or more executors or alternates. Where there is no will (so there is an intestacy) or the executors named in the will are unwilling or unable to administer the estate, or no executor is named in the will, the court may name a willing person (often a family member) as administrator of the estate.

It is the role of the executor to administer the estate in accordance with the WESA and the terms of the will. That will require taking an inventory of the assets and eventually realizing on them, and determining the liabilities of the estate. Ultimately, the goal is to pay the creditors and then distribute the remaining assets to the beneficiaries in accordance with the direction in the will.

A court appointed administrator will have a similar role to the executor if there is a will. If there is no will, after payment of the creditors, distribution to the beneficiaries will be in accordance with the provisions of the WESA related to intestate estates.

Is the estate insolvent?

In some cases, an initial assessment by someone familiar with the deceased’s financial affairs may be sufficient to determine whether an estate is insolvent. Unfortunately, solvency or insolvency may not always be immediately determinable. The value of the assets may be uncertain. Creditors may not be known or the value of their claims may be uncertain. Some obligations, such as taxes, might require significant work to calculate. Once the financial status of the estate is determined, it may be possible to assess whether a WESA administration or BIA administration is more appropriate for dealing with the insolvent estate.

Factors to consider in assessing whether a WESA or BIA administration is appropriate

Factors to consider in deciding whether to have a WESA or BIA in administration of the estate include:

1. Are there assets of any value? If there are few assets with minimal value and obviously significant debts, it may be that no one will want to take on the role as Personal Representative. If there is a will, however, the named executors may want to immediately renounce the appointment. In doing so, the executor may need to have advice from a will and estates lawyer regarding the obligations, if any, that may have arisen as a result of the executor being viewed as having intermeddled in the estate.

2. Are all the creditors arm’s length to the deceased or are there significant amounts which are owed to related persons? If there are a number of related creditors, for the purposes of transparency, having a LIT administer the estate may be preferable to avoid any allegation by arm’s length creditors that the Personal Representative was biased in favour of related persons in assessing their claims.

3. Are any of the creditors’ claims disputed? If there is no issue on the claims, for example, they are regular monthly bills, credit cards bills, bank loans and other similar claims that the Personal Representative recognizes as valid; then a WESA administration may be more cost effective. If the court has already granted probate or administration, having yet another court application to bankrupt the estate may not be financially prudent. By contrast, if some claims are disputed, having a LIT assess the claims may be more efficient.

4. Are there assets that may be difficult to realize? If there are assets that may require court proceedings to recover, or are located in another jurisdiction, having a LIT recover those assets may be more cost effective and efficient.

5. Are there any court actions commenced against the deceased or the estate? If so, having a bankruptcy will result in a stay of those proceedings and prevent the commencement of new proceedings. Claims will then be processed in accordance with the provisions of the BIA.

6. If it is clear at the time of the death that the estate is insolvent, is there a person willing to act as a Personal Representative? If not, bankrupting the deceased’s estate on the application of a “friendly” creditor, such as a family member who paid the funeral expense, will relieve anyone from having to take on the role of Personal Representative and avoid the cost of an application for probate or administration of the deceased’s estate.

7. Are there any arm’s length creditors who may consider bankrupting the deceased’s estate? If so, leaving such process in the hands of the creditor may, in some cases, make sense if there are limited assets.

Each situation will be unique. Accordingly, where there is an insolvent estate, the family of the deceased, or the Personal Representative if one has been designated, may want to take the advice of an insolvency lawyer and LIT in deciding how best to deal with the estate.

Part 2 will address, in general terms, the WESA and BIA proceedings.

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