March 1, 2017

Insolvent Deceased Estates – How the Bankruptcy Act Can Help

The death of a family member or loved one brings about a raft of emotional challenges. Whilst grievance is at the forefront, attention inevitably turns to dealing with and managing the deceased’s financial affairs. If the (usually) unfamiliar appointment of a person as an Executor (under the deceased’s Will) or Administrator (say by Order of the Court due to intestacy), of a Deceased Estate wasn’t daunting enough, imagine the heightened anxiety when learning that the deceased’s assets are insufficient to pay out Estate liabilities and expenses (i.e. that they are insolvent).

Fortunately for Executors/Administrators, the laws of each State and the Commonwealth cater for this situation. Relevant State based legislation is summarised below:

State Relevant Act Specific Parts
Victoria Administration and Probate Act 1958 Section 39
New South Wales Probate and Administration Act 1898 Section 46C & Parts 1 & 2 of Schedule 3
Queensland Succession Act 1981 Sections 57 & 59
South Australia Administration and Probate Act 1919 Section 61
Western Australia Administration Act 1903 Section 10A & Schedule 5
Australian Capital Territory Administration and Probate Act 1929 Section 41C & Schedule 4
Northern Territory Administration and Probate Act Schedule 4
Tasmania Administration and Probate Act 1935 Schedule 2

For those less inclined to take the wheel and navigate the myriad of State based legislative provisions, the Commonwealth legislature provides an alternative in the form of the Bankruptcy Act 1966 (“the Act”) and more specifically, a chapter of the Act commonly referenced as “Part XI” (Part 11). Part XI provides a remedy for both persons administering an insolvent deceased estate (including Executors) and creditors of the insolvent deceased alike. Each remedy necessitates the presentation of a petition to either the Federal Court of Australia (“FCA”) or the Federal Circuit Court of Australia (“FCCA”):

  • Creditors Petition – Section 244 of the Act – essentially the same rules as if the petition was being presented against a living debtor. If the petition is successful, the Legal Personal Representative of the deceased (i.e.  Executor/Administrator) must make out and file a Statement of Affairs (“SOA”) with the Australian Financial Security Authority (“AFSA”) within 28 days of being advised of the Order;
  • Administrator’s Petition – Initiated by the Executer under Section 247 of the Act – in the prescribed form (“Form 15”) and accompanied by a SOA (prescribed “Form 4”) and a Consent to Act (filed with AFSA if it is proposed that a Registered Trustee administer the Bankrupt Estate).

Practicalities of Administration under the Bankruptcy Act

1. Distribution of Estate Funds pursuant to priorities set out in Section 109 of the Act and Schedule 3 of the Bankruptcy Regulations 1996, including the following ordinal payment of:

  • Petition costs;
  • Costs and expenses of administering the Estate;
  • Trustee’s lawful remuneration;
  • Funeral and Testamentary Expenses.

2. Ordinary exclusion of certain assets from becoming divisible (available) for creditors of the deceased, including:

  • Life insurance policy proceeds of the deceased unless explicitly defined in the policy or Will, as being available to pay debts; and
  • Superannuation benefits.

3. The availability and application of the Antecedent (Voidable) Transaction provisions of the Act, including:

  • Section 120 (undervalued transactions):
  • Section 121 (transfers to defeat creditors);
  • Section 121A (transactions where consideration given to third party);
  • Section 122 (preferences).

4. Exclusion of certain processes, including:

  • No “Act of Bankruptcy” required to Petition;
  • Income Assessments;
  • Discharge; and
  • Objections to discharge.

5. Facilitation of ordinary Trustee obligations and duties (subject to Court supervision), including:

  • Asset realisations;
  • Creditor claims review and adjudication;
  • Investigations;
  • Reporting to Creditors; and
  • Paying dividends.

Advantages of utilising the Bankruptcy Act 

  • Independent Appointee (Trustee);
  • Power to set aside antecedent (voidable) transactions and potentially increase the value of the Estate;
  • Expanded priority payments regime (i.e. funeral and testamentary expenses); and
  • Assigning legal and commercial risk to an expert.

The administration of an insolvent deceased estate under the Act (as opposed to State based legislation) will suit those administrations of a particularly complex nature and/or that warrant independent investigation and administration. State based legislation ought to sufficiently address more simplified insolvent deceased estates that require less formality.

If you are the Executor; a Creditor (or the Legal Representative of either) of a Deceased and concerned their Estate may be or may become insolvent,  contact an SV Partners office nearest to you and obtain the right advice, tailored to your individual needs.

Article written by Fabian Micheletto, Associate Director, Victoria

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