Unlike in personal insolvency, the estate is bankrupt when its liabilities are greater than assets. There is no need for an order declaring an estate bankrupt. Equally, there is, therefore, no specific, different Grant appointing those responsible for administering an insolvent estate. A bankrupt estate may be administered by its appointed executor or administrator (PR), applying insolvency rules in the administration process.

As an alternative, PRs may relief themselves of a responsibility for administering an insolvent estate by applying for an Insolvency Administration Order (IAO). The application is made by a petition (in relation to which a court fee is payable). Following issue, a hearing of the petition is scheduled and an Insolvency Administration Order (IAO) is issued.

Once issued, the IAO appoints an Official Receiver (OR). The OR will collect from the PRs information about assets and liabilities of the estate in order to establish if there are reasons to administer the estate (e.g. there are properties that need to be sold etc.) If there are reasons to administer the estate, a Trustee in Bankruptcy will be appointed. This ends the PRs role, save that if at the end of the process there are any funds left for payment to beneficiaries, those will be paid by the Trustee to the PR for onward distribution to beneficiaries. The Trustee in Bankruptcy will not distribute to beneficiaries direct.

A petition for an IAO may be made by the PRs themselves. When PRs of a bankrupt estate are not taking steps to administer the estate, a petition for an IAO may also be issued by a creditor of an undisputed debt of over £750. There is no need for the creditor to serve a statutory demand before the petition is issued.

Why would a PR petition for an IAO instead of administering the estate themselves? After all, this adds costs to the administration process so, how can it be viewed of benefit?

The answer is that sometimes, the appointment of a Trustee in Bankruptcy may use his Insolvency Act powers to increase assets or reduce liabilities of the estate for the reasons set out below:

  1. An IAO takes effect on the date of death. This allows the trustee the option of setting aside transactions that were incurred from the date of death to the date of the Order. IAO is, therefore, a relatively hassle free and cost effective way of voiding all the costs improperly incurred by PRs.
  2. The issue of the IAO gives the court the ability to bring back to the estate 50% of any jointly owed assets which passed to the surviving joint owner by survivorship. PRs would have no access to the jointly owned property passing by survivorship. The trustee in Bankruptcy can ask for an order pursuant to s.421 of the Insolvency Act. It effectively severs the joint tenancy and brings back to the estate 50% the joint asset, at its value on death. The order will be made unless the surviving owner can show exceptional circumstances.
  3. The estate may also be increased by virtue of the Trustee’s ability to challenge what has gone on prior to death. For example, he might set aside transactions at an undervalue, entered into as far back as 5 years prior to the date of the deceased’s death. The Trustee can also set aside preference transactions entered into within 2 years of the date of death.
  4. The Trustee in Bankruptcy appointed under IAO can disclaim ownership of a Property. For example, if the deceased had a leasehold interest which continued post death (e.g. a leasehold of unused shop premises). The Trustee can disclaim the ownership, whereas PRs might be stuck with the liability.
  5. There are restrictions on the creditors’ right to bring claims to e.g. seize goods when an IAO is in place.