Learning Outcomes
After studying this article, you will be able to distinguish between the administration of solvent and insolvent estates, explain the statutory order of payment of debts, and identify the duties and powers of personal representatives. You will also be able to apply the correct legal rules for distributing assets and handling creditor claims, ensuring compliance with the SQE1 assessment requirements.
SQE1 Syllabus
For SQE1, you are required to understand the administration of estates in both solvent and insolvent scenarios. Focus your revision on:
- the duties and powers of personal representatives (executors and administrators)
- the statutory order of payment of debts and liabilities in solvent and insolvent estates
- the consequences for beneficiaries and creditors in insolvent estates
- the procedures for dealing with creditor claims and the effect of insufficient assets
- the legal framework governing estate administration, including relevant statutes
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the statutory order for payment of debts in a solvent estate?
- What is the effect on beneficiaries if an estate is insolvent?
- Who is responsible for administering an estate and what are their primary duties?
- How are creditors ranked in the administration of an insolvent estate?
Introduction
When a person dies, their property and liabilities must be managed and distributed according to law. The process of administering an estate is governed by statutory rules and the duties of personal representatives. It is essential for SQE1 to understand the differences between solvent and insolvent estates, the order of payment of debts, and the consequences for beneficiaries and creditors.
Duties and Powers of Personal Representatives
The administration of an estate is carried out by personal representatives—either executors (appointed by will) or administrators (appointed by the court if there is no will or no executor able to act).
Key Term: personal representative
A person (executor or administrator) responsible for collecting, managing, and distributing the deceased’s estate in accordance with the law.
Personal representatives must:
- collect and value all assets of the estate
- pay funeral expenses, debts, and taxes
- distribute the remaining assets to beneficiaries according to the will or intestacy rules
They act in a fiduciary capacity and must act honestly, diligently, and in the best interests of the estate.
Worked Example 1.1
Sarah dies leaving a will appointing her brother as executor. Her estate includes a house, savings, and some debts. What are her brother’s main duties as executor?
Answer: He must collect and value all assets, pay funeral expenses and debts, settle any taxes due, and distribute the remaining estate to the beneficiaries named in the will.
Administration of Solvent Estates
A solvent estate is one where the assets are sufficient to pay all debts, funeral expenses, and administration costs.
Key Term: solvent estate
An estate where the total value of assets exceeds all liabilities and expenses.
Personal representatives must pay debts in the following statutory order:
- Funeral, testamentary, and administration expenses
- Secured debts (e.g., mortgages)
- Preferential debts (e.g., certain employee claims)
- Unsecured debts
- Interest on debts
- Deferred debts (e.g., loans from family members made without security)
After all debts and expenses are paid, the remaining assets are distributed to beneficiaries.
Worked Example 1.2
An estate has assets of £200,000 and debts of £120,000, including a mortgage, credit card bills, and a loan from a friend. How should the debts be paid?
Answer: Pay funeral and administration expenses first, then the mortgage (secured debt), then credit card bills (unsecured debts), and finally the friend’s loan (deferred debt). Any remaining assets are distributed to beneficiaries.
Administration of Insolvent Estates
An insolvent estate is one where the assets are insufficient to pay all debts and liabilities.
Key Term: insolvent estate
An estate where the total liabilities and expenses exceed the value of the assets.
Insolvent estates are administered according to the rules in the Insolvency Act 1986 and the Administration of Insolvent Estates of Deceased Persons Order 1986. The order of payment is:
- Funeral, testamentary, and administration expenses
- Preferential debts (e.g., certain employee claims)
- Secured creditors (fixed charges)
- Secured creditors (floating charges)
- Unsecured creditors
- Deferred debts
No distributions are made to beneficiaries unless all debts and expenses are paid in full.
Key Term: preferential debt
A debt given priority by statute, such as certain employee wage claims.
Worked Example 1.3
An estate has assets of £50,000 and debts of £100,000, including a mortgage, unpaid wages to an employee, and several unsecured loans. What is the effect on beneficiaries?
Answer: The assets are used to pay debts in the statutory order. As the estate is insolvent, beneficiaries receive nothing.
Payment of Debts: Statutory Order
The statutory order of payment of debts is essential for both solvent and insolvent estates. Personal representatives must strictly follow this order to avoid personal liability.
Key Term: statutory order of payment
The legally prescribed sequence in which estate debts and liabilities must be paid.
If personal representatives pay beneficiaries before settling debts, they may be personally liable to unpaid creditors.
Exam Warning
If personal representatives distribute assets to beneficiaries before all debts and liabilities are paid, they may be personally liable to creditors for any shortfall.
Creditor Claims and Beneficiaries
Creditors can claim against the estate for unpaid debts. In an insolvent estate, creditors may receive only a proportion of what they are owed, depending on the available assets. Beneficiaries receive nothing unless all debts and expenses are paid in full.
If a creditor is not paid because the personal representatives have already distributed the estate, the creditor may pursue the beneficiaries for repayment, but only up to the amount they received.
Summary Table: Order of Payment
| Order | Solvent Estate | Insolvent Estate |
|---|---|---|
| 1 | Funeral, testamentary, administration expenses | Funeral, testamentary, administration expenses |
| 2 | Secured debts (e.g., mortgages) | Preferential debts |
| 3 | Preferential debts | Secured creditors (fixed charges) |
| 4 | Unsecured debts | Secured creditors (floating charges) |
| 5 | Deferred debts | Unsecured creditors |
| 6 | Beneficiaries | Deferred debts |
Key Point Checklist
This article has covered the following key knowledge points:
- The duties and powers of personal representatives in estate administration
- The statutory order of payment of debts in solvent and insolvent estates
- The consequences for beneficiaries and creditors in insolvent estates
- The legal framework for creditor claims and the effect of insufficient assets
- The importance of following the statutory order to avoid personal liability
Key Terms and Concepts
- personal representative
- solvent estate
- insolvent estate
- preferential debt
- statutory order of payment
