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General

Incipiently insolvent

Sometimes, an estate will be known to be insolvent from when the individual dies. If the deceased was already declared prior to death, the Official Assignee (OA) carries on as normal. But what happens if it becomes apparent sometime after death that the estate is insolvent and how does this affect the executor/trustees?

This issue arose in F M Custodians Ltd v McHaffie [2019] NZHC 733, much to the frustration of the deceased’s husband, who brought proceedings against the creditors.

A timeline of the key details is as follows:

  • 23 September 2014: Mrs McHaffie (the deceased) died.
  • 9 March 2015: Probate granted. The administrators of her estate were Mr McHaffie (her husband) and Mr Smail.
  • 15 November 2018: It became apparent to the creditors (F M Custodian and Mr Dynes – the applicants) that the debts owed to them exceeded the estate’s assets. They served notice on the administrators requesting that the administrators apply to the Court to have the estate administered under the Insolvency Act 2006.
  • 5 December 2018: The executors fell out with each other and couldn’t agree on administration. They responded to the creditors saying they would not be applying as per the Insolvency Act.
  • 19 December 2018: The debt of $431,000 was due to Mr Dynes. F M Custodians swore an affidavit regarding the estate’s assets and liabilities, and showed that they were owed a debt of $143,000.
  • 29 January and 5 February 2019: Proceedings served to the executors.
  • 25 February 2019: Court proceedings begin. Counsel for Mr Smail confirms the financial position of the estate. The executors do not file any opposition to the application under the Insolvency Act.
  • 25 March 2019: Proceedings filed for current judgement, in which Mr McHaffie asked for more time to file an opposition to the application under the Insolvency Act. He was unsuccessful because the judge did not think it was necessary or in the interests of justice.

Nation J found sufficient evidence to support the bankruptcy petition. At [30], his Honour said:

“As per the requirements of the Insolvency Act, I find that the evidence of the debts to FM Custodians and to Mr Dynes would be sufficient to support a bankruptcy petition had Mrs McHaffie been alive. The administrators of her estate did not apply for an order that the estate be administered within 15 working days of receiving the written request to do so from counsel for the creditors. More than two months have passed since administration was granted; indeed, probate was granted on 9 March 2015, more than four years ago. I am satisfied there is no reasonable probability that the estate will be sufficient for the payment of the debts of the deceased and that creditors will not be prejudiced by the estate being administered in the normal way.”

There was no explanation as to what the executors had been doing for those past four years, however once the creditors came forward it was clear the estate was insolvent. Once the creditors requested the applicants apply to the Court, the have 15 working days to do so, then the creditors can apply to the Court themselves and seek a declaration that the estate insolvent.

As happened in this case, this had the effect of replacing the executors with Public Trust and the estate was to be administered as per the Insolvency Act.

The case illustrates that statutory protections for creditors in action in circumstances where executor inertia does not serve the interests of any parties. The applicant creditors were awarded costs from the estate.

References:

  • F M Custodians Ltd v McHaffie [2019] NZHC 733

 

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