Administration of an insolvent estate raises a number of unique challenges that the estate trustee must maneuver. One particularly unique challenge is the determination of whether or not it would be beneficial to petition the estate into formal bankruptcy or to administer the estate as an insolvent testamentary estate.
Commonly, an estate that does not have sufficient assets to pay its liabilities is referred to as “insolvent” or “bankrupt” interchangeably. However, these two concepts are distinctly different. An estate that is bankrupt is one that has been assigned and declared formally bankrupt. An insolvent estate, on the other hand, is one that simply does not have enough funds, liquid or otherwise, to pay all of its debts.
When an estate trustee is confronted with the task of administering an insolvent estate, there are a number of matters that ought to be considered and explored, including exposure to personal liability, the priority of payment of creditors and level of desired control over the estate in question.
First and foremost, an estate trustee must consider the level of exposure to personal liability that he or she is willing to accept. As a fiduciary, an estate trustee is obligated to pay the estate debts and may attract personal liability if they fail to appropriately apportion available funds among the deceased’s creditors. If an estate trustee makes a petition to have the estate declared bankrupt, then he or she will not only relinquish complete control of the estate to the appointed trustee in bankruptcy, but may also avoid personal liability if the estate assets are not appropriately proportioned among its creditors.
An estate trustee must avoid giving preferential treatment to creditors of the estate. This principle is codified in s. 50 of the Trustee Act, R.S.O. 1990, c. T. 23, and s. 5 of the Estate Administration Act, R.S.O. 1990, c. E.22. However, the priority of which estate debts ought to be paid differ depending on whether the estate is administered as an insolvent testamentary estate or a bankrupt estate. For instance, when in bankruptcy the Bankruptcy and Insolvency Act, provides that payment of support arrears will take priority over the payment of federal income taxes, while in the case of an insolvent estate, federal income taxes take priority.
Finally, an estate trustee must understand that it is not possible to retain any level of control over the administration of an estate once it has gone into formal bankruptcy proceedings. Accordingly, it would be prudent to first obtain advice in relation to the most effective and appropriate manner to move forward with the administration of an insolvent estate.
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When someone passes away, their executor is responsible for paying out of the estate any debts and liabilities for which the deceased was responsible. However, when there is debt for which two or more people are jointly liable, who becomes responsible when one of the joint debtors dies?
In the case of a joint debt, presumably all joint debtors will have taken responsibility and signed for that debt. Accordingly, when one joint debtor dies, the other joint debtors will be responsible for the full amount of the debt.
This obligation to pay the full amount of a joint debt is between the debtor(s) and the creditor. The creditor can thus seek repayment from either joint debt holder, or, after the death of one joint debtor, from the surviving debtors. As between the debtors themselves, however, there may be remedies for a situation in which one joint debtor is made to pay the full debt, without contribution from the other joint debtor. This may arise upon the death of one of the joint debtors if the Estate refuses to pay back any of the debt.
The courts have held that if liability for joint debt is shared, but only one debtor is ultimately made to pay the full amount of the debt, there may be an equitable remedy available. In Parrott-Ericson v Stockwell, 2006 BCSC 1409, the court stated that, even if there is no specific arrangement between the estate and the survivor who becomes responsible for a joint debt, “equity will impose that obligation in order to avoid unjust enrichment. That is the usual rule, because ordinarily there is unjust enrichment if the liability is not shared.”
In that particular case, unjust enrichment was not found. The joint debt in question was a line of credit secured against two properties owned jointly by the Deceased and his surviving spouse. The line of credit had been used to acquire the properties. Upon the death of the Deceased, the spouse took sole title to the properties by right of survivorship, and she also became liable for the balance of the line of credit. The court held that, although normally the estate would be unjustly enriched in this situation, as the spouse was receiving the entire benefit of the properties, it was not unjust that she be responsible for the full amount of the loan relating to that property.
Ultimately, the answer to this question may not be completely straightforward. Ensure that responsibility for joint debt is clear as between any joint debtors to ensure that you are not liable to pay the full amount of a joint debt after someone’s death, and that you have recourse to claim contribution from the deceased’s estate if necessary.
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Sometimes it is the most simple questions that are the most difficult. The Estates Act, R.S.O. 1990, c. E.21 provides that a person “having or pretending to have an interest in the property affected by the will” must be served with an Objection but not much more. Rule 75.01 of the Ontario Rules of Civil Procedure provides that an “estate trustee or any person appearing to have a financial interest in an estate may make an application under rule 75.06 to have a testamentary instrument that is being put forward as the last will of the deceased proved in such manner as the court directs.” Is a creditor a person with such an interest?
In Belz v. Mernick Estate (2000), 31 E.T.R. (2d) 27 (Ont. S.C.J.), Hailey J. held that the sort of “financial interest” that Rule 75 contemplates is a “beneficial interest”. There the context was an application for an Order Giving Directions. Belz v. Mernick Estate has been followed in a number of cases, mostly recently in Salzman v. Salzman, 2012 ONSC 1733 (Ont. S.C.J.).
The reason I raise the point is that I recently came across an interesting English judgment on point. Randall v Randall  EWHC 3134 (Ch.) featured a separation agreement whereby the husband was entitled to part of his former wife’s future inheritance from her mother that was over and above £100,000. The cynical amongst us might not be surprised to learn that the mother gave her daughter exactly £100,000 in the Will. A Motion was brought to determine a number of preliminary issues including whether the ex-husband could challenge the Will. The Court held he could not and traced the rule back to an old case, Menzies v Pulbrook and Kerr  2 Curt 846 (Prerogative Court), and through a series of cases up to the present day. The explanation was of course the same as Justice Hailey’s – an “interest in an estate is not the same as being interested in the estate, or having an interest that is connected to the estate” in the words of the judge. A creditor has an interest in getting paid, not establishing proper rights in the assets of the Estate by law and must confine himself accordingly.
Why should we have an interest in “interests”? We practice in a very old and well litigated field. “Pragmatic” solutions have always been sought by judges and the old cases feature a lot of learning. Given that just about everything is available on the Internet now, I suggest we go a step farther than being archivists. It is a salutary exercise to actually read these old cases and not dismiss them as so many people do as “old authority”. Do we really need to re-invent the wheel on a continuing basis?
Listen to Accounting Under the Powers of Attorney
This week on Hull on Estates, Diane and Paul discuss accounting under the powers or attorney, the duty to account after the guarantor has passed away and the De Zorzi Estate v. Read case (2008, O.J. No. 944).