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Insolvency and Deceased Persons - Part 2

In Part 1 we discussed the factors to be considered in deciding whether to deal with a deceased person's insolvent estate under either the Wills, Estates and Succession Act ("WESA") or the Bankruptcy and Insolvency Act ("BIA"). In this concluding part, we will discuss the court proceedings in general terms under the WESA and the BIA.

WESA

In all but a few situations, a court application will be required to obtain approval to administer a deceased person's estate. The WESA and its regulations, together with the Supreme Court Civil Rules set out the procedures to be followed. While a lawyer may not be required to file all the required documents, most executors or persons seeking to be appointed as administrator of the estate may need advice regarding the process.

As part of the process, the executor or the proposed administrator (the "Personal Representative") will prepare a list of assets and liabilities. If at this initial stage, it become apparent the estate is insolvent, the Personal Representative may want to obtain advice on insolvency options for dealing with the estate under the BIA from an insolvency lawyer and a Licenced Insolvency Trustee ("LIT"). As noted in Part 1, the mere fact that the estate is insolvent does not mean a BIA process should be followed. The WESA process may be just as efficient and more costs effective depending on the nature of the assets and liabilities.

BIA

If following the court appointment in a WESA proceeding, the Personal Representative determines the deceased's estate is insolvent, and the Personal Representative is not prepared to administer the estate under the insolvency provisions of WESA, the Personal Representative can apply to the bankruptcy court under section 49(1) of the BIA for leave to assign the estate into bankruptcy.

However, where there is an obviously insolvent estate, a will, and a willing executor named thereunder, the WESA process can be avoided. In Re Sherstofbetoff, (1945) 26 C.B.R. 210 (Sask. D.C.), the court found that it was unnecessary for the executor to obtain probate of a will in order to apply for leave to assign the estate of a deceased person into bankruptcy.

Unfortunately, if there is no will or no willing executor, there is no Personal Representative for the estate until to Court appoints one. Nevertheless, the WESA procedure could be avoided if there is a "friendly" creditor willing to make an application under section 44(1) of the BIA to bankrupt the estate. Since a creditor's claim need only be for an amount in excess of $1,000, a family member who has paid the funeral expenses in excess of that amount will have a claim against the estate for an amount sufficient to support a bankruptcy order.

If there are no significant assets in the estate, but significant debts, it may well be that no one will be willing to administer the estate under the WESA or to incur the time and up front (but possibly recoverable costs) of a BIA application. In such case, the family members who might have had an interest in dealing with the estate may simply do nothing, leaving it to creditors to take whatever initiative they may wish to take to deal with their claim.

Materials for a BIA Application

Whether it is an application for leave or for a bankruptcy order being sought by a "friendly" creditor, the court should have as much information as possible regarding the assets and liabilities of the deceased's estate and the reason for the bankruptcy. The court will be interested in:

  • A description of the key assets, their value, their location and whether there will be further proceedings required to recover any assets;
  • The creditors and the value of the claims, particularly if there are related persons;
  • The provisions of the will, if there is one; or information regarding the attempts made to locate a will;
  • The beneficiaries, either under the will or in an intestacy, and their positions regarding the application;
  • The reasons why a BIA administration of the insolvent estate is more appropriate than a WESA administration.

The more information the court has regarding the insolvent estate and the reasons for a BIA administration, the more likely the order will be granted.

Obviously, however, if the party making the application is an arm's length creditor, they may only have information regarding their own claim and perhaps information related to the attempts to have a Personal Representative deal with the claim. If the Personal Representative has been appointed in a WESA proceeding, or if such a proceeding is pending, and the Personal Representative is prepared to deal with claims under the WESA insolvency provisions, that may be a factor for the court in deciding not to grant a bankruptcy order in respect of the estate.

Notice of the Court Application

The Personal Representative seeking leave to assign the estate into bankruptcy may consider serving the beneficiaries with notice of the application. However, if the beneficiaries consent to the application being made, such service may not be necessary. Service on creditors of the estate is not necessary.

A creditor seeking to bankrupt the estate will serve the Personal Representative (or perhaps known beneficiaries if there is no Personal Representative). However, if the applicant is a "friendly" creditor, the materials may well reflect the fact that the Personal Representative or beneficiaries consent to the application, obviating the need for service.

The applicant should be prepared to explain to the court who has been given notice of the application or why no one has been served.

Costs of a court application

There will be costs associated with an application for leave to assign the insolvent estate into bankruptcy or an application for a bankruptcy order by a "friendly" creditor. In either case, the application is being made for the general benefit of the creditors and may be or little or no benefit to the applicant.

If the applicant is a court appointed Personal Representative, the costs will likely be covered as part of the funeral and testamentary expenses under section 136(1)(a) of the BIA if there are sufficient assets. Consideration should be given to obtaining a declaration as part of the order sought related to such expenses and their priority. In any event, there should be a clear order approving recovery of the full costs of the application if not otherwise caught by section 136(1)(a) of the BIA.

If the application is by a "friendly" creditor, such creditor will want to recover his or her full costs in making the application. The court has the power to make such an order, but those costs rank behind the claims for funeral and testamentary expenses and the fees and disbursements of the LIT.

In either situation, the order sought should include that the legal costs be paid on a full indemnity basis following taxation. The rationale for asking the court to make such order is that the applying party should not be out of pocket in taking the proceedings for the benefit of the creditor body as a whole.

Each insolvent estate will have its own unique factors. An insolvency lawyer can assist in evaluating the issues and assessing the best course of action for dealing with the insolvent deceased's estate.

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