Dealing with insolvent deceased estates

Rueben Mukavhi

A few of my clients have asked me to explain what happens in a situation where the assets in a deceased estate are not sufficient to cover the liabilities of the estate. We call this an insolvent estate.

First things first. The beneficiaries of an estate share the “free residue” of the estate. They share that which remains after the administration costs and the claims of the creditors of the estate have been paid. Where the assets of the estate are not enough to pay the administration costs and the creditors in full, the estate is said to be insolvent.

The executor of every estate has a duty to assess the solvency of the estate he/she is administering. If it appears to him/her that the estate is insolvent, then he/she must calculate the likely payout to each creditor, treating all the creditors proportionally, and then call a meeting of the creditors of the estate to propose to them the calculated payout as full and final settlement of their claims. In legal terms, the proposal is akin to a scheme of arrangement or a compromise.

Every creditor who proved a claim against the estate has a right to be heard and to vote at the meeting. The votes of the creditors are reckoned according to the proportion of the creditor’s claim in relation to the total of the claims. For example, if the total of the claims is $100 and a creditor is owed $10, then the vote of such creditor is reckoned as 10%. If the majority of the creditors vote for the proposed payout, then the executor can proceed to prepare the distribution accordingly. The proof of the consent of the creditors, as encapsulated in the vote for the proposal, must be filed with the Master of the High Court for his consideration before the distributions can be done.

In the event that the creditors vote to reject the proposed payout in full and final satisfaction of their claims, then the executor must file an application for the estate to be liquidated under the insolvency laws of the country. Such liquidation will be done by an insolvency practitioner appointed by the High Court as liquidator, and will entail the realization of all the assets of the estate, with the proceeds being applied first to cover the costs of liquidation and then to cover the creditors. The creditors get whatever is available after the costs have been paid. Chances are that the situation of the creditors becomes worse if the estate goes through the liquidation route, because the costs of administration will have increased. The legal costs of the application for liquidation and the liquidator’s fees add to the costs of administration. The dividend that the creditors will eventually get will be less than if they had agreed to a compromise with the executor.

It is clear that the creditors of an insolvent estate are better off agreeing to a payout arrangement with the executor, instead of pushing the estate into the liquidation process. The arrangement with the executor is cheap and fast, and thus ensures a bigger payout than would be the case with liquidation.

There you have it!

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