Insolvency issues when dealing with estates - Episode #150
Listen to Insolvency issue when dealing with estates.
This week on Hull on Estates Ian Hull and Suzana Popovic-Montag discuss insolvency issues and banking issues when dealing with estates now that we are in a more uncertain economy.
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Insolvency issues when dealing with estates - Episode #150
Posted on February 17th, 2009 by Hull & Hull LLP
Hello and welcome to Hull on Estates. You are listening to Episode 150 on Tuesday, February 17th, 2009
Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada. Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and wills. Now, here are today’s hosts.
Suzana Popovic-Montag: Hi and welcome to another episode of Hull on Estates. I’m Suzana Popovic-Montag.
Ian Hull: And I’m Ian Hull.
Suzana Popovic-Montag: And we’re very glad to be back on Hull on Estates and having the opportunity to podcast once again. If you want to be heard on Hull on Estates, you can participate of course by leaving us with a comment. You can e-mail us at hull.lawyers@gmail.com.
Ian Hull: Or please feel free to visit our estate blog at estatelaw.hullandhull.com.
Okay Suzana, well not to be a downer about the economy but a realist, we thought we would touch on some of the what I would call insolvency issues when dealing with estates. And some of the bankruptcy issues that arise in what we are in now an economy of more uncertainty than we were a year ago.
Suzana Popovic-Montag: And you know, Ian, at our last Hull & Hull Breakfast Seminar, this was one of the topics that was discussed and we’ve had a lot of feedback on it since then and so I just thought it might be good for us to address this particularly as you say in this climate right now.
Ian Hull: Alright, so really there are sort of some fundamental approaches to an estate administration. And one of them, the first starting point is, of course, that no distributions can be made in an estate until the debts are provided for. So we’ve got to consider then what are those debts and how we will provide for them and if we are in an insolvent estate situation, how do we manage the creditors?
Suzana Popovic-Montag: And, of course, that’s going to be tempered with the basic rule that the estate is what the estate is. And you just can’t go below zero so to speak. And so once you’ve determined what assets there are, and determined what creditors there are of the estate, you have to do the best that you can in those circumstances.
Ian Hull: And the more complex level on this analysis really lies in the question of the estate trustee’s role in determining what is the proper order of preference, because as estate trustee you’re obligated to determine what competing claims go first, who gets paid what. And that is not always an easy task.
Suzana Popovic-Montag: But fortunately there are some procedures that we can look to, to help in this administration in this kind of a context. And one of the first, of course, is when we look to the legislation and we look to the statutes. We know that there are provisions in the Trustee Act that specifically speak to that.
Ian Hull: Absolutely. And this is not the most common route to go when you’re in an insolvent estate. The most is the Bankruptcy and Insolvency Act which we’ll talk about in a minute. But the Trustee Act actually provides some pretty creative tools to help manage the creditors. Again, remembering that if they are in an insolvent estate situation, that’s what you’re essentially doing. And I look to really the Sections 48 through to 59 of the Trustee Act that set out the basic parameters.
Suzana Popovic-Montag: And in particular, I guess what we’re looking to do is to see some guidance for an executor who’s dealing with claims that are competing against limited assets in an estate. And so the question of priority, I think, is one that comes to mind, the easiest.
Ian Hull: And the easiest answer to the priority is, of course, funeral expenses, testamentary expenses, those kinds of things come off the top in any event.
Suzana Popovic-Montag: And certainly from our perspective as lawyers, the legal costs or the accounting costs that are associated with that are typically also provided for as well.
Ian Hull: And for those who are smart enough to be in a secured position, Section 57 of the Trustee Act talks about the protections available to a secured creditor. And in that case, the real dispute there really only comes down to whether or not you have valid security in that whole fight.
One interesting twist is Section 59 of the Trustee Act which provides that estate trustees or creditors can appoint an inspector to account for the various credit being sought. And those are the classic scenarios where we’ve got secured creditors, some of whom feel that they were registered properly and earlier than the others and it’s a first in time and proper registration fight.
Suzana Popovic-Montag: Now Ian, you mentioned just a few minutes ago that typically we look more to the Bankruptcy and Insolvency Act and maybe we could just talk about some of the provisions there that we can keep in mind when we’re dealing with these kinds of estates.
Ian Hull: Absolutely. That is the most common sort of venue we work within an insolvent estate environment. And Section 49 of the Bankruptcy and Insolvency Act talks about the right of creditors to petition an estate or an estate trustee may have the right to voluntarily make an assignment in bankruptcy.
Suzana Popovic-Montag: And this really, I guess, is the most common method that people would adopt to deal with these situations. And it can also accommodate a large number of creditors, and particularly, larger situations.
Ian Hull: So once we’ve gone bankrupt or been forced to go bankrupt, we also can look at Section 141 of the Bankruptcy and Insolvency Act to deal with what is the proper scheme of distribution? Who gets what and how much?
Suzana Popovic-Montag: And what does that Section provide, Ian?
Ian Hull: Well it allows for receiving order or the actual voluntary assignment and provides that all claims are paid rateably, subject of course to two important caveats. That is, Section 136(1) which gave us the priority that we have under the Trustee Act and that is priority for funeral and testamentary expenses.
Suzana Popovic-Montag: And the second would be Section 144 that talks about having the creditors paid and that if there is any surplus, how that gets paid out amongst the other individuals.
Ian Hull: And we won’t forget throughout this, of course, we are governed by the fact that if there are secured creditors, and properly registered and on time, they’re sort of first to go.
Now the third area which I think is worth just briefly talking on, because it’s rarely used, is where the Court itself will administer an estate. And this isn’t just for insolvent estates. This is in cases where an estate simply can’t be administered. But Rule 65.01 of our Ontario Rules of Civil Procedure allow the Court to essentially jump in and administer an estate in very special circumstances.
Suzana Popovic-Montag: And Ian, in those special circumstances where it is actually granted, what happens?
Ian Hull: It’s a bit creative because what happens, I mean, fundamentally is that a reference is directed and referee powers are set out. So the Court is really given very broad powers there to deal with the property of the estate, either in an insolvent estate or just one that isn’t being administered because everybody’s fighting or something like that. And those kinds of powers are usually set out through directions, a comprehensive order and a referee’s order. So that reference itself sets out the process.
The final comment that I want to make really deals with the importance of the fundamental administration questions on an insolvent estate. And some people don’t always go to Section 53 of the Trustee Act when considering an administration of an estate but almost all people know that you need to advertise for creditors.
Suzana Popovic-Montag: And that’s particularly, I think, noteworthy in these situations where you want to make sure that if you’re going to start paying out limited funds, that you’re paying it to everyone who’s at the table, who ought to be at the table.
Ian Hull: And the mechanism for advertising for creditors is really created by a form of practice as well as anything else. And we will typically recommend to our clients three advertisements in local and national papers, depending on the circumstances, over a month long period or maybe a six week period, depending on your circumstances.
So you’ve got that sort of minimal expectation. There are also defences that are available to a claim against an estate and when you’re in a marginally insolvent or insolvent estate, you may also want to look at efficient ways of dealing with creditors. Or on the opposite side, if you’re a creditor, you may want to efficiently deal with your claim. You can look to the Estates Administration Act, Sections 44 and 45, which set out a summary procedure for making claims, both defending and making claims against an estate. This is a very efficient mechanism as well to consider. And much like the Bankruptcy and Insolvency Act, it is the one that is most often looked to when you’re trying to make sort of quick and efficient claims or defending claims.
Alright, finally the point that can’t be forgotten is the concept of contingent liabilities. What may or may not be obvious, but are on the books?
Suzana Popovic-Montag: And I guess, Ian, what you’re suggesting in these situations, or what you’re referring to, are claims possibly under the Family Law Act or the Succession Law Reform Act by spouses or family members for things over and above what is provided for in the Will.
Ian Hull: Absolutely. And those claims, for example, dependant relief claims, can be significant. Family Law Act claims are almost always significant but are usually obvious. People know that that claim is coming but sometimes laying in the woods is a claim by a dependant. And again, the contingency of those liabilities needs to be considered when you’re determining at the outset whether or not this estate is indeed solvent or insolvent.
Suzana Popovic-Montag: And it’s also, I guess, crucial to determining priority of creditors as well because if these are valid claims, they will have to also be addressed during the course of the payout of the actual estate assets.
Ian Hull: Absolutely.
So I think those are sort of the basic issues relating to insolvent estates. We hopefully all will have solvent estates in our lives and our deaths, but we at least know what to do when things go bad.
Suzana Popovic-Montag: And so on that happy note, I guess we’ll come to an end of this week’s discussion. Thank you to everyone for listening and thank you for joining me today, Ian.
Ian Hull: Thank you Suzana. And please feel free to take a look at our estate blog, daily blog at estatelaw.hullandhull.com.
Suzana Popovic-Montag: Or provide us with any feedback, comments you might have at e-mail at hull.lawyers@gmail.com.
Ian Hull: Thanks very much Suzana.
Suzana Popovic-Montag: Thank you Ian.
This has been Hull on Estates with the lawyers of Hull & Hull. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.
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