Back to basics - Bankrupt beneficiaries - How to avoid negligence

31 March 2011

Gill Steel, Lawskills

The case of Raymond Saul & Co v Holden [2008] EWHC 2731 clearly identifies the need to conduct a Bankruptcy Search at the date of death and not just prior to a distribution to avoid negligently overlooking the payment of the entitlement to a bankrupt beneficiary’s trustee in bankruptcy.

For some time probate practitioners have been aware of the need to confirm that a payment due to a beneficiary in an estate was properly payable to him personally and not to any trustee in bankruptcy. This has entailed undertaking a Bankruptcy only search at the Land Charges Registry.

Usually probate practitioners would have undertaken Bankruptcy searches just before making a distribution which would in most cases be some time after the date of the deceased’s death.

In Raymond Saul & Co v Holden the residuary beneficiary was declared bankrupt two months after the deceased’s death and he was automatically discharged from the bankruptcy before the administration of the estate was complete.

Facts

Bertha Hemming left almost her entire residuary estate to her son Bernard and appointed him as her executor. He instructed a firm of solicitors to act on his behalf. Two months later Bernard was declared bankrupt and a Trustee in Bankruptcy was appointed.

Bernard was automatically discharged from the bankruptcy before the administration of his mother’s estate was complete and subsequently he died. The firm wished to clarify whether the residue of Bertha’s estate should be paid to the Trustee in Bankruptcy or to Bernard’s estate and so they sought a declaration from the Court under CPR part 64.

They argued that the residuary legatee had two separate rights:

• A right to compel due administration of the estate which arises on death and therefore vests in the Trustee in Bankruptcy and
• A right to payment of residue which only comes into existence upon the completion of the administration i.e. in this case after Bernard was discharged from his bankruptcy.

Outcome

The right of a residuary legatee is a composite right, said Richard Snowden QC hearing the case, to have the estate properly administered and to have any residue paid to him as and when the administration was complete.

This right vests in a Trustee in Bankruptcy and it cannot revert to the bankrupt person unless and until his bankruptcy debts and costs have been paid.

This composite right constitutes ‘property’ for the purposes of s.436 Insolvency Act 1986 and therefore the Trustee in Bankruptcy has priority over any claims against Bernard’s estate.

Problem

Land Charges Searches only reveal subsisting bankruptcy entries registered against a legatee’s name. On a discharge of bankruptcy the entries are not automatically removed – they are only removed if the Court specifically orders it; so, they could be revealed after discharge BUT all entries are removed automatically after five years unless they are renewed.

There is therefore a risk in waiting to make a search before distribution when the death was more than five years ago as a current search might not reveal that the legatee was bankrupt at the date of death.

Practice Point

To avoid potential negligence the probate practitioner would be well advised to conduct a Bankruptcy search at the commencement of the administration as well as before distribution in case this reveals a past bankruptcy order. Should this be the case the practitioner would need to specifically seek clearance from the Trustee in Bankruptcy before making any distribution to a beneficiary or at his direction.

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