Danger of death

Probate solicitors could be forced to pay back thousands of pounds in fees if the estates they are administering are declared insolvent. Grania Langdon-Down reports

The prospect of having to repay hundreds of thousands of pounds of fees is enough to drain the colour from any solicitor’s face. But following an alarming judgment last month, that is exactly what could happen to probate practitioners if the estate they have been administrating becomes insolvent.


City law firm Kendall Freeman, the successor firm to DJ Freeman, was ordered to pay back more than £200,000 in fees, interest and costs in relation to the administration of the estate of Lloyd’s name Philip Vos last month (see [2005] Gazette, 1 September, 5).

The judgment clarifies that payments or dispositions from the deceased’s estate are void from the date of death – rather than from the date that the estate was declared insolvent by the court. That means solicitors risk having to pay back what could be very substantial fees if they have been administering an estate for a long time, unless they get the payments ratified by the court.


Kendall Freeman partner Colin Joseph says the firm will not appeal against the judgment because it was ‘so discretionary’. While he does not want to go into detail about the case, he adds: ‘The lesson from this judgment is that solicitors should be very cautious when dealing with any situation where there is potential for insolvency.’


Richard Glithero, head of corporate recovery at Manchester firm Pannone & Partners, acted for the trustee in bankruptcy who brought the successful claim against Kendall Freeman. He says he has been contacted by at least four law firms wanting copies of the judgment because they are concerned that they might be caught in a similar situation. Mr Glithero has also heard from two firms considering bringing similar claims on behalf of insolvency practitioners.


While the judgment turned on its facts, Mr Glithero says: ‘What it has made clear is that if a deceased individual’s estate is made insolvent, the date which is relevant for making payments and dispositions from the estate void, is the date of death.


‘Before this decision, there was some uncertainty as to whether or not the actual wording of the law would be so strictly applied, as this could be said to cause an element of unfairness. Someone may administer an estate for several years while it was apparently solvent, and then something arises which makes it insolvent, and all the payments taken out of the estate back to the date of death are suddenly void. That is irrespective of the knowledge of the person who was dealing with the estate and making the payments in good faith.


‘However, the court does have discretion as to what payments it will approve once the executor, or the practitioner acting on their behalf, applies for ratification. So, it may be that practitioners are going to have to make routine applications for ratification, even if there could be no criticism of the level of fees they have charged or the nature of the work they have undertaken.’


He adds: ‘In this case, Mr Vos died in 1992. There was a period of negotiation over the settlement of the Lloyd’s claim, and it was only when the situation remained unresolved that Lloyd’s petitioned for the bankruptcy of his estate in 2000, eight years after his death. The court ratified payments taken out of his estate by the law firm for the work they had done up until 1994, but said that, after that time, the firm should have known that the estate was insolvent and should have advised that it was administered as an insolvent estate.’


Mr Glithero says care needs to be taken if acting for the estate of a person who was a Lloyd’s name in the early 1990s – in case their liabilities have not been resolved. ‘Lloyd’s has been dealing with hundreds, possibly thousands, of cases with financial difficulties arising from the situation in the early 1990s, so it may take some time before someone’s estate is put into bankruptcy.’


Katherine Neal, a private client assistant solicitor at London firm Pemberton Greenish, goes further: ‘If this judgment is going to be held as a legal principle, you are automatically going to have to get some kind of protection on every Lloyd’s estate – and any estate where there are concerns it may be insolvent.’


Mr Glithero identifies other examples, such as a director who has entered into significant personal guarantees, which create a contingent liability against the estate. Insolvency could also be triggered by a liability arising from litigation brought against the deceased, of which the executor and his solicitors were previously unaware.


He says: ‘The message from the judgment is that if a solicitor is involved in administering an estate and taking fees and expenses out of the estate, they have to be absolutely confident the estate is solvent and will remain solvent.


‘If anything changes, they should make an immediate application to the court for ratification of the fees they have been paid. If they don’t – and the estate is subsequently declared bankrupt – they leave themselves open to an application being made against them a lot further down the line, when they may not be in the best position to demonstrate that their work was justified as being for the benefit of the estate, or produce the evidence that they need to support that conclusion.’


He adds: ‘If another case comes along now where a trustee in bankruptcy has been appointed to a deceased person’s estate that is insolvent, we will look at everything which has been taken out of the estate back to the date of death, knowing we have extremely strong grounds for having that money repaid unless we feel the court would validate those payments.’


While Mr Glithero considers the issue from the insolvency angle, Paul Hewitt, a partner at City firm Withers, comes at the problem from the probate side. A specialist in contentious probate and trusts, he says what has changed is any assumption that administration costs will automatically be paid.


He says: ‘The issue is about ensuring solicitors recognise the situation promptly and act accordingly. When a practitioner realises that the estate is insolvent, they are going to want protection from the court. They will need to show that the administration costs have been for the benefit of the estate – in effect that they equate to those an insolvency practitioner would have charged if an insolvency order had been made – and therefore that they should be a first charge.


‘One of the lessons from the judgment may be mundane, but it is that you must go through all the papers very carefully to see if there are any warning signs about the possibility that the estate might be insolvent – for instance, if the deceased was a Lloyd’s name, or a sole trader, or there are significant liabilities.’


Mr Hewitt adds that it is clear from the judgment that good faith is not sufficient to protect the probate practitioner. ‘It may appear a harsh decision, but it is very much on its facts, and the judge does say that the courts should be slow to adopt too strict an approach.


‘However, what is important and one of the messages it appears the judge was trying to get across in this case – and, to an extent, he was perhaps making an example – is that the duty of the executor changes if an estate is insolvent. It moves to the creditors rather the beneficiaries.’


The rules for administering an insolvent estate are set out in textbooks, including the Law Society’s own Probate Practitioner’s Handbook, he says. ‘But it would certainly be helpful to have advice from an insolvency expert in a complex case.’


Tax and trusts partner Alastair Murdie runs the probate department at City firm Payne Hicks Beach and is a former senior lecturer at the College of Law. He says: ‘In the 19 years I have been here, there have only been two estates which have been insolvent. However, there have been quite a few more which could potentially have turned out to be insolvent, more often than not the estates of Lloyd’s names.


‘The golden rule of thumb is that if you are not sure whether an estate is solvent or not, then administer it as if it is insolvent. If it transpires it is not insolvent, no harm has been done.’


If the estate is insolvent, the statutory order of application of the assets starts with the secured creditors. ‘Reasonable’ funeral, testamentary and administration expenses come second, ahead of unsecured creditors. ‘So solicitors do come very high up in the order if they have been administering the estate, provided their charges are “reasonable”, he says. ‘However, if you do work that you can’t really justify, then almost by definition the charges for that work cannot be reasonable.’


Ms Neal says there are court processes that allow solicitors to protect their fees, but they were not designed for this particular issue and they would need to be adapted through a test case: ‘Procedures such as Yorke applications arose out of concerns that personal representatives were not distributing to beneficiaries, because they didn’t know whether Lloyd’s liabilities were going to be a problem, and they could have found themselves personally liable if they got it wrong. However, no one thought about professional personal representatives and payment of their administration fees, because they were properly incurred.’


In contentious probate cases, Beddoes orders allow personal representatives to continue to charge even if there is a claim against the estate. But these tend to be used in Inheritance Act 1975 claims so they do not quite fit either, Ms Neal says.


She adds that it would be difficult to recover lost fees from beneficiaries: ‘If you tried to sue the beneficiaries for the fees, it might then turn into an indemnity issue, because they might sue you – on the grounds that you should have thought of this before.’


For Nick Bird, partner in London firm Reynolds Porter Chamberlain’s lawyers’ liability group, the Vos case highlights a trap for the unwary. ‘The solicitor is in the difficult position of having to rely on the court’s discretion to ratify the payments. This is a risky way to proceed as the judgment shows. It is a clear risk management consideration for individual firms.’


But he does not think the judgment will make it more difficult for estates to find someone to administer them: ‘There are enough licensed insolvency practitioners to deal with the work, and their fees will come out of the estate in priority to the ordinary creditors.’


Mr Murdie doesn’t believe probate practitioners will be put off either. ‘They are more likely to be deterred where there are potential or actual conflicts between the personal representatives who are also the beneficiaries – now that really can be difficult to handle,’ he says.


Ms Neal adds: ‘Solicitors won’t be put off taking on certain estates as long as we can protect our position. But if we find we can’t, we won’t do it. Solicitors don’t like giving up fees.’


Grania Langdon-Down is a freelance journalist