Estates: The Administration Of An Insolvent Deceased Estate

ESTATES: THE ADMINISTRATION OF AN INSOLVENT DECEASED ESTATE

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When a person dies, their debts are not discharged as a matter of course. Debts in the sole name of the deceased must be repaid from the estate. But what happens when the liabilities outweigh the assets of the estate?

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When an individual passes away his/her estate, the assets, income, and liabilities, is vested in the Master of the Court and an executor is appointed to manage and administer the estate. If at any time whilst administering the estate, the executor finds that the estate is indeed insolvent, even after collecting debt that may be owed to his estate, the estate must then be administered in terms of Section 34 of the Administration of Estates Act (hereinafter referred to as "AEA"). The Insolvency Act 24 of 1936 may then also play a role in the administration of the insolvent estate.

According to Section 34 of the AEA, there is a duty on the executor to notify the Creditors, SARS, and the Master of the High Court that the liabilities of the estate outweigh the assets, essentially, this notice will set out the position of the estate, and inform the creditors that unless the majority in number and value of all the creditors instruct the executor in writing within a period specified in the notice (not being less than fourteen days) to surrender the estate under the Insolvency Act. 1936 (Act 24 of 1936), the executor will proceed to realize (sell) all the assets in the estate.

The Executor must notify the creditors of the manner and conditions of the intended sale and that they have an opportunity to lodge an objection to realise or sell a certain asset(s). If there are valid objections, which the executor will be able to respond to, same will be considered, investigated and decided on by the Master, the Master will then direct and/or order the executor to proceed with the sale of the assets and/or give any other order as he deems fit.

Accordingly, after selling all assets and collecting debts that may be due to the estate, a Liquidation and Distribution Account ("L&D Account") will have to be drafted and lodged at the Master's Office for the Master's confirmation. The L&D Account must provide for the distribution of the proceeds in the order of preference prescribed under the Insolvency Act (claims that are secured, preferent or concurrent). The L&D Account will lie open for inspection for a period of twenty-one (21) calendar days and an advertisement in the local newspaper and Government Gazette will have to be made by the executor. Thereafter the executor is tasked in applying for approval to distribute the proceeds.

Once the distribution is approved and the executor distributes the proceeds of the sale, the creditors will be paid out what is due to them provided that there are sufficient monies to pay the debts of the estate. in the event that there is not sufficient monies in the estate, the creditors will likely have no option but to write the debt off, which will be VAT deductible. 

In a case of a deceased that was married 'in community of property', the creditors will be able to attach any property that may form part of the "joint estate" when the deceased estate is unable to pay out the debt. This entails that the estate's creditors may attach the assets belonging to the surviving spouse even if the assets were acquired in the surviving spouse's own capacity and is registered in their own name. 

What happens to life policies that the deceased had in place for payment to nominated beneficiaries? Fortunately, the monies paid out will not form part of the insolvent estate, will belong to the beneficiaries and will not be able to be claimed by any creditor of the deceased estate. However, when there are no nominated beneficiaries of his life policy, the payout will form part of the deceased estate and will be distributed to the creditors of the insolvent estate. 

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Philip Da Silva​