Creditor's rights

The rights of a creditor against a deceased's estate is an issue which crops up surprisingly frequently, and is an area of practice sometimes difficult to advise on. A very recent High Court judgment has however helped to clarify the position.

The case

In Randall v Randall [2014] EWHC 3134 (Ch) the High Court made it clear that a creditor of the estate of a beneficiary has no interest in a deceased's estate in order to be able to bring a probate claim. Furthermore (and rather importantly) a creditor of the deceased has no interest in order to bring a probate claim.

The facts of the case are somewhat unusual. Mr & Mrs Randall (the claimant and the defendant) were divorced and had disposed of their claims for financial provision in their divorce proceedings by consent in 2006. The consent order provided that in the event that Mrs Randall received an inheritance sum or gift worth over £100,000 from her mother, the balance would be divided equally between her and Mr Randall. Mrs Randall's mother died in 2013, leaving a will made in October 2011. Mrs Randall was the appointed executrix and the beneficiary of a pecuniary legacy of £100,000, with the rest of the estate passing to grandchildren. Accordingly Mr Randall received no benefit pursuant to the terms of the financial provision order. There was an earlier will made in January 2009 in similar terms.

Mr Randall sought to challenge the October 2011 will - he did not challenge the January 2009 will which he needed to do in order to gain any advantage, but this point became immaterial in the context of the judgment. The preliminary issue was whether Mr Randall needed to show an interest in the estate for him to have standing to bring his claim.

Fingings

The court found that Mr Randall had to show he had an interest in the estate, which is a mandatory substantive common law requirement (sitting in CPR 57.7) which governs probate claims and is supported by the case of O'Brien v Seagrave [2007] EWHC 788 (Ch).

An interest in the estate is determined by reference to the following touchstones: (a) whether they are personal representatives; (b) the grant of representation; and (c) the entitlement to a distribution of the estate. Further, as Deputy Master CollaÇo Moraes stated: "The court is concerned with identifying 'an interest in the estate', and not whether someone is 'interested' in the estate. Just as a creditor of an estate, while interested in the estate, has no interest in the estate, so in my judgment a creditor of a beneficiary of the estate has no interest in the estate, though he is possibly interested in the estate."

What then for creditors?

The avenues available to creditors are determined by whether the estate is at a point pre or post issue the grant of representation. In pre-grant situations, it remains open to creditors to obtain a 'creditors grant' under section 116 of the Senior Courts Act 1981. There is a need to 'clear off' all those with prior entitlement to a grant. In post-grant situations creditors can (if the personal representatives (PR) are refusing to discharge the deceased's debts) enforce their debts against the estate by bringing a claim against the PRs and obtaining judgment and enforcing in the usual way. They can alternatively obtain an Insolvency Administration Order under the Insolvency Act 1986 section 264.

The grounds being that: (a) the debt is payable at the date of the petition or has since become payable and has not been paid or secured for, or has no reasonable prospect of being able to be paid when it falls due; and (b) it is reasonably probable that the estate is insolvent. As to the latter, insolvent means that the estate once realised is insufficient to meet all its debts and liabilities (this must be shown to the satisfaction of the court). Alternatively they can obtain directions from the court under CPR Part 64 for the administration of the estate. The court can consider the position of the estate in broad terms and, in addition, if the PRs are unwilling to deal with the estate properly, it can order their removal within the Part 64 proceedings.

Randall highlights the need for creditors to consider carefully which option they choose in pursuing their debts, dependant on their objectives and the specific facts of each case.

Lloyd Junor is a senior associate at Thomas Eggar

He writes the regular in-practice article on wealth structuring for Private Client Adviser