What happens when a person dies with debt levels exceeding their assets?
What happens when a sole director and shareholder of a company dies?
What happens when a director dies and the company is insolvent?
Over the past 40 years Dye & Co has dealt with these and similar questions on a number of occasions. Such scenarios are becoming more prevalent since the inception of sole director, sole shareholder companies and with our ageing population.
Detailed below are some examples and case studies:
Example 1: – Death of an Insolvent Person
Take the example of the death of a person who has debts that exceed their realisable assets. Often the first reaction of the surviving family members is to contribute sufficient funds to meet the shortfall.
Providing there are no joint debts or guarantees executed over the debts, to a surviving party, the estate only needs to payout the funds to the creditors from the available assets of the deceased. If this is performed by the executors or persons holding letters of administration, then the payment order is determined by the Administration & Probate Act.
If a trustee is appointed to the estate, then the Bankruptcy Act determines the order of payment. The trustee manages all the affairs and the executors or persons holding letters of administration do not take part in the management of the estate.
In either scenario, the shortfall remains with the deceased and the creditors bear the cost of any shortfall in respect of same.
Example 2: – Do not use your exempt or non-divisible property
Using the facts from Example 1 and adding in the additional facts that the deceased has a life insurance policy and/or a superannuation fund. The life insurance policy is not an asset of the estate regardless of whether it is completed by a trustee or the executors. As such it is not available to pay debts of the deceased.
In a bankrupt estate the superannuation fund is non-divisible property which is not an available asset to meet the debts of the estate.
However, should an executor or person holding letters of administration manage the estate, it may depend on what the death benefit nomination and the Will (if applicable) as to whether the application of the funds are included as an asset of the estate or not.
Case Study 1: An alternative resolution to probate – dealing with an Insolvent sole director company
Sole director and shareholder of a company died intestate, leaving, inter alia, an operating business of the company behind. The company was insolvent.
In order to appoint a liquidator, it would require an initial application to court to get letters of administration / probate and then appoint a liquidator. This is often an expensive and protracted process.
In this case, the son of the deceased was also creditor of the company. A statutory demand for the payment of debt due to the son was issued against the company ultimately resulting in its winding up and a liquidator being appointed. This was a timelier and more cost-effective process to achieve the same outcome.
Case Study 2: – A Will, Joint Executors, Insolvent Sole Director Company
Sole director and shareholder died, leaving, inter alia, a trading business of the company. The company was insolvent.
The will had joint executors.
The joint executors resolved to appoint a director to the company for the sole purpose of executing documentation to wind the company up and appoint liquidators. The appointment of liquidators was completed on the same day as the appointment of the director.
The liquidators were now able to tidy up the mess of the insolvent and directorless trading company. There was no exposure to the newly appointed director appointed for the purpose as the company did not trade under their control. The 30 day rule associated with the assumption of ATO liabilities did not lapse and there are no offences committed.
Case Study 3: – Sudden death of a director of a solvent company
A sole director and shareholder died suddenly and young. He died intestate, no spouse or children. The company had been trading profitably, however the sole director was the driving force and persons known to him did not have the knowledge or expertise to manage the company.
Court orders were obtained to appoint administrators to the company. The court orders provided the administrators with the requisite control and the ability to trade the company with a view to selling the business of the company as a going concern.
A sale campaign resulted in a successful sale and the preservation of jobs for the employees of the company. Ultimately resulting in a dividend to all creditors of 100 cents in the dollar and ultimately a return to the estate.
- Get advice – from a Wills and Estate specialist regarding how the proceeds of any Will and Superannuation Fund will be applied in the event of death
- Get advice – from your accountant regarding the proceeds that may flow and the most tax effective way of dealing with same
- Get advice – from and Insolvency Specialist if there is an insolvent estate to understand your options and consequences, each case is different.
- Have a Will – update it as regularly as your circumstances change
- Do not immediately assume that you need to “top up” the shortfall amount of a deceased estate