Estate administration - more than remote

Personal representatives risk being personally liable if they fail to discharge their duties to creditors. Adam Carvalho and Joseph de Lacey discuss recent judicial guidance on the scope of due diligence.

As readers will know, personal representatives (PRs) must collect in the assets of the deceased, pay their liabilities, and distribute the balance to the beneficiaries.

Ascertaining liabilities is usually straightforward, but how should PRs proceed if there is uncertainty as to what may be payable? Any failure to discharge debts with due diligence which results in a creditor or beneficiary suffering loss may result in the PRs incurring personal liabilities, because the duty to discharge the deceased’s debts is a duty which is owed by the PRs and to both creditors and beneficiaries: see Re Yorke (deceased) [1997] and also Re Tankard [1942].

The case of Re Studdert [2020] provides a useful illustration of these issues and the way in which they can be resolved. The case concerned the estate of a convicted paedophile. According to his PRs, there was a very real chance that the estate would be subject to personal injury claims in respect of historical childhood sexual abuse by the deceased, but they had no information as to the number of potential claimants. The deceased’s actions gave rise to a personal liability which had not been satisfied prior to their death. Those liabilities do not vanish on death – under s1(1) of the Law Reform (Miscellaneous Provisions) Act 1934, causes of action subsisting against the deceased survive death as against their estate.

In the court’s judgment, Chief Master Marsh set out the principles which the court will consider when PRs are faced with similar issues, and provided welcome guidance as to the steps that PRs should take. Such cases are, of course, rare, but the judgment may well prove useful where PRs are faced with uncertainty as to liabilities and are seeking a way to advance the administration while protecting their personal position.

The estate

The deceased, Michael de Clare Studdert, died on 9 August 2017. He had at one time been a school chaplain, but in 2007 received a lifetime ban from exercising any priestly function within the Church of England. This prohibition resulted from his history of possessing, making and distributing indecent images of children.

By his will, he appointed a firm of solicitors as his executors, and provided for a number of specific pecuniary legacies to individuals, with the residuary estate left to an educational trust and registered charity, which he had established in 1987. The deceased’s estate had a net value of just over £4.5m.

A grant of probate was issued to the PRs in January 2018. However, upon receipt of the grant, the executors were unable to proceed with the administration. This was because they were concerned that the estate might be subject to claims from survivors of historic abuse.

Aware of their potential personal liability in respect of the deceased’s debts (which included his liability in respect of potential personal injury claims), and the possibility that the extent of such claims might render the estate insolvent, the PRs applied to the court for guidance as to the steps they should take.

The law

The obligations of the PRs were summarised by Chief Master Marsh as follows (quoting from Williams, Mortimer & Sunnucks, 21st ed):

"Having got in the estate of the deceased, the personal representatives must ascertain the debts and liabilities, and arrange for their payment in the due course of administration."
Williams, Mortimer & Sunnucks, 21st ed

Creditors must be paid in priority to beneficiaries, and if the PRs fail to fulfil their obligations to creditors, they may be personally liable (at para 16).

The particular difficulty for the PRs in this case was that, while there was a legitimate expectation that claims would be made against the estate, there was little they could do to identify potential claimants. And, indeed, some three years after Mr Studdert’s death, no claims had been intimated and the executors were not aware of the identity of any possible claimants. They could not therefore conclude whether the estate was solvent or not.

The primary consideration for the court, therefore, was whether the executors should take reasonable steps (and if so, what steps) to identify potential claimants.

In the usual case, an executor might rely on the protection afforded by section 27 advertisements. Section 27 of the Trustee Act 1925 provides that where executors advertise their intention to distribute an estate and invite creditors of the estate to give notice of their claims, then those executors shall not be liable to any creditor who has not given notice of their claim within the stipulated period. Such an advertisement had been placed by the PRs, but in this case it was thought inherently unlikely that victims of historic abuse might see it, or act upon it. In any event, it was not clear whether the executors would be able to rely on the protection in s27 in circumstances where, even if no response to the advertisement was received, they believed that a class of claimants may exist
(at para 9).

In the usual case, the PRs might also have sought insurance or obtained security or indemnities from the beneficiaries. There were obvious difficulties however with such potential protections where there were unascertained creditors. The reason for this is clear – an unquantifiable liability is inherently difficult to insure, and a beneficiary will not likely agree to an indemnity that is unlimited in amount.

Given the potential existence of (as yet unascertained) creditors and (as yet unquantifiable) liabilities, the executors sought directions from the court. Chief Master Marsh agreed that in the circumstances the PRs’ application was ‘the only safe course of action’.

Principles to be applied where there are unascertained liabilities

The principles that the court will apply when faced with the issues in this case were set out in Re Yorke and examined further in National Westminster Bank plc v Lucas [2014] (concerning the estate of Jimmy Savile). Drawing on these cases, the chief master set out the following statements of principle that the court would have in mind on an application for directions:

• The duty placed on administrators to pay the debts and liabilities of the estate is not an absolute one.
  
  
• The administrators only need to be required to take reasonable steps to locate and identify unascertained creditors. This is another way of saying that the court will take a practical view.
  
  
• The steps the administrators will be required to take will vary depending on the circumstances. The nature of the liabilities and the degree of likelihood that they exist are but two factors that are likely to be important.
  
  
• The court will balance the need to pay debts and liabilities with the reasonable expectation on the part of the beneficiaries that they will receive payment.

Court hearings

The court provided directions to the executors on an iterative basis, over the course of three hearings.

The January 2019 hearing

At the first hearing, in January 2019, evidence was served by the executors which pointed to the possibility that there might be a class of persons who might claim against the estate. The chief master noted that, if this was only a ‘remote concern’, then the court may have reached the view that ‘the balance came down in favour of permitting the claimants to distribute the estate on the footing that any such claims could be disregarded’. But the executors’ concerns were not remote, and were based on the following:

• The deceased had strong connections with Poland, where the age of consent was 15. He had a Polish bank account and chattels in Poland, and his will provided a number of legacies to persons described as being ‘my Polish friends’.
  
  
• It appeared likely from observations made by the deceased’s cousin that the deceased had had sexual contact with children under the age of 16 in Poland.
  
  
• In 2015, the deceased had applied to court for a variation of restrictions placed upon him at the time of his conviction for possession of indecent images of children. His stated purpose was to enable him to spend time with two Polish families who had children under the age of 16. That application was refused, with the court finding that the deceased was ‘capable of being extremely cautious about disguising his interest in children’.
  
  
• After the deceased’s death, the executors received two letters sent to the deceased by the former radio DJ Chris Denning, who was serving a 13-year sentence for sexual offences against boys. Mr Denning had a history of sexual offences committed in Eastern Europe.

In light of the above, the chief master ordered that there was a real prospect that the deceased may have committed historic sexual assault both in England and Wales and also in Eastern Europe and, in particular, within Poland, and that these historic assaults may have given rise to personal injury claims against the deceased and therefore his estate.

Having reached this decision, it was necessary for the court to provide the executors with directions about the steps they should take. The executors could not, after all, remain passive and simply wait for potential claims to materialise. The executors were therefore directed to:

• distribute the pecuniary legacies – these were relatively small compared to the value of the estate, and would not make a material difference to the estate’s ability to pay victims who might come forward; additionally, the payments to the deceased’s ‘Polish friends’ might also make it easier to obtain information that was helpful to the claimants;
  
  
• give notice of the order to the pecuniary legatees, the police and the Church of England and invite them to provide further information relating to the potential historic assaults; and
  
  
• investigate the cost and practical benefit of setting up a website in both the English and Polish languages as a facility to allow potential claimants to contact the executors.

In explaining the order, the chief master emphasised that in this case the reasonable steps that the executors should take to identify and locate unascertained creditors should:

• be taken in stages; and
  
  
• be more extensive than might be the case in relation to ordinary creditors against the estate.

The court, having formed the view that there was a real likelihood that persons with claims against the estate might exist, determined that those claimants should be given the opportunity to come forward. The court noted however that there were immense practical difficulties for the executors in terms of obtaining further information about a class of potential claimants whose identities and existence is unknown.

The October 2019 hearing

A further hearing was held on 4 October 2019. Prior to that hearing, the executors had undertaken the enquiries directed of them. The order had, for example, been provided to the police and the Church of England, but had been met with guarded responses. The order made on 4 October 2019 therefore directed both organisations to provide relevant information about historic assaults unless it would be unlawful for them to do so. The order further required the executors to give notice of the order and of the deceased’s criminal convictions to the schools at which he had worked.

The order in January 2019 had further directed that the PRs investigate the cost and likely benefit of setting up a dedicated website. However, the evidence provided to the court did not warrant the PRs being required to set up such a website without further justification for it. The PRs were therefore directed to obtain expert evidence, with the court agreeing that the proper expert in this case was a lawyer with experience of dealing with claims made (and not made) by survivors, rather than a person with experience of working with survivors of abuse (at para 27).

The April 2020 hearing

The third hearing took place in April 2020. At that hearing, the evidence of a lawyer with extensive experience of dealing with claims by sexual abuse victims was put before the court. The court also had the benefit of the information that had been obtained as a result of the directions given in October 2019. This was sufficient to warrant the court declaring that it was satisfied that the deceased had committed historic sexual assault in England and Wales and, outside of the jurisdiction of the English court, in Poland, Denmark and Italy.

As a result, the court ordered that the PRs not distribute the estate until further order. Although the court noted that it was possible that no victims would come forward, the court held that:

... there needs to be a reasonable opportunity for claims to be made and a bar on distribution altogether is proportionate for the time being.

As to how long that bar should remain in place, the court said only that it remained to be seen. It was, however, always open to the beneficiaries of the estate to apply for the bar on distributions to be lifted. The bar should not, the court held, remain in place indefinitely (at para 34). The PRs were therefore directed to provide a further report to the court in due course, following which the court would consider the issue of distributions so as to provide a proper balance between the execution of the PRs’ duties to identify creditors of the estate, and their duty to distribute the estate in accordance with the terms of the will. The court suggested that consideration would be given to the setting up of a compensation scheme, if one were warranted.

In addition, the court ordered that the PRs:

• set up websites in the English, Polish, Danish and Italian languages which would provide details of the deceased’s date of death, his criminal convictions, and a copy of the court’s order, and provide for a facility for potential claimants to contact the PRs’ solicitors;
  
  
• create entries on social media (to include Twitter, Facebook and Wikipedia) in the above languages, to signpost claimants towards the website; and
  
  
• maintain the website and social media entries until further order.

Finally, the court noted that the evidence the PRs filed at court had identified a victim of historic abuse by the deceased. The PRs were given permission to seek further advice as to communications with that victim, but were in the meantime recommended to send a note of the deceased’s death and details as to how a claim might be made. The court also noted that an investigation had been commenced in Poland regarding the deceased’s activities in that country. The PRs were directed to therefore give notice of the court’s order and of the deceased’s criminal convictions to the Polish embassy in London, and to invite the embassy to provide further information about the investigations that were being carried out.

Conclusions on the case

Only rarely will PRs be faced with the issues arising in this case (and in National Westminster Bank). But, when they are, they must have at the forefront of their minds the potential for personal liability should they fail to discharge their duties to creditors without due diligence.

What ‘due diligence’ requires is now clear following the chief master’s judgment. In short, PRs must take reasonable steps to locate and identify unascertained creditors. Those steps are unlikely to be limited however to the placing of an advertisement in accordance with s27 of the Trustee Act 1925, particularly where:

• the PRs have more than a ‘remote concern’ about the possibility of there being a class of persons who might have claims against the estate; and
  
  
• the placing of an advertisement in line with the requirements of s27 may not assist in the identification of potential claimants.

Indeed, to obtain complete protection, a PR with reasonable concerns about unascertained liabilities may wish to seek the guidance of the court, and ask for directions as to the steps that should be taken. Insurance, beneficiary indemnities or a retention, can provide a measure of protection, but those measures are more suitable in respect of ascertainable potential liabilities.

If, on the evidence, the court is satisfied that the PRs’ concerns are ‘remote’, directions may be given that the PRs distribute the estate on the footing that the potential claims in question may be disregarded. What constitutes a ‘remote’ concern was not explained in the court’s judgment, but in our view a concern should be remote if, on the balance of probabilities, it is unlikely to occur.

The court’s judgment, and its previous orders, also illustrate the flexibility inherent in the court’s jurisdiction over PRs, and the willingness of the court to make orders suitable to the circumstances and the changing times. Indeed, over three hearings, the court gave constructive and pragmatic directions as to the steps that should be taken to try to identify claimants (including through the use of social media). A similar conclusion can be drawn from the judgment in National Westminster Bank, in which the court gave its approval for a scheme designed to facilitate the settlement of personal injury claims which might be brought against the estate of Jimmy Savile.

Finally, although s27 therefore provides a measure of protection to trustees and PRs, it does not represent a limit as to the steps a PR should take before they can safely distribute. In cases such as this, where there is concern regarding the potential for personal liability in respect of unascertained liabilities, it may be prudent to ask the court to give directions as to the steps that should be taken and which, in the PRs’ view (as supported by evidence), are reasonably likely to identify creditors.

If you require further information about anything covered in this briefing, please contact your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2020

This content was originally published in Trusts & Estates Law and Tax Journal.