Download 1. PAYMENT OF DEBTS – THE ORDER OF APPLICATION OF

PAYMENT OF DEBTS – THE ORDER OF APPLICATION OF ASSETS
At the outset of administration it is vitally important for the personal representative to determine
whether there is any risk that the estate is or may become insolvent.
Insolvent Estates
The most important duty of the personal representative is to pay the debts of the deceased. Where
the deceased estate is administered in bankruptcy, the debts will be paid in accordance with the
provisions of the federal bankruptcy legislation, and the administration of the estate will be taken out
of the hand of the personal representative altogether, since the assets of the estate will vest in the
trustee in bankruptcy.
Where a bankrupt dies before discharge of bankruptcy, the proceedings continue.
Administration of Insolvent Estates Under the Succession Act 1981 (Qld)
An insolvent estate will only be administered under federal bankruptcy law where a bankruptcy
petition is presented which requires a debt of at least $5000.00 owing to a petitioning creditor
(possible for creditors to jointly petition or assign debts so as to satisfy the limit).
Accordingly, a bankrupt estate is sometimes administered outside the provision of bankruptcy
legislation, in which case the provisions of ss 57 and 58 of the Succession Act 1981 (Qld) apply.
57 Payment of debts in the case of insolvent estates
Where the estate of a deceased person is insolvent—
(a) the funeral, testamentary and administration expenses have priority; and
(b) subject as aforesaid and to this Act, the same rules shall prevail and be observed as to the
respective rights of secured and unsecured creditors and as to debts and liabilities provable and as
to the valuation of annuities and future and contingent liabilities, respectively, and as to the
priorities of debts and liabilities as may be in force for the time being under the law of
bankruptcy with respect to the administration of estates of deceased persons in bankruptcy.
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∘ This provision follows the laws of bankruptcy for the time being in force.
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58 Retainer, preference and the payment of debts by
personal representatives
(1) The right of retainer of a personal representative and the personal representative’s right to prefer
creditors are hereby abolished.
(2) Nevertheless a personal representative—
a) other than one mentioned in paragraph (b), who, in good faith and at a time when the personal
representative has no reason to believe that the deceased’s estate is insolvent, pays the debt of
any person (including himself or herself) who is a creditor of the estate; or
b) to whom letters of administration have been granted solely by reason of the personal
representative being a creditor and who, in good faith and at such a time pays the debt of
another person who is a creditor of the estate;
shall not, if it subsequently appears that the estate is insolvent, be liable to account to a creditor
of the same degree as the paid creditor for the sum so paid.
∘ Offers protection to personal representatives who, in ignorance of insolvency, pay creditors.
Is the estate solvent?
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Solvent
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Insolvent
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Apply ss 59-61
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Is there a debt of $5000 and
petitioning creditor?
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Yes
No
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Commonwealth
Banruptcy Act,
ss 244-252C
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ss 57, 58
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Solvent Estates
In respect of a solvent estate the question is out of which benefits left to beneficiaries must the debts
be paid? The law answers this by defining classes of assets applicable for payment of debts in order.
59 Payment of debts in the case of solvent estates
(1) Where the estate of a deceased person is solvent the estate shall, subject to this Act, be applicable
towards the discharge of the debts payable thereout in the following order, namely—
class 1—property specifically appropriated devised or bequeathed (either by a specific or general
description) for the payment of debts; and property charged with, or devised or bequeathed (either by
a specific or general description) subject to a charge for the payment of debts;
class 2—property comprising the residuary estate of the deceased including property in respect of
which any residuary disposition operates as the execution of a general power of appointment;
class 3—property specifically devised or bequeathed including property specifically appointed under
a general power of appointment and any legacy charged on property so devised bequeathed or
appointed;
class 4—donationes mortis causa.
CLASS 1 – Property Designated by the Testator for the Payment of Debts
Any property, whether realty or personalty, designated by the testator to be used for the payment of
debts, will be used first, whether the testator uses language of appropriation, that is trust (“on trust”),
or charge.
In other words, attention is first paid to the intention of the testator.
It is unnecessary to distinguish between the two directions in Class 1as far as the payment of debts is
concerned. If the testator leaves some property on trust to pay debts and other property charged with
payment of debts, the property will be charged rateably: s 59 (2).
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Any such property which happens to be surplus to the claims of creditors is undisposed of
and forms part of the residuary estate: s 33G. Normally such a property is identifiable
because the property will be given “on trust” to pay debts, or to “trustees.”
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Property given to a beneficiary but charged with the payment of debts, the person to whom
the debt is given is entitled to keep any part of the property not required to bear the burden
of the charge. Normally such a charge is identifiable because the property is given to the
beneficiary “subject to” the payment of debts.
CLASS 2 – The Residuary Estate
“Residuary estate” is furnished by s 55 of the Succession Act 1981 (Qld), which provides:
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55 Definition for div 2
In this division—
residuary estate means—
(a) property of the deceased that is not effectively disposed of by his or her will; and
(b) property of the deceased not specifically devised or bequeathed but included (either by a specific
or general description) in a residuary disposition.
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Class 2 also includes property in respect of which any residuary disposition operates as the
execution of a general power of appointment.
CLASS 3 – Property Specifically Devised or Bequeathed
If debts still remain unpaid after all assets in classes 1 and 2 have been exhausted, assets comprised in
class 3 will be used.
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The policy of the law is to allow comparative immunity from creditors to the beneficiaries of
specific devises and legacies, as against beneficiaries of residue and general legatees.
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Specific property that has been disposed via a general power of appointment.
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Specific property devised or bequeathed that has been charged with the payment of a legacy.
CLASS 4 - Donationes mortis causa
‘Gift on the occasion of death:’ if all property comprised in classes 1, 2 and 3 are insufficient to pay
the debts, donationes mortis causa may be reached by the creditors (gifts made in contemplation of
death).
The Principle of Rateability
59 (2) Property within each class as aforesaid shall be applied in the discharge of the debts and, where
applicable, the payment of pecuniary legacies rateably according to value; and where a legacy is
charged on a specific property the legacy and the property shall be applied rateably.
59 (3) The order in which the estate is applicable towards the discharge of debts and the incidence
of rateability as between different properties within each class may be varied by a contrary or other
intention signified by the will...
The principle of rateability ensures that whatever assets from a given class are utilised for the
payment of debts, properties within that class will abate rateably, as far as beneficiaries’ rights are
concerned.
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