Revised Accountant in Bankruptcy guidance on funeral expenses in sequestration
By Steven Wood, Practice Support Specialist (Insolvency)
11 September 2019
The Accountant in Bankruptcy’s Notes for Guidance for Trustee’s (NFG) were updated earlier this year, with one of the key changes being revised guidance in relation to the payment of funeral expenses. Following further dialogue with the Accountant in Bankruptcy (AiB), Steven Wood revisits that change in more detail.
As reported in a previous article, paragraph 6.18 of the 2016 Act version of the NFG has been amended to significantly revise the guidance on payment of funeral expenses. The death of any person is a difficult time for the family left behind but where the deceased is in significant debt and insolvent then there are further complications. It is therefore of importance that there is as much clarity as possible surrounding the individual’s affairs in order that any appointed insolvency practitioner can deal with matters both sympathetically and fairly.
Paragraph 6.18 previously stated “For avoidance of doubt, the term ‘where the debtor is dead’ in Section 129(1) (c) of the Act refers to a debtor who was deceased at the date of bankruptcy and not to a debtor who has died subsequent to being sequestrated. A trustee has no liability for deathbed and funeral expenses of a debtor who dies after the date of bankruptcy”.
The updated guidance states “Section 129(1)(c) of the Act refers to a debtor who has died prior to, or after, the date of their sequestration and prior to the distribution of the debtor’s estate by the trustee. If a claim for funeral expenses and administration costs is received by the trustee in respect of a debtor who has died prior to the distribution of the estate funds, the trustee should record in the bankruptcy accounts, for determination by the Accountant, the amount of the funeral expenses and administration costs that they consider have been reasonably incurred and should be paid as an outlay from the debtor’s estate”.
This represents a significant shift in position and clarification was sought from the AiB by ICAS.
Bankruptcy (Scotland) Act 2016 ("the 2016 Act")
The AiB have confirmed that the introduction of the 2016 Act had no bearing on the amendment made to the NFG and that a consolidation Act is interpreted in line with the law consolidated. Section 235(1) of the Act makes this explicit as it states, “repeal and re-enactment of a provision by the Act does not affect the continuity of the law”.
As a result, the change in guidance is not an unintended consequence of the alteration in wording between section 51 of the Bankruptcy (Scotland) Act 1985 (“the 1985 Act”) and section 129 of the 2016 Act.
In view of this, the AiB have acknowledged that the 1985 Act versions of the NFG should be similarly amended and will take action to bring these into line with the 2016 Act version.
AiB's opinion
The AiB have stated that the reason for the shift in the guidance is because the timing of a debtor’s death is not referred to in either section 51 of the 1985 Act or section 129(1)(c) of the 2016 Act. As a result, “no clear provision excludes deathbed and funeral expenses, incurred in relation to post-sequestration deaths, from being prioritised in distribution”.
The AiB further advise that they “understand the diverging views on this matter and appreciate that the Notes for Guidance stand in contrast to the previous view and practice”. However, they have considered the matter carefully and remain of the view that the change to the NFG is reasonable. They have agreed to further update the NFG to “acknowledge the longstanding doubt” in relation to this matter.
The AiB concede that this matter effectively comes down to interpretation and whether the term “deceased debtor”, as it appears in section 51(1)(c) of the 1985 Act, is construed as having the same meaning as the equivalent references in the 1985 Act relating to applications/petitions for the sequestration of the estate of the deceased debtor.
In noting that the issue of funeral expenses and priority in distribution is arguable, the AiB note the view of Donna McKenzie Skene in her Bankruptcy textbook (16-94):
“The provision of deathbed and funeral expenses does not refer to the timing of the debtor’s death. It is, therefore, possible that it could be argued that deathbed and funeral expenses fall within this provision even where the debtor has died after the date of sequestration and the debts are therefore post-sequestration debts. It is thought, however, that the better view is that deathbed and funeral expenses fall within this provision only where the debtor has died prior to the date of sequestration and the debts are pre-sequestration debts, sequestration generally being concerned only with claims existing at the date of sequestration. This is the view taken by AiB in the Notes for Guidance for Trustees [2016, para 6.18]. The Notes…go on to state, however, that if the debtor had a life insurance policy that has vested in the trustee, the trustee should consider releasing reasonable funds from the policy proceeds to meet the debtor’s funeral costs on the application of a person or person who can demonstrate responsibility for those costs. It is not clear what the basis for this advice is…it may be, however, that the creditors would be prepared to consent to such an approach on humanitarian grounds”.
The AiB further note the comments of Professor McBryde in his book on bankruptcy that “The claims of creditors with which the trustee is normally concerned are those which exist at the date of sequestration. But it does not follow from this that the estate can never meet claims which arise after that date, otherwise, trustees would never be paid”.
Therefore, although section 129 of the 2016 Act refers to funds being used in order to “meet the following debts in the order in which they are mentioned”, the AiB’s view is that the deathbed and funeral expenses reasonably incurred and the expenses in administering the deceased’s estate can be similarly viewed to that of payments for remuneration and outlays of the trustee incurred after the estate has been sequestrated i.e. expenses incurred post-sequestration that can be met from the estate in priority to creditors.
The AiB further reference the equivalent arrangements in England and Wales on funeral expenses, whilst acknowledging that the bankruptcy systems are quite distinct.
Comment
The issue of funeral expenses and priority in distribution is acknowledged as arguable. However, this issue has been considered as settled for some time due, in no small part, to the AiB’s Notes for Guidance, which have been unequivocal on this point since their introduction.
While the 1985 Act did not expressly define a deceased debtor, the wording used within section 51 ties in with the terminology used in other sections of the 1985 Act and led to a presumption that the debtor would have to be deceased at the date of sequestration. Section 51 (c) of the 1985 Act refers to a “deceased debtor”, being the same term used in the sections of the 1985 Act which deal with the petition for sequestration of a deceased debtor (being an individual deceased at the time of presentation).
It is also the same term as that used in Schedule 3 of the 1985 Act (and the same schedule of the 2016 Act) which deals with preferred debts in sequestration. The relevant date for claims in relation to a deceased debtor is confirmed in that Schedule to be the date of his or her death. Therefore, if the term deceased debtor is not interpreted as being a debtor deceased at the date of sequestration, it would potentially result in the relevant date for preferential claims significantly post-dating the date of sequestration in cases where the debtor dies while the Trustee is in office, which can’t have been the intention.
In the absence of the timing of a debtor’s death being defined it appears more likely that, had the intention been to include post-sequestration liabilities, it is that point which would have required express clarification as it goes against the general presumption in sequestration. As Donna McKenzie Skene goes on to state “the better view is that deathbed and funeral expenses fall within this provision only where the debtor has died prior to the date of sequestration and the debts are pre-sequestration debts, sequestration generally being concerned only with claims existing at the date of sequestration”.
In Professor McBryde’s book on Bankruptcy he states “Where the debtor dies after the date of sequestration there may, or may not, be an executory but there will commonly be funeral expenses and there may well be deathbed expenses. It is thought that these post-sequestration debts do not rank in the sequestration. If necessary, there can be a further sequestration of the deceased’s estate (the deceased may have saved some of the income permitted under section 32(1)). The term ‘deceased debtor’ in section 51 should be given the same meaning as in other parts of the Act and in section 8 it is clear that the death must occur prior to the presentation of the petition. Any other construction would have a curious result if a sequestration of a living debtor was followed by the debtor’s death and a sequestration of the deceased’s estate. If funeral expenses were claimable in a sequestration irrespective of the date of death the expenses would be a claim in both sequestrations – which cannot be intended”.
As confirmed by the AiB, a consolidation Act is interpreted in line with the law consolidated and repeal and re-enactment of a provision by the Act does not affect the continuity of the law. Therefore, while Section 129(1)(c) of the 2016 Act is worded in a more ambiguous manner than Section 51 of the 1985 Act, the AiB’s guidance is now at odds with the long-settled position in sequestration and the conclusions of leading authorities in the field.
The AiB have confirmed that this change has not resulted from any case law or legal advice and that they do not consider it appropriate for referral to their Policy and Cases Committee.
Impact on Insolvency Practitioners
The change to a long-standing settled position is clearly unhelpful to insolvency practitioners. The revised guidance and inclusion of a post-sequestration death has introduced a great deal of uncertainty into a situation which is often fraught with emotional difficulty for the deceased family. It also brings a greater potential for conflict and dispute with the trustee over what is a fair and reasonable level of funeral expenses to be incurred. It also gives rise to greater uncertainty for creditors as the costs of executory would be paid in priority of creditors.
While there may well be social reasons for adopting a changed stance, the NFG do not appear to have been amended based on legislative or case law developments. The NFG do not have any statutory standing and therefore insolvency practitioners are entitled to adopt approaches different from that stated within the NFG. It is of course recommended that where a different approach is taken that this is fully documented and the reasons for any departure explained.
A trustee may also wish to seek legal advice or the direction of the court, especially where the subject is perhaps as highly emotive as this.
