National Westminster Bank Plc v Lucas & Ors

A validation order under Insolvency Act 1986, section 284, may preserve dispositions from automatic invalidity without conclusively approving the underlying expenditure. Before an executor knows that an estate may be insolvent, expenditure is assessed by the ordinary standard of proper, bona fide administration. Once that risk is known, the executor must have regard to potential creditors and apply a more rigorous standard. The court may validate legal expenses while preserving later challenges to their reasonableness. It may validate inheritance tax payments where mechanisms exist for repayment, but should not give income tax payments the effect of preferring HMRC without a proper opportunity for HMRC to be heard.

The claimant bank was executor of Jimmy Savile’s estate and applied for retrospective and prospective validation orders concerning payments made or to be made during the administration. The estate might be insolvent because of anticipated claims by alleged victims of abuse. The payments included funeral expenses, legal fees, inheritance tax, income tax and other administration expenses.

The court had to determine whether the dispositions should be protected from the automatic effect of section 284 of the Insolvency Act 1986, and whether the order should also prevent beneficiaries or other persons claiming against the estate from later challenging the expenditure.

1. The applications were granted in part. Validation orders were made for the funeral expenses and other substantially unchallenged items. The order concerning legal expenses was limited, and income tax payments were excluded.

2. By virtue of the Administration of Insolvent Estates of Deceased Persons Order 1986, section 284 applied to dispositions from a deceased person’s estate. The court could validate dispositions retrospectively or prospectively, and could qualify the validation so that it did not determine whether the expenditure was ultimately allowable on an account.

3. Two periods were material. Before the executor was on notice that the estate might be insolvent, expenditure was valid if properly and bona fide incurred in the ordinary administration of the estate. After that point, the executor had to adopt a more rigorous approach, have regard to potential creditors, and avoid treating the deceased’s assets as unequivocally available for generous expenditure.

4. The funeral expenses, although high, were reasonable having regard to the deceased’s condition in life and were properly incurred before the relevant insolvency risk became apparent. They were therefore fully validated and made unchallengeable in the circumstances of this application.

5. Legal expenses were validated only against automatic invalidity under section 284(1). The court would not conduct a detailed taxation at the hearing. Later challenges remained available through the ordinary account-taking and costs-review procedures, although parties were expected to act sensibly and proportionately.

6. Inheritance tax payments were validated because HMRC could account back to the estate if insolvency later emerged. Income tax payments were not validated because doing so could give HMRC the practical position of a preferred creditor. A future application could be made with HMRC joined.