Administering an Estate that Cannot Pay its Debts - What an executor needs to know before distributing an insolvent estate

1. Executors need legal authority before acting

An executor has no legal authority to deal with any estate asset until the Supreme Court of Victoria issues a Grant of Representation, unless the estate falls under the small estate threshold, currently around $137,210 and indexed annually.¹ If no executor was validly named, or the will is invalid or successfully challenged, the court appoints an administrator instead. This is often the beneficiary entitled to the largest share, and as administrator they carry the same duties and personal exposure as an executor.²

2. When does an estate become insolvent

An estate is insolvent when the total debts of the deceased, including any mortgage, unpaid tax, credit facilities and personal guarantees they had signed, exceed the value of everything they owned. This is not always obvious at the outset. Property that is subject to debt, business interests, and guarantees the deceased provided to support someone else's loan can each take time to properly identify and value. New South Wales succession legislation defines insolvency in these terms: liabilities that cannot be paid in full from the deceased's assets. The same basic concept applies across Australian jurisdictions, including Victoria.³

3. Why the order of payment matters

Executors must apply estate assets to debts in a legally prescribed order of priority, not on a first asked, first paid basis. In Victoria, this is set out in section 39 of the Administration and Probate Act,⁴ which directs that insolvent estates be administered according to the priority rules in the Second Schedule to that Act, broadly importing the priority rules that apply in bankruptcy.⁵ Funeral, testamentary and administration expenses rank first, followed by secured debts against the specific assets securing them, and unsecured creditors last, sharing proportionally if funds fall short. Beneficiaries rank behind all of these, and receive nothing until every valid debt and cost has been paid in full.⁶

4. Where Executor Liability Comes from

An executor has a duty to discharge the debts and liabilities of the estate with due diligence, and to apply assets in the correct order before distributing anything to beneficiaries.⁷ Paying one creditor in full ahead of others of equal or higher priority, or distributing any asset to a beneficiary before debts are settled, can expose the executor personally to the shortfall, regardless of intention.

5. A Federal Alternative: Administration under the Bankruptcy Act

As an alternative, an executor or a creditor may apply to have an insolvent estate administered under Part XI of the Bankruptcy Act 1966⁸. This is a federal process modelled on personal bankruptcy administration.⁹ The Act provides two separate mechanisms for bringing an estate within this process, and the requirements for each differ:

• A creditor's petition under section 244¹⁰ requires a debt of at least $10,000, owed to a single creditor or several creditors combined, plus an Australian connection test relating to the deceased.¹¹
• An administrator's petition under section 247¹² is brought by the executor or administrator themselves, typically once it becomes apparent the estate is insolvent and the will cannot be given effect to. It carries no minimum debt threshold.¹³

Part XI is not limited to estates that were already insolvent at the date of death. It also covers estates that become insolvent afterward, where debts incurred by the executor in the course of administering the estate push it into insolvency.¹⁴

One advantage of Part XI over state administration is worth flagging specifically: it activates the same voidable transaction powers available in ordinary bankruptcy, allowing the appointed trustee to recover property that was transferred for less than market value, or paid to one creditor in preference to others, before the administration began. That recovery power is not available under Victoria's state-based process.¹⁵

6. A Complication Specific to Business Owners: The Sole Director Estate

If the deceased was the sole director and shareholder of a company, and that company is itself insolvent, the company's assets and liabilities cannot simply be folded into the deceased estate administration. The company is a separate legal entity, and dealing with its position requires its own liquidator appointment, entirely separate from whatever process is used for the personal estate.¹⁶

The practical difficulty is that a deceased sole director cannot appoint anyone, and the estate's administrator has no automatic power to act for the company either. Section 201F(2) of the Corporations Act 2001 (Cth)¹⁷ resolves this by allowing the executor or administrator to appoint a new director to the company. That person then holds the same powers as any ordinarily appointed director and can pass the resolutions needed to appoint a liquidator, pending transfer of the shareholding to the beneficiaries.¹⁸

How DSA Law helps

Personal exposure for an executor almost always comes down to timing, paying a creditor too soon, or distributing before the debt position is clear. We work with executors before that happens. Get in touch with us before you make your next move.

¹ Supreme Court of Victoria, Small Estates Optional Service, Information about the Probate Office’s service to assist with applications for probate and administration for small estates.

² Victoria Legal Aid, Administration of the Estate, 17 February 2026.

³ Probate and Administration Act 1898 (NSW) s 46C(3).

⁴ Administration and Probate Act 1958 (Vic), s 39.

⁵Administration and Probate Act 1958 (Vic) s 39(2)-(3).

⁶ Ibid.

⁷ Re Tankard v Midland Bank Executor and Trustee Co Ltd [1942] Ch 69.

⁸ Bankruptcy Act 1966 (Cth), pt XI.

⁹ Australian Financial Security Authority, Administration of Estates of Deceased Persons, Official Receiver Practice Statement 5.

¹⁰ Bankruptcy Act 1966 (Cth) s 244.

¹¹ Ibid.

¹² Bankruptcy Act 1966 (Cth) s 247.

¹³ Ibid.

¹⁴ Bankruptcy Act 1966 (Cth) s 244(1)(b); Australian Financial Security Authority, Administration of Estates of Deceased Persons, Official Receiver Practice Statement 5.

¹⁵ Australian Financial Security Authority, Administration of Estates of Deceased Persons, Official Receiver Practice Statement 5.

¹⁶ Corporations Act 2001 (Cth) s 201F(2).

¹⁷ Ibid.

¹⁸ Ibid.