The object and effect of the Deeds of Arrangement Act 1887 was to require the registration of compositions with and assignments for the benefit of creditors.
A debtor may execute a deed of arrangement without any involvement of the court for the benefit of three or more creditors or for the benefit of his creditors generally. This is an alternative way for a debtor to deal with his/her affairs than entering into bankruptcy or an individual voluntary arrangement. Deeds of arrangement require the approval of a simple majority of creditors in number and value, and do not require a nominee, report to court or a meeting of creditors to be held. However, such deeds are rarely used, as they do not prevent a bankruptcy petition from being presented by a non-consenting creditor.
Prior to the Insolvency Act 1986 the execution of almost any deed of arrangement including the steps taken prior to its execution constituted an act of bankruptcy within the meaning of the Bankruptcy Act 1914 section 1. Any creditor who was aware of these actions could present a bankruptcy petition based on those actions. Such deeds were therefore vulnerable to pressure from any non-assenting creditor and consequently this restricted their use. The deeds of arrangement procedure was reviewed and minor amendments were made, the principal being the removal of the reference to an act of bankruptcy. However there is still no provision to prevent a non-assenting creditor from presenting a bankruptcy petition.
The provisions are now contained in the Deeds of Arrangement Act 1914 (DOAA14), and the Deeds of Arrangement Rules 1925 (DOAR25), (as amended by the Administration of Justice Act 1925, and the Insolvency Acts 1985 and 1986).
Although the execution of a deed is no longer an act of bankruptcy, a debtor may still be deterred from contacting his creditors to consider a proposed deed since any non-assenting creditor will retain the option of presenting a petition for bankruptcy. Deeds of arrangement do have advantages in that only a simple majority of creditors in number and value are required and they may in some cases be cheaper and simpler than individual voluntary arrangements as there is no nominee, no report to court and it is not always necessary to call a meeting of creditors. However, the debtor proposing a deed does not have the "binding" protection afforded to a debtor proposing a voluntary arrangement by an interim order.
A supervisor under an individual voluntary arrangement may consider and recover any transactions defrauding creditors under section 423. The trustee under a deed of arrangement is unable to recover preferences or dispositions of the debtor’s property which may be recoverable by a trustee in bankruptcy. Therefore creditors agreeing to a deed of arrangement would need to be satisfied that the debtor has acted reasonably and no such transactions have occurred. Creditors may feel that a supervisor under a voluntary arrangement is able to exercise greater control over a debtor than a trustee under a deed e.g. if the debtor fails to comply with the voluntary arrangement the supervisor may implement bankruptcy proceedings. In practice, deeds are hardly used at all but when they are it is usually in small cases where there is a measure of goodwill between the debtor and his/her creditors.
When an individual becomes aware of his/her insolvency he/she may arrange a meeting with his/her advisors to discuss the alternative options available to him/her. It may be desirable to contact major creditors to ascertain if a proposed deed would be considered favourably since there is little point in preparing detailed proposals which are likely to be rejected.
The decision may then be taken to call an informal meeting of creditors. Whilst there is no statutory requirement to convene such a meeting and it is possible for a debtor to execute a deed and circulate creditors for their assents, it is good practice to hold a meeting and a more satisfactory method of seeking creditors' approval. In small cases where there are few creditors it may be possible to approve an entire arrangement without using these procedures. There is no statutory form of notice and a simple letter from the debtor or his/her advisors indicating the time, place and date of the meeting and its purpose will suffice. The meeting may approve the proposed trustee or appoint another insolvency practitioner. A committee of creditors may be requested to submit a statement of claim in order that a statement of affairs can be prepared and also requested that no precipitate action be taken pending the meeting.
The debtor, with the assistance of his/her advisors, should prepare a report outlining the reasons for the proposal including the likely effect of the deed. If it is to be accepted by creditors the proposal should offer a better return to creditors than would be the result in a bankruptcy. Apart from the saving in bankruptcy costs it is usual to point out additional savings or benefits to the creditors e.g. a more commercial realisation may be achieved by placing the assets promptly in the hands of a deed trustee rather than from a forced sale after a bankruptcy order has been made, or the proposal may involve the debtor remaining in business and making payments to creditors from his/her income.
There is no statutory form for any of the deeds referred to below and consequently there exists considerable flexibility, which can be advantageous in adapting the deed to the circumstances.
The DOAA14 applies to a deed of arrangement which includes any class of instrument detailed below which is made for the benefit of a debtor’s creditors generally or three or more of the debtor’s creditors provided that he/she is insolvent at the time the deed is executed. A debtor who is not insolvent may also execute a deed in favour of his/her creditors generally.
The classes of instruments include:
The most common instrument is an assignment of substantially all the debtor’s assets to a trustee for the benefit of creditors. The DOAA14 does not apply to oral agreements nor any instrument entered into by a firm of persons in partnership. A deed is revocable until its execution is communicated to creditors. A deed which reserves some benefit for the debtor is not necessarily void, it has to be determined whether the deed was intended to benefit the debtor at the expense of the creditors.
Every deed is a contract and is governed by the ordinary principles of the law of contract notwithstanding the provisions of the DOAA14. Its effect and the rights and liabilities of the various parties under the deed depends on its own terms, there being no prescribed form and consequently no prescribed effect.Where one party fails to fulfil a condition of the contract, the other party may be released from his/her liability.
Notes: [DOAA14 s1]
A deed must be registered with the Registrar at the Insolvency Service's Insolvency Practitioner Unit in Birmingham within 7 days after its execution or, if it is executed out of England, within 7 days after it should arrive in England by ordinary post, if posted within one week of execution.
Any deed not registered within this time is void. Where the time for registering a deed expires on a Sunday (or any day on which the registration office is closed), registration will be valid if made on the next following day on which the office is open. The High Court or a judge thereof, upon being satisfied that an omission to register a Deed of Arrangement within the time required was accidental or due to inadvertence, may extend the time for registration. The following documents are required to register a deed:
A deed which is for the benefit of some specified creditors does not have to be registered if the debtor is not insolvent (Re Spinks’ Trustee v Dicker, The Times 26 October 1978). A deed of assignment executed by a foreign debtor in his own country, and valid by law, does not require registration and the trustee under the deed is entitled to goods in this country belonging to the debtor at the date of registration. A deed executed in Scotland by a debtor domiciled in England does not require registration under Scottish law nor is it void for lack of registration in England (Re Pilkington’s Will Trusts  Ch574). Where a deed of arrangement concerns land, the deed must also be registered with the Land Registry in accordance with the Land Charges Act 1925.
Notes: [DOAA14 s2][DOAA14 s8][DOAA14 s7][DOAR25 r14][DOAA14 s5(1)][DOAA14 s5(1)][DOAR25 r6]
Deeds are registered with the Registrar at Insolvency Practitioner Unit, Birmingham. The registrar shall keep a register which should contain an abstract of the contents of the deed including:
The court may extend the time for registration or order any omission or misstatement of the name, residence or description of any person to be supplied or rectified, if satisfied that the omission was accidental or due to inadvertence or to some cause beyond the control of the debtor (other than negligence). Where the debtor’s place of business or residence is situated outside the London insolvency district, the registrar shall within 3 days of registration send a copy of the deed to the registrar of the county court of the district where the business or residence is situated.Notes: [DOAA14 s6][DOAA14 s7][DOAA14 s10] and [DOAR25 r14]
The register is open for public inspection between the hours of 10 am and 4 pm Monday to Friday. Any person is entitled to search the register upon payment of the appropriate fee and to inspect, examine and make extracts from the registered deed. Alternatively, deeds can be inspected at the court at which they have been filed where office copies are also available on payment of the appropriate fee.
Note: [DOAA14 s9], [DOAR25 r10] and [DOAA14 s25]
A deed which is for the benefit of the debtor’s creditors generally shall be void unless it receives the assent of a majority in number and value of creditors within 21 days of registration. Assent is given by executing the deed or providing the trustee with a witnessed written assent. In calculating the majority in number, those creditors whose claim are less than £10 are left out of the account but they are included in calculating the majority in value. A creditor holding security shall be reckoned as a creditor only in respect of the balance (if any) due after deduction of the value of the security. The debtor must make a full disclosure of all creditors because assent is required from a majority of all existing creditors, not just those declared by the debtor. Any undisclosed creditors who later refuse to assent may displace the majority and therefore upset the deed. The trustee must file a statutory declaration that a majority of creditors in number and in value have assented to the deed within 28 days of registration of the deed. This period may be extended by order of the court. Delays may occur after the approval of a deed by major creditors, if a large number of small creditors who were not present at the meeting have failed to respond, so that a majority in number is not available. It may be useful to circulate such creditors before the meeting so that as soon as adequate assents are received the deed can be formally executed.Notes: [DOAA14 s3]
A deed can be void or voidable for one of the following reasons:
If a deed is void the trustee should give notice as soon as practicable to creditors and the Registrar.Notes: [DOAA14 s2] [DOAA14 s11] [DOAA14 s3] [s339-341, s423-425] [DOAA14 s20]
A creditor who does not assent to the assignment can still sue the debtor and present a bankruptcy petition. Such a creditor has no remedy against the trustee under the deed for breach of duty. A creditor who, with full knowledge of the facts, has assented to the assignment cannot sue the debtor or present a bankruptcy petition.
Where a creditor carries on business at several branches, an assent by one branch to a deed of assignment will bind the creditor in respect of all debts due to him even though other branches may have dissented (Re Dunlop Rubber Co Ltd v W. B Haigh & Son  1 KB 347).
A trustee under a deed of arrangement made for the benefit of creditors generally must be a qualified insolvency practitioner and must provide the required security which should be filed at court, unless a majority in number and value of the creditors agree to dispense with this security.
The deed should give the trustee adequate powers to ensure that it is not limited in scope and that its intentions are achieved e.g. if the basis of the scheme is that creditors are to be paid out of future income, it may be desirable that the deed gives the trustee power to sell the debtor’s assets if realisations are less than expected.
All monies received by the trustee under a deed of arrangement must be banked in an account opened in the name of the debtor’s estate at one of the main clearing banks. The trustee does not have to use the Insolvency Services Account. If the trustee carries on a business, he must maintain a separate trading account. If a trustee acts under a deed of arrangement after he is aware that it has become void either because of non-compliance with any of the DOAA14 requirements or because he has failed to provide security, he may be liable to a daily default fine.Notes: [s388(2)][DOAA14 s11][DOAA14 s11] [DOAR25 r33] [DOAA14 s12]
The deed will usually set out the manner in which the trustee is to be remunerated although this is frequently left to be settled by the creditors or the creditors’ committee. It is advisable that the deed includes a provision for an application to court or some other procedure in the event of disagreement.
The trustee should maintain proper records for the administration of the deed including trading accounts, if appropriate. Within 30 days of every 12 month period the trustee must submit a copy of his receipts and payments account to the Registrar at The Insolvency Service's Insolvency Practitioner Unit in Birmingham. Where the trustee carries on a business, a trading account must be forwarded as a distinct account. Failure to submit accounts will result in the trustee being liable to a daily default fine and he/she shall also be guilty of contempt of court.
The trustee must also send to each creditor who assented to the deed a statement of his account at the end of 6 months from the date of registration of the deed and at the end of every subsequent 6 month period until the estate has been finally wound up. If a trustee fails to do so he shall be guilty of contempt of court.
A majority of assenting creditors (in number and value) may request the The Insolvency Service's Insolvency Practitioner Unit to audit the accounts of the trustee, by writing to the Registrar. In such circumstances, the creditors will be requested to provide security to cover the costs of the audit.Notes: [DOAA14 s13], [DOAR25 s31 and s33][DOAA14 s14][DOAA14 s15]
A trustee should distribute funds in accordance with the terms of the deed. A trustee will be guilty of a misdemeanour if he pays to any creditor a sum larger in proportion to the creditor’s claim than paid to other creditors entitled to the benefit of the deed unless the deed authorises him to do so or unless such payments are made to a creditor entitled to levy distress or a preferential creditor (Re Shenton  Ch 651). A trustee who distributes monies due to a preferential creditor amongst unsecured creditors may commit a breach of trust (Re Moss  W.N. 171). Where a deed provides for distribution as in bankruptcy the ordinary principles of set off are applicable. Where a deed does not provide for the payment of debts with interest, in the event of there being a surplus the creditors are not entitled to any interest on their debts, which should be returned to the debtor. The debtor or any creditor can apply to the court 2 years after the registration of the deed for an order that any unclaimed dividends and undistributed funds be paid into court.Notes: [DOAA14 s17] [DOAA14 s16]
The trustee should ensure that all assets have been realised and all income recovered as covered by the deed. The costs of the administration must be settled which includes the trustee’s remuneration, solicitor’s charges and BIS fees. If there are sufficient funds to pay creditors in full and satisfy the costs of the administration, then surplus funds should be returned to the debtor. The trustee should complete a final return of receipts and payments up to the date of ceasing to act, verified by affidavit which is filed with the Registrar. It is good practice to send a summary of the receipts and payments account to all creditors together with a report on the outcome of the administration. The trustee is automatically released and no formal application is required.
Where a deed is void in the circumstances set in paragraph 57.59, the trustee has no liability providing that he can show that he did not know and had no reason to suspect that the deed was void and that when it was brought to his attention, he took the appropriate action. When a deed is void for any reason other than that, being for the benefit of creditors generally, it has not been registered within the specified time, the trustee should as soon as practicable after he becomes aware that it is void, give notice in writing to each creditor whose name and address he knows, and file a copy with BIS. If the trustee continues to act when he is aware that the deed is void or the appropriate security has not been obtained, he may be liable to a fine.
Notes: [DOAA14 s19] [DOAA14 s20][ DOAA14 s12]
The death of the debtor does not affect the continuance of a deed and the trustee retains the powers to pay creditors in accordance with the deed. The trustee should give notice to the Registrar and the court of the death of the debtor. A difficulty will arise if the deed provided for the debtor to contribute from his earnings or his business. Any covenants in the deed relating to the right of the trustee to sell the debtor’s property or prohibiting the sale without the trustee’s consent are binding against the debtor’s representatives.
The deed should provide for the action to be taken in the event of the death of the trustee. It would be usual for the creditors to appoint a new trustee when a vacancy occurs. However, if there was any difficulty in convening a meeting of creditors and executing the deed of appointment, consideration should be given to applying to court for an order appointing a new trustee under the Trustee Act 1925 section 41(2). The executors of the trustee’s estate have no power to deal with the debtor’s estate although they would have the power to appoint a new trustee under the Trustee Act 1925 section 36.
A deed executed before the presentation of a bankruptcy petition is not invalidated by its presentation and the deed trustee’s title is not affected. Where a deed of arrangement is void by reason that the requisite majority of creditors have not assented to the deed or where the deed was for the benefit of three or more creditors and the debtor was insolvent at the time of the execution of the deed and the deed was not registered as required, but is not void for any other reason, and a bankruptcy order is made upon a bankruptcy petition which is presented three months after the execution of the deed, the deed trustee is not liable to account to the trustee in bankruptcy for any dealings with or payments out of the debtor’s property which would have been proper if the deed had been valid if he proves that at the time he did not know and had no reason to suspect the deed was void.
Where a deed is avoided by reason of the bankruptcy of the debtor, any expenses properly incurred by the trustee under the deed in the performance of any duties imposed upon him by the Act shall be allowed or paid to him by the trustee in bankruptcy as a first charge on the estate (Green  1 KB 183). A creditor is entitled to prove in the bankruptcy for the balance of his debt.Notes: [DOAA14 s19][DOAA14 s21]
On the making of a bankruptcy order the official receiver should contact the deed trustee (see paragraph 57.51) and inform him of the making of the order. A deed that was correctly formed and is not void under DOAA14 sections 2 and 3 remains valid after the order. The official receiver should obtain a copy of the deed from the deed trustee together with a copy of his receipts and payments account. If the deed is conventionally and correctly drawn, so as to give no creditor any advantage that he would not have in bankruptcy, its execution would not seem to be capable of constituting a voidable preference under section 340. If the deed authorises the payments of debts other than pari passu (in equal proportion) it is possible that the deed could be attacked by a non-assenting creditor who could contend that they had been prejudiced by a voidable preference, although the deed was agreed and assented to by a majority of creditors. If a deed is not voidable under sections 339-342 it cannot be challenged under sections 423-425.