In Short
- A Deed of Company Arrangement (DOCA) helps companies facing insolvency avoid liquidation by agreeing with creditors on debt repayment and business management.
- The voluntary administrator proposes the DOCA, which must be approved by a majority of creditors both in number and value.
- The deed administrator manages the company under the DOCA, ensuring compliance and reporting to regulators until the arrangement ends.
Tips for Businesses
If your company is struggling financially, consider a DOCA as a way to keep trading and avoid liquidation. Ensure you seek professional advice to tailor the arrangement to your specific needs, understand the obligations involved, and maintain clear communication with creditors throughout the process.
When a company is facing insolvency, a deed of company arrangement (DOCA) can help the company avoid liquidation and remain intact, or continue some (or most) of its business. A DOCA can be put in place after a company enters voluntary administration. It is a binding agreement between the company and its creditors, setting out how the company will manage its affairs and assets to repay outstanding debts. Entering into a DOCA can allow you to avoid the total and immediate winding up of your company and can allow creditors to get a better return on their investments.
What is the Purpose of a DOCA?
If a company is nearing insolvency and in severe financial difficulty, it can enter into voluntary administration. Voluntary administration is where a qualified insolvency professional (the ‘voluntary administrator’) takes control of the company to work out:
- whether it can be saved; or,
- the best way to deal with the affairs and assets of the business if it cannot be saved.
What Should a DOCA Cover?
To be effective, a DOCA must clearly set out how the company will manage its affairs and deal with its assets. For example, a DOCA must include:
- who is to be appointed the administrator of the DOCA;
- the details of all property that is available to pay creditors;
- the nature and term of any moratorium (moratoriums prevent creditors from taking certain activities for a set length of time, such as commencing legal proceedings or taking possession of company property);
- how and when the DOCA will terminate;
- the extent to which the company will be released from its debts;
- details of the claims which led to the DOCA; and
- the order in which any proceeds of the company’s assets are to be distributed.
How is a DOCA Put in Place?
The voluntary administrator will propose a DOCA to the company’s creditors at a meeting of creditors. A DOCA must be approved by both:
- 50% in number of creditors; and
- 50% by value of the total amount owed to creditors.
If the creditors vote for the proposal that the company enter into a DOCA, the company must sign the DOCA within 15 business days following the creditors’ meeting (unless a court allows a longer time). If the company fails to sign the DOCA within this timeframe, it will automatically enter into liquidation.
Each DOCA is different and should be tailored to the company’s specific circumstances. While certain elements are common, the DOCA should clearly state any conditions the company must meet for the arrangement to stay in place, such as hitting financial targets or meeting restructuring milestones.
Challenging a DOCA
While a DOCA binds all unsecured creditors, they can challenge it in certain situations. Creditors who believe the DOCA is unfair or oppressive can apply to the court to have it varied or terminated. The court may make such an order if it is satisfied that:
- the information provided to creditors was false or misleading;
- the DOCA is unfairly prejudicial to, or unfairly discriminatory against, one or more creditors; and
- the DOCA is contrary to the interests of the creditors as a whole.
Who Manages the DOCA?
When the company executes a DOCA, the voluntary administration period of the company effectively ends. Instead, the DOCA will govern the company.
The creditors will appoint a person as the ‘deed administrator’ of the DOCA. The deed administrator must oversee the company’s management under the DOCA. Although the creditors may appoint another person to be the deed administrator, the deed administrator is typically the person who was the company’s voluntary administrator. This is because they are already familiar with the company, and it is therefore usually preferable for both the company and creditors that they continue this role.
The deed administrator plays the primary role of ensuring the company complies with its commitments and obligations under the DOCA (and that any others who have obligations under the DOCA do the same). They are also the person who creditors or others will approach if they are concerned that the company is failing certain obligations.
The deed administrator has reporting obligations to ASIC on behalf of the company. For example, they must lodge a detailed list of the company’s receipts and payments with ASIC every six months.
What is the Effect of a DOCA?
The DOCA, in setting out the management affairs of the company, is binding on:
- the company, its officeholders (i.e. its directors and company secretaries) and shareholders;
- all unsecured creditors (even those who voted against the proposal);
- owners of company property;
- those who leased property to the company; and
- secured creditors who voted in favour of the DOCA.
Secured creditors who did not vote in favour of the DOCA are not bound by it. However, they cannot enforce their security or take action against the company’s property without the court’s permission. This provides an important protection for the company as it works to implement the DOCA.
While a company is subject to a DOCA, it must include the words ‘subject to a Deed of Company Arrangement’ on:
- any public documents; and
- other documents, such as contracts, that the company enters into.
The DOCA will terminate in accordance with its terms. Usually, this is when the company makes a final payment to its creditors under the terms of the DOCA. Once the DOCA is terminated, the company resumes control of its operations, and the administration period ends. If the company is solvent, it can continue trading as a going concern. It is also possible for a court or the creditors to terminate the DOCA if the company fails to abide by its terms.
Why Consider a DOCA?
A DOCA offers several advantages for companies facing financial difficulties, such as:
- Business Continuity: Unlike liquidation, a DOCA allows the company to continue operating, potentially preserving jobs and business relationships.
- Flexibility: a DOCA can be tailored to the specific circumstances of the company, offering more flexible solutions than other insolvency procedures.
- Cost-Effective: Compared to liquidation, a DOCA can be a more cost-effective way to resolve financial issues.
- Better Returns for Creditors: In many cases, a DOCA can provide creditors with a better return than they would receive in liquidation.
- Reputation Management: By avoiding liquidation, companies can maintain better relationships with stakeholders and preserve their market reputation.
However, it is important to note that a DOCA is not always the best solution. Companies should carefully consider their options and seek professional advice before making any decisions.
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Key Takeaways
Although financial instability can be daunting, your company may have several options available to address it. Entering into a Deed of Company Arrangement can help you keep your company solvent and active, rather than subjecting it to a winding-up process. A DOCA can provide a path forward, but it also imposes obligations and carries risks that you must manage carefully. Approach the process thoughtfully. Seek professional legal and financial advice to decide if a DOCA suits your situation and to structure.
If you need help with a DOCA, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A DOCA is a formal agreement between a company and its creditors that sets out how the company will manage its affairs to repay debts. It helps the company avoid liquidation, continue operating, and often delivers better returns to creditors than winding up the company would.
The deed administrator, usually the voluntary administrator, manages the DOCA. They ensure the company complies with its obligations, monitor payments to creditors, and report regularly to ASIC. They also act as the point of contact for creditors concerned about non-compliance or the company’s progress under the arrangement.
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