When a company is facing insolvency, a deed of company arrangement (DOCA) can help the company avoid liquidation and remain intact or capable of continuing some or most of its business. A deed of company arrangement is a binding agreement between a company and its creditors setting out how the affairs and assets of the company will be dealt with if the company is in danger of becoming insolvent or has entered voluntary administration. Entering into a deed of company arrangement can allow you to avoid the total and immediate winding up of your company and creditors can also get a better return on their investments.
What is the Purpose of a Deed of Company Arrangement?
Voluntary administrators are appointed to consider whether the company can be saved or should be wound up. One of the avenues that administrators’ consider proposing to creditors is a Deed of Company Arrangement.
The primary purpose and advantage of a DOCA is to produce a better outcome for all relevant parties, rather than wind the company up in liquidation.
The Deed of Company Arrangement
The DOCA must include terms that cover the following:
- Who is to be appointed deed administrator;
- Identification of the property that is available to pay creditors;
- The nature and term of any moratorium;
- The extent to which the company will be released from its debts;
- How and when the DOCA will terminate;
- The relevant day in which claims arose if the DOCA is to include them; and
- The order in which any proceeds of the company’s assets are to be distributed.
Execution of the DOCA
The company must execute the DOCA within 15 business days after the end of the meeting of creditors, where the creditors resolved to enter into the DOCA. The administrator must also execute the DOCA. If you do not execute the DOCA within the relevant time, the company will automatically go into liquidation. In these circumstances, the administrator will become the liquidator.
The Deed Administrator
When a company executes a DOCA, the voluntary administration effectively ends. At that time, the administration becomes a deed administration governed by the DOCA.
A deed administrator of the DOCA must be appointed (usually the voluntary administrator). However, the creditors can appoint another deed administrator. Given that the voluntary administrator is already familiar with the company, it is usually preferable for them to continue in this role
Effect of the DOCA
The DOCA binds the company, its officers and its members. It also releases the company from its debts where the DOCA provides a release and binds the relevant creditor in respect of debts and claims.
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. The directors of the company regain control of the company, although they can have some restrictions.
The DOCA terminates as per the terms of the DOCA. Usually, this is when the company makes a final payment as per its terms to the creditors. Once the agreement is terminated, the company can continue as a solvent company and moves on from the administration. It is also possible for the court and/or the creditors to terminate the DOCA if the company doesn’t abide by its terms.
Overall, a DOCA provides the parties with a way to move forward after a company finds itself in financial difficulty and appointed an administrator. If the company can continue, it may result in a better outcome for all rather than winding it up.
Financial instability for a company can be daunting, but there are several options available to you. Entering into a Deed of Company Arrangement can help you keep your company solvent and active, rather than subject to a process of winding up. If you own or operate a company and require advice in respect of a Deed of Company Arrangement, receivership or liquidation, get in touch with our insolvency lawyers on 1300 544 755.
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