When a company is facing insolvency, a deed of company arrangement (DOCA) can help the company to avoid liquidation and remain intact or capable of continuing some, or most, of its business. A DOCA can be put in place when the company is in danger of becoming insolvent or has entered voluntary administration. A DOCA is a binding agreement between a company and its creditors (i.e. the people owed money by the company) setting out how the affairs and assets of the company will be dealt with. 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. 

One of the methods that a voluntary administrator may use is a Deed of Company Arrangement. The primary advantage of a DOCA is that it may produce a better outcome for all relevant parties, rather than wind the company up in liquidation. 

What Should a DOCA Cover?

In order to be effective, a DOCA will need to comprehensively cover how the affairs and assets of the company will be dealt with. 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 time, the company will automatically go into liquidation. 

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.

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 can release the company from certain debts where the DOCA provides for that release. The directors of the company can regain control of the company, although they may face some restrictions. 

The DOCA will terminate according to the terms of the DOCA. Usually, this is when the company makes a final payment to its creditors under the terms of the DOCA. Once the DOCA terminates, the company can continue as a solvent company and its period of administration is over. It is also possible for a court or the creditors to terminate the DOCA if the company fails to abide by its terms.

Key Takeaways

Although financial instability can be daunting, your company may have several options available. 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. A DOCA can allow a company and its creditors to move forward when the company is in financial difficulty and may result in a better outcome for everyone.

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