What is a Deed of Company Arrangement?
A Deed of Company Arrangement (‘DOCA’) is a proposal made to creditors of a company in voluntary administration to avoid the company being placed into liquidation. It is used as a flexible corporate recovery tool to save a company from terminal collapse. Put simply, a DOCA is a promise of a repayment plan. Once approved by creditors, the DOCA is a legally binding arrangement between a company, its creditors and the Deed Administrator which governs how the company’s affairs will be dealt with.
Aim of a Deed of Company Arrangement
A DOCA aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both.
Who is bound by a Deed of Company Arrangement
A DOCA binds all unsecured creditors, even if they voted against the proposal. It also binds owners of property, those who lease property to the company and secured creditors, if they voted in favour of the DOCA. In certain circumstances, the Court can also order that these people are bound by the DOCA even if they didn’t vote for it.
The DOCA does not prevent a creditor who holds a personal guarantee from the company’s director or another person from taking action under the personal guarantee to be repaid their debt.
Benefits of a Deed of Company Arrangement
There are numerous benefits for a DOCA, this which varies with each individual DOCA proposal. The following are some of the more common benefits in accepting a DOCA as opposed to placing the company in liquidation:
- Ensured a greater return to ordinary unsecured creditors
- Allows for the implementation of a revised business plan and strategy
- The continuation of the company’s business or part thereof with responsibility for trading resting with either the Directors or the Deed Administrator
- Payment to creditors of a fixed sum, or specified rate in the dollar or a percentage of profits payable in a lump sum or by way of installments over a period of time
- Injection of capital or the sale of certain assets
- Certain liability values can be minimised through a DOCA. For example, leave entitlements maybe accrued by the company in the normal course of business after a DOCA is executed and need not chrystallise as is the case in a liquidation scenario.
- Enables a company to offer creditors payment of less than a 100¢ in the dollar for their debts
- Insolvent trading and other insolvent actions cannot be pursued against a director
- Voidable insolvent transactions cannot be pursued against recipients of preferential payments or uncommercial transactions
- Certain tax advantages can be maintained by the company upon the completion of a DOCA
- All unsecured creditors’ claims against a company as at the date of the appointment of the Voluntary Administrator are bound by the DOCA
- Various assets (i.e. debtors, work in progress, intellectual property, goodwill) can be preserved and maximised through a DOCA
Issues to consider in making a successful Deed of Company Arrangement Proposal
The following are some of the key issues which must to be considered in making a successful DOCA proposal:
- Determining a business recovery plan / strategy prior to the appointment of a Voluntary Administrator
- Assess a company’s compliance history with taxation, industry and regulatory authorities. This is the key ingredient in obtaining support from the government, industry and regulatory creditors.
- Promises / repayment arrangements should only be made if they can be kept by the company
- Cashflow forecasts on the ongoing viability of a company post Voluntary Administration
- Related parties claims and deferral or a compromise of such claims in a DOCA
- Company’s prior relationship / history with creditors and its employees
- Funding for the proposed DOCA should be clearly demonstrated (i.e. future cash flows, property, third party sources or other sources)
- Liquidation comparisons and return for creditors
- Director’s net asset position
- Timing of a dividend
Monitoring a Deed of Company Arrangement
A Deed administrator is in charge of ensuring that the company carries out its commitments as specified in the DOCA. The extent of the deed administrator’s ongoing role will be set out in the DOCA.
Creditors can also play a role in monitoring the deed. If creditors have any concerns regarding the terms of the DOCA being met, they should take this up promptly with the Deed Administrator. Matters that may give rise for concern include deadlines for payments or other actions promised under the DOCA being missed.
Creditors also have the right when a DOCA is proposed and considered at the second creditors’ meeting to negotiate consequences of failure to meet such deadlines into the terms of the deed.
Any request to vary the deed proposal to include such consequences should be made before the deed proposal is voted on.
Default on a Deed of Company Arrangement
If a company defaults on the terms of the Deed, the Deed Administrator may call a meeting of creditors to terminate the Deed and place the company into liquidation.
Finalisation of a Deed of Company Arrangement
Where the company satisfies all of its requirements pursuant to the DOCA, it will be released from the DOCA and will no longer be subject to any formal insolvency administration.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.