Proposing a Deed of Company Arrangement (DOCA)
Part of the voluntary administration process is proposing a Deed of Company Arrangement, or a DOCA. A deed of company arrangement (DOCA) is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. If your company is going through the involuntary administration process, knowing exactly what a DOCA is and how it works is essential. Revive Financial specialises in giving expert advice and can help you understand the importance of a DOCA and how it can help to save your company.
During the voluntary administration process, the voluntary administrator is appointed to consider all of a company’s options on whether it can be saved or should be wound up. Creditors of your company may vote for a DOCA proposal which must be signed within 15 days of the creditors meeting
A DOCA aims to:
- Govern how a company’s affairs will be dealt with
- Maximise the chances of the company
- Maximise as much as possible of the company’s business
- Provide a better return for creditors than an immediate winding up of the company
A DOCA prevents your company from going straight into liquidation, so it is important that it is signed as soon as possible.
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A company must first enter Voluntary Administration in order to enter a DOCA. While the company is in Voluntary Administration, the company directors, or any other party, may submit a proposal for a DOCA to the Administrator appointed to the company.
Within 20 business days of their appointment, the Administrator must give to creditors a report on the expected return to creditors under the proposed DOCA (or each of the DOCAs if multiple proposals) or in liquidation. The administrator’s report will contain his recommendation on which option is better for creditors and provide information to help them decide the company’s future at a creditors meeting. The meeting is required to be held within five business days of the report date (i.e. within 25 business days of the administrator’s appointment).
At the meeting held to consider the company’s future, creditors will vote on whether to accept the proposal for a DOCA or to place the company in liquidation.
If creditors accept the DOCA proposal, the company will enter a formal DOCA agreement prepared by a solicitor. The DOCA agreement is usually entered into shortly after the meeting and must be signed within 15 business days of the creditors meeting. If it fails to do so, the company will enter liquidation.
Key features of a DOCA proposal will be:
- The Company assets available to be sold to pay creditors, who will sell them and the timeframe for their sale,
- Payments the company will make from future trading profits or external sources and the source of those funds,
- Creditors, often related parties, who have agreed not to prove in the DOCA to improve the return to other creditors,
- The order of priority for the funds to be distributed to creditors – employees must receive priority for their superannuation and other entitlements,
- Any parties guaranteeing the company’s obligations under the DOCA,
- Who the Administrator of the DOCA will be (known as the deed administrator, and usually the administrator),
- The debts covered by the deed and the extent to which those debts are released, and
- The conditions for the DOCA to come into operation or terminate.
Additional inclusions may be made if those proposing the DOCA require a restructuring of the company’s shareholding.
A DOCA is a very flexible and powerful restructuring mechanism. Examples of restructuring measures which might be incorporated to give the company the best chances of survival include:
- Refinancing or obtaining new finance facilities including debtor finance,
- Vacating leased premises and including the balance payable in the DOCA,
- Downsizing the workforce to match the requirement for the company’s future.
- Conducting a debt for equity swap. A DOCA proponent such as a director or shareholder, investor or a creditor, may provide support for a DOCA on the condition of all, or a minimum shareholding in the company. This can be referred to as an equity ‘cram down’. Share transfers can occur by consent, or as the shareholding is likely worthless in insolvency, the Administrator can apply to court to order the transfer, and
- Creation of a creditors’ trust shortly after the commencement of the DOCA. Creation of a creditors’ trust can fulfil the DOCA obligations so the company can quickly exit the appointment. However, there are strict ASIC guidelines about when it is appropriate to use a creditors’ trust.
The Administrator’s report will generally provide the following information to assist creditors decide whether it is in their interests to accept a DOCA proposal or place the company in liquidation:
- The key features and a copy of the DOCA proposal,
- The estimated return to creditors and the timeframe for payment,
- A detailed explanation of the Administrator’s investigations and findings,
- Details of the Administrator’s expected costs, the company’s assets and creditors’ claims in the liquidation,
- A comparison of the expected return to creditors under the DOCA or in liquidation,
- Comments about the company’s ability to trade profitably in the future and to comply with the terms of the DOCA,
- The Administrator’s recommendation as to whether creditors should vote in favour of the DOCA proposal or liquidation, and
- Any other information which would be relevant to creditors in making their decision about the company’s future.
The company’s future is dependent on which option the creditors attending the meeting in person or by proxy vote on. Voting is on the voices, however a poll is often called. Where a poll is called, the company’s proposal for a DOCA will only be accepted if a majority in number and majority in dollar value vote in favour. If the requisite votes are not received, the company will enter liquidation unless the Administrator exercises his casting vote to accept the DOCA proposal.
The Administrator may exercise their casting vote if voting is split. For example, where the majority in number vote in favour of the DOCA proposal, but the majority in value vote against. The Administrator needs to carefully consider their decision and use their vote in the interests of the company and creditors as a whole. If an Administrator has recommended in his report that creditors accept the DOCA proposal, he will generally exercise his vote in favour of this option.
Once creditors have voted to accept the company’s DOCA proposal, the formal DOCA agreement will be prepared by a solicitor and include the following key terms:
- Who is to be appointed as the deed administrator,
- The company’s property that is available to pay creditors i.e. assets or future instalments,
- The nature and term of the moratorium provided i.e. preventing creditors from taking legal action during the DOCA,
- The extent to which the company will be released from debts it owes,
- How and when the DOCA will terminate,
- The date for creditors to calculate their claims in the DOCA, generally the date the company entered Voluntary Administration, and
- The order in which the DOCA proceeds are to be distributed to creditors.
The 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 deed. In certain circumstances, the court can also order that these people are bound by the deed even if they didn’t vote for it.
In short, no. A DOCA settles creditors’ claims against the company, but does not affect a creditor’s rights to pursue the directors for the balance of the debt owed under a personal guarantee.
Similarly, if a director is liable to the Australian Taxation Office for their company’s PAYG and/or superannuation guarantee charge liabilities, a DOCA will not release the director’s personal liability.
That said, a DOCA can reduce the claims personal guarantee creditors and the ATO have by:
- Allowing a business to continue trading and meeting lease payments, finance payments,
- Generating profits to meet DOCA payments and possibly contribute to paying down personal guarantee claims, and
- In some cases, a DOCA can be structured to provide an improved return to certain creditors over others. It’s important here that all creditors receive an equal or better return than they would in liquidation, otherwise they may have grounds to set aside the DOCA as unfairly prejudicial.
As part of the restructuring, directors may seek to settle personal guarantee claims by agreement to pay a reduced amount, or instalments over time.
Yes. Subject to the company complying with the terms of the DOCA and not incurring further debts it cannot pay, the company will avoid liquidation and the potential claims a liquidator may have for:
- Insolvent trading,
- Recovering director drawings and loan accounts,
- Breach of director duties claims, and
- Claims for unfair preferences and uncommercial transactions.
A DOCA will be successfully completed when its terms have been fulfilled and funds have been paid to creditors.
A DOCA can be terminated early, leading to the company automatically entering liquidation, in the following circumstances:
- If specific circumstances are included in the DOCA for its automatic termination, and these circumstances exist;
- A meeting of creditors is called by the deed Administrator if it appears unlikely that the terms of the DOCA will be fulfilled and creditors vote to terminate the DOCA; or
- An application to the Court, generally by creditor or the Deed Administrator, results in an Order that the DOCA is terminated.
Arranging a DOCA provides a company a way to move forward after finding itself in financial difficulty. If the company can continue its business, arranging a DOCA may result in a better outcome for all parties involved rather than winding up the company and going into liquidation.
The important effects a DOCA will have on your company include:
- The DOCA binds the company, its directors, creditors, members and the deed administrator. This means that even if unsecured creditors did not vote in favour of the DOCA, they are bound by its terms if it is accepted,
- While your company is under a DOCA, it must include the words ‘Subject to a Deed of Company Arrangement’ on all public documents and contracts,
- The directors of a company regain control of the company but may be subject to restrictions of their role,
- The company must abide by the terms of the DOCA or risk termination of the DOCA, automatically leading to liquidation,
- A DOCA’s terms can be varied at any time during its life by resolution at a meeting of creditors, and
- The DOCA terminates after the company makes all final payments to its creditors.
Payment of debts owed to creditors of a company under a DOCA are generally paid in a similar way as in liquidation. However, the DOCA will specify the particular order for the classes of creditor, any creditors who agree not to approve for a return and the dividend process the deed Administrator will follow.
The deed Administrator will give notice to creditors to formally claim and prove their debt, admit or reject their claims and then pay them the return. The terms of the DOCA set out the order that creditors will be paid. Again, just like if a company was going through liquidation, the DOCA is required to give priority to ensure that all employee entitlements are paid in priority to other unsecured creditors, unless employees agree to waive this priority.
Further Information About Proposing a DOCA
Financial difficulties for your company can be intimidating, but if you understand the process and the options available to you it can become a stress-free process.
Acting early always results in better outcomes. Delaying action, depletes cash and assets, increases creditors’ claims, makes the company’s future more uncertain and creates an emotional atmosphere for the directors, employees and the company’s creditors. If your company is having financial trouble, contact our experts free confidential consultation.