25 May 2017
A Deed of Company Arrangement (“DOCA”) (“Deed”) is a means by which a Director or third party of a company in voluntary administration can make a proposal to creditors of the company to pay all or part of the company’s debts and then be free from those debts. A DOCA provides an alternative to Liquidation for a company that has prospects of turning the business around and/or restructuring.
How is a DOCA Proposed?
A DOCA Proposal can be submitted to the Voluntary Administrator of the company during the Voluntary Administration process. The Voluntary Administrator (“VA”) will assess the proposal and compare the possible outcomes of the proposed DOCA with the likely outcome in a liquidation. The VA will report the likely outcomes to creditors and provide a recommendation as to which option is in the best interests of creditors. Creditors will be entitled to vote on the future of the company at the second meeting of creditors from the following options:
- End the voluntary administration and return the company to the directors’ control;
- Approve a Deed of Company Arrangement through which a company will pay all or part of its debts and then be free of those debts; or
- Wind up the company and appoint a Liquidator.
What constitutes a DOCA Proposal?
The terms of a DOCA Proposal are very flexible and will usually provide for the company to pay all or part of its debts, usually over a period of time, and then be free from those debts. It will usually allow for the company to continue trading its business. The funds may be contributed by the Director, a third party or from revenue if the business is able to continue trading. The control of the company will also return to the company’s Director upon the execution of the DOCA. Certain information must be included in a DOCA including:
- The name of the deed administrator;
- The property that will be used to pay creditors;
- The debts covered by the deed and the extent to which those debts are released;
- The order in which the available funds will be paid to creditors (the DOCA must ensure that employees have a priority in payment of outstanding employee entitlements unless the eligible employees agree by a majority in both number and value to vary this priority);
- The nature and duration of any suspension of rights against the company;
- The conditions (if any) for the DOCA to come into operation;
- The conditions (if any) for the DOCA to continue in operation; and
- The circumstances in which the DOCA terminates.
There are also certain terms that are automatically included in the DOCA, known as the ‘prescribed provisions’, unless the DOCA says they will not apply. These include matters such as powers of the Deed administrator, termination of the DOCA and the appointment of a committee of creditors (called a ‘committee of inspection’). The VAs report will detail which prescribed provisions are applicable, excluded or varied.
How is a DOCA established?
After receiving the VA’s report which outlines the terms of the proposed DOCA and provides a recommendation, a meeting of creditors is convened at which creditors must decide whether they want to vote to accept the DOCA Proposal or place the company into Liquidation (or return the company to the control of the Director/s).
Creditors may want to negotiate the terms of the proposed DOCA before it is voted on. Any request to vary the terms of the proposed DOCA should be submitted to the VA prior to the DOCA proposal being voted on.
If creditors resolve to accept a DOCA Proposal (by voting at a meeting of creditors), the company must sign the DOCA within 15 business days of the creditors’ meeting (unless the Court allows further time), otherwise the company will automatically go into Liquidation.
Who is bound by the DOCA?
The DOCA binds all unsecured creditors, even those who may have voted against the proposal. Other parties bound by the DOCA, if they vote in favour of the DOCA, include:
- Owners of property;
- Parties that lease property to the company; and
- Secured creditors.
In certain circumstances, a Court may Order that these parties are all bound by the DOCA, even if they did not vote to accept the proposal.
Monitoring the DOCA
Upon the execution of the DOCA, the VA becomes the Deed Administrator. The Deed Administrator’s role includes:
- Monitoring the DOCA and ensuring the company (and any other parties who have made commitments under the DOCA) comply with their obligations;
- Dealing with creditor claims (Proofs of Debt); and
- Paying dividends in accordance with the terms of the DOCA.
Any material contraventions of the DOCA must be informed by the Directors to the Deed Administrator and the Deed Administrator must notify creditors pursuant to the provisions of the Insolvency Law Reform Act 2016 (“ILRA”).
The Deed Administrator’s role is ongoing until the terms of the DOCA have been fulfilled or the company is wound up.
A DOCA ends in the following circumstances:
- The terms of the DOCA have been fulfilled and creditors have been paid;
- If specific terms of the DOCA have not been met and the DOCA provides that in these circumstances the DOCA terminates and the company automatically goes into Liquidation;
- The Deed Administrator calls a meeting of creditors if it appears likely that the terms of the DOCA cannot be fulfilled and creditors vote to end the DOCA and place the company into Liquidation; or
- An application to the Court results in an Order that the DOCA is terminated and the company is wound up.
Where the DOCA is terminated and the company is wound up, the Deed Administrator will automatically become the Liquidator.
If your company is experiencing financial difficulty, it is vital to act promptly and obtain independent, professional advice about the best course of action in your circumstances.
As a Director, you have the ability to appoint a Voluntary Administrator to take control of the company and to deal with creditors. This provides the company some breathing space and takes the pressure off you as a Director and allows you to submit a proposal for a DOCA to pay all or part of the company’s creditors. A DOCA provides an alternative to Liquidation where a company is experiencing financial difficulty and may be helpful if a company wants to restructure its business going forward but needs to deal with its debts.
Acting promptly will not only ensure you fulfil your duties as a Director but allow the greatest possible likelihood of being able to achieve a successful restructure and save the business and company.
Rodgers Reidy are highly specialised in dealing with insolvent companies and companies experiencing financial difficulty and have experience across a broad range of industries. Contact Rodgers Reidy now for a confidential discussion in relation to your business circumstances.
1. ASIC Information Sheet 74 – Voluntary Administration: A guide for creditors