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Deeds of Company Arrangement

What is a DOCA?

A DOCA is a formal written arrangement entered into by an insolvent company, its creditors and any other relevant party to resolve the company's debt problems. It can only be formed through the Voluntary Administration process under Part 5.3A of the Corporations Act. Agreements that are not formed under this process will not bind all creditors of the company.

How is a DOCA commenced?

A DOCA must be accepted by the required majority of the company's creditors at a meeting held during a voluntary administration of the company. A DOCA will actually come into force when it is executed by all of the parties to the deed.

What can be proposed in a DOCA?

Any legal arrangement can be proposed to creditors.

Commonly the proposal will be for the payment of funds either as a lump sum after the signing of the DOCA, or by periodic payments over some time period. It may also include the sale of assets owned by the company, or the payment of profits generated from continued trading.

It is common that parties associated with the company will subordinate their claims, thereby increasing the rate of distribution to non-associated creditors, and that securities or guarantees would be provided by these parties.

What will be acceptable to creditors?

Generally creditors will accept a proposal if the dollar return will be greater than the dollar return from the liquidation of the company, and there is more certainty of receiving that return. However there are times when commerciality will not be the deciding factor. If a director has been dishonest or caused creditors significant grief, creditors may decide not to accept a proposal.

What is the role of the deed administrator?

The deed administrator usually only monitors the DOCA to ensure that the provisions are fulfilled, that the company continues to trade in accordance with their budgets, and distributes dividends at the appropriate times. The directors will generally manage the company during this period.

What should creditors look for in a DOCA?

Firstly creditors should consider whether the DOCA will give a better and more certain dollar return than a liquidation. If not, then a liquidation would seem the obvious choice.

Secondly creditors should consider whether any associated parties are willing to guarantee or provide security to support any contributions or other conditions under the DOCA. If not, creditors may believe that the DOCA will not survive or that the directors are not serious about the proposal.

Creditors should examine information that shows the ability to make the payments over the period. There is little point accepting a deed that is founded only on hope and luck.

Will a DOCA stop personal guarantees being exercised?

No. The statutory restriction on guarantees is lifted at the end of the voluntary administration. A guarantee is a private obligation made between the guarantor and the holder of the guarantee. Nothing in a DOCA can oblige a holder of a guarantee to release or not enforce their rights.

Can the company deal with its assets while under a DOCA?

This depends on the terms of the DOCA. Usually the deed will say that the company cannot secure, refinance or sell fixed assets without the approval of the deed administrators. Assets needed in the trading of the business (stock) will have to be available to the company if it is to trade under the DOCA.

Do creditors need to attend meetings?

No. Creditors can ignore the meeting process and still prove for a dividend. Creditors can appoint proxies to represent them if they do not want to attend meetings but want their voice heard. But creditors are bound by the deed and any resolution passed at a meeting, whether they attend or not.

What happens if the company does not comply with the DOCA?

The DOCA can be terminated if any default is not rectified within the specified period. A notice will usually be issued shortly after the default and the company will be given a time period to rectify the default. The company may request that a meeting of the creditors be called to consider an amendment to the deed. If the default is not rectified or the DOCA is not rectified, it will usually terminate and lead to a liquidation of the company.

How does a DOCA end?

A DOCA will end if:

• the provisions of the DOCA are fulfilled;
• it is automatically terminated due to a default not being rectified;
• the creditors resolve to terminate the DOCA because of a default; or
• the Court Orders that the DOCA be terminated.

A termination of the DOCA will also usually lead to the liquidation of the company.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last updated: 8.1.2008