The prospect of company insolvency can feel daunting, but companies don’t need to rush into liquidation right away. There are alternative solutions. For example, a deed of company arrangement creates a binding agreement between a company and its creditors that determines how to handle the company’s affairs after entering voluntary administration.
A deed of company arrangement serves two main purposes. It helps businesses stay operational and gives creditors better returns than immediate liquidation. Business owners dealing with financial challenges should learn about the deed of company arrangement process to make better decisions.
Whether you’re a business owner looking to avoid liquidation or you’re a creditor who’s received notice about a proposed deed of company arrangement, this guide will take you through your options and potential next steps.
What is a Deed of Company Arrangement?
A deed of company arrangement (DOCA) is a formal binding agreement between a company and its creditors that emerges during the voluntary administration process. Companies facing financial difficulties can use this arrangement as a structured path toward business continuity or better outcomes.
DOCA meaning and legal definition
The DOCA works as a statutory contract that manages relations between the company and its creditors after voluntary administration ends. The agreement outlines how the company’s affairs and assets will handle unpaid debts. This legal tool helps maximise the company’s chances of continuing operations or gives creditors better returns than immediate liquidation.
A DOCA carries more legal weight than informal arrangements. The executed deed binds all unsecured creditors whatever their vote on the proposal. It also binds property owners and lessors to the company, among secured creditors who supported the deed.
When is a DOCA used?
Companies use a DOCA at the time they enter voluntary administration due to financial distress. The administrator reviews whether they can save the business. They might propose a DOCA instead of winding up or recommend other options such as receiverships if the situation warrants it.
This type of arrangement is particularly valuable in scenarios where:
- The business remains viable despite financial challenges
- Debt restructuring would enable continued trading
- Creditors get better returns than through liquidation
- The company preserves jobs and business relationships
The DOCA needs approval from most creditors by number and value at the second creditors’ meeting to move forward.
How it is different from liquidation
Liquidation focuses on closing a company’s affairs and distributing assets, while a DOCA aims to rehabilitate and continue operations. The key differences show that:
- A DOCA allows the company to continue trading under restructured terms, whereas liquidation results in the permanent closure of the business.
- DOCAs provide a framework to repay debts in stages, while liquidation typically offers a one-off distribution of remaining assets to creditors.
- Failure to meet DOCA obligations can still lead to liquidation, so the arrangement carries risk.
Understanding these differences is crucial when deciding the best path forward for your business.
How a DOCA is Created and Approved
A DOCA follows a well-laid-out process that starts when a company enters voluntary administration.
Voluntary administration and the second creditors’ meeting
The path to a DOCA begins when directors appoint a voluntary administrator after they determine the company is insolvent or likely to become insolvent. The administrator evaluates the company’s viability and collaborates with directors to create a DOCA proposal.
This process involves two creditors’ meetings. The first meeting happens within eight business days of appointment. Creditors can vote to replace the administrator or create a committee of inspection. A second meeting takes place within 25 business days of appointment. This significant meeting lets creditors decide the company’s future and whether they accept a DOCA proposal.
Voting requirements for approval
A DOCA needs majority support from creditors to move forward. The approval requires:
- 50% in number of creditors voting, and
- 50% in value of the total amount owed to creditors
The administrator has the deciding vote as chair of the meeting if a deadlock occurs, where majority exists in number but not value, or vice versa. Creditors can ask for more information or delay the meeting up to 45 business days if they need more details.
Timeframe for execution after approval
Time becomes essential once creditors approve a DOCA proposal. The company must sign the deed within 15 business days of the creditors’ meeting unless the court allows an extension.
Missing this deadline creates serious problems. The company automatically enters liquidation and the voluntary administrator becomes the liquidator. The DOCA binds all unsecured creditors after execution, even those who opposed it.
What Happens After a DOCA is Signed?
A deed of company arrangement creates several vital legal effects right after execution. Every party involved should know what this means.
Who is bound by the DOCA?
The DOCA creates binding obligations for many parties. It binds:
- The company itself, its officeholders, and shareholders
- All unsecured creditors, even those who voted against it
- Owners of company property
- Those who lease property to the company
- The Deed Administrator(s)
Secured creditors are only bound if they voted for the DOCA. Courts can still order secured creditors to follow it even if they voted against it.
Impact on secured and unsecured creditors
Unsecured creditors must follow the repayment plan in the DOCA, which limits their options to recover money from the company. They might not get full payment, but they usually receive more than through liquidation.
Secured creditors face a more complex situation. The Bluenergy court ruling shows that a DOCA can affect secured creditors even when they don’t take part in the process. Yes, it is possible that parts of secured debts follow the same rules that apply to unsecured creditors.
Effect on personal guarantees and director liabilities
A DOCA does not cancel personal guarantees. Section 444J of the Corporations Act states that releasing a company’s debt under a DOCA does not change a creditor’s rights under a guarantee or indemnity. Directors or others who gave personal guarantees still remain personally liable.
Directors should think carefully about any personal guarantees before choosing voluntary administration.
Use of Creditors’ Trusts in some DOCAs
Some DOCAs use creditors’ trusts to help companies exit external administration faster. This setup transfers creditors’ claims to a new trust, and creditors become beneficiaries instead of creditors.
The biggest advantage lets companies exit administration right away. They no longer need to use the label ‘Subject to Deed of Company Arrangement’. Listed companies can also ask for ASX quotation of securities, change their share capital, board makeup, or main business activities.
The downside?
Trust beneficiaries might have less protection than DOCA creditors.
How Creditors Are Paid Under a DOCA
Creditors must follow specific procedures to get paid under a deed of company arrangement. The payment process works similarly to liquidation but follows the terms laid out in the DOCA.
Submitting a proof of debt
Creditors need to establish their claim by submitting a proof of debt form to the deed administrator. You should include copies of all relevant invoices and supporting documents that confirm your claim. The administrator might give you a specific form to complete within a set timeframe. Your chances of claim acceptance increase with proper documentation, as administrators assess each submission based on the evidence you provide.
Priority of payments and employee entitlements
The DOCA’s terms determine the order in which creditors receive payment. The typical payment hierarchy works this way:
- Administrator’s fees and expenses come first
- Secured creditors (unless they voted against the DOCA)
- Employee entitlements
- Unsecured creditors
The DOCA must ensure employee entitlements take priority over other unsecured creditors, unless eligible employees agree to change this arrangement. Employee payments usually follow this order: outstanding wages and superannuation first, then leave entitlements, and finally retrenchment pay.
Role of the Deed Administrator in distributing funds
The deed administrator makes sure the company meets its DOCA commitments. They pay dividends to creditors after checking all claims. They must file annual accounts of receipts and payments with ASIC, which keeps the process transparent. The DOCA spells out their specific ongoing responsibilities.
What to do if your claim is rejected
Quick action is essential if your claim gets rejected. The administrator will send you a rejection notice explaining why. You can then:
- Follow the steps in the rejection notice
- Get legal advice about appeal options
- Take the decision to court within the given timeframe
Courts usually support administrators’ decisions unless clear evidence shows they were wrong.
Need Guidance on a DOCA? SV Partners is Here to Help
If your business is facing financial difficulties, a Deed of Company Arrangement (DOCA) could provide a path forward, but it’s not a one-size-fits-all solution. The right advice can make all the difference.
At SV Partners, our experienced team can guide you through your options and help you determine whether a DOCA is the best course of action. We’re here to support you every step of the way, from assessing viability to negotiating terms and managing creditor expectations.
Get in touch with SV Partners today to discuss how we can help you navigate financial distress with confidence.
