Deed of Company Arrangement
When a company enters Voluntary Administration, the usual objective is for the company to agree a deal with its creditors – the formal name for that deal is a Deed of Company Arrangement or DOCA.
The aim of a DOCA is to maximise the chances of a company continuing, or to provide a better return for creditors than an immediate winding up of the company, or both.
The Law provides no specific guidance or requirements on what a DOCA must say and do. That is so that DOCAs can be designed to suit the situation. Commonly, DOCAs will promise say: 10 cents in the dollar to all creditors, or a director will personally promise to contribute $100,000 and that is to be divided amongst the creditors. The point is that a DOCA is very flexible and so can propose whatever is appropriate.
Voting on a DOCA
At the Second Meeting of Creditors, creditors are asked to vote on the DOCA. In order for the DOCA to be approved, the meeting must pass a resolution – that means that, of those creditors voting, it must be approved by 50% in number and 50% in value. There can be quite a few complications surrounding the voting, such as particular creditors rights to vote and the amount of different creditor’s claims.
What happens after the vote for a DOCA?
If creditors vote for a DOCA, the company must sign the deed within 15 business days of the creditors’ meeting, unless the court allows a longer time. If this doesn’t happen, the company will automatically go into liquidation, with the Voluntary Administrator becoming the liquidator.
- The DOCA binds all unsecured creditors. So it even binds a creditor that voted against the DOCA. 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 deed even if they didn’t vote for it.
- You may be aware that a creditor who holds a personal guarantee against a director is not allowed to pursue that guarantee whilst a company is under Voluntary Administration. However, once a DOCA is signed, the DOCA does not prevent a creditor who holds a personal guarantee from the company’s director or another person taking action under the personal guarantee to be repaid their debt.
What’s a Creditors Trust
In some cases the proposed DOCA involves the creation of a Creditors’ Trust. A Creditors’ Trust is a separate legal arrangement used to accelerate a company’s exit from Voluntary Administration. Creditors’ claims are generally transferred to a newly created Creditors’ Trust and any return is received from the trustee of the trust, not the Deed Administrator. The DOCA generally terminates after the creditors’ claims against the company are moved to the trust.
How do creditors get paid in a DOCA
Payment of dividends to creditors under a DOCA mirror the procedures for payment of a dividend in a liquidation. So, the Deed Administrator will call for Proofs of Debt from creditors, admit and reject claims and then pay a dividend. All of the timing and processes are set out in the Corporations Law.
- The order in which creditor claims are paid depends on the terms of the DOCA.
- Often, the DOCA proposal is for creditor claims to be paid in the same priority as in a liquidation.
- Other times, a different priority is proposed.
- The DOCA must ensure employee entitlements are paid in priority to other unsecured creditors unless eligible employees have agreed to vary their priority.
Who monitors the DOCA
It is the Deed Administrator who ensures that the company carries through the commitments made in the DOCA. The extent of the Deed Administrator’s ongoing role will be set out in the DOCA.