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The Rise of the "Love" DOCA in the shadow of COVID-19

May 18, 2020 | Written by Brad Vincent
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I read with interest a recent article by Thomas Russell at Piper Alderman revisiting the intention of the lawmakers who drafted the Voluntary Administration regime. As Thomas succinctly put it “the primary objective of voluntary administration is to save the business, not pay creditors.”  That will be news to most people.

To explain what this could mean for the average struggling business, I will have to take you on a trip through the voluntary administration process.

In a typical voluntary administration, the administrators take control of the company for 35 days or so with the aim of agreeing a deal with creditors to allow the company to be handed back to the directors (or sometimes sell the business). At the conclusion of the administration period (usually 35 days but that can be extended) the administrators call a meeting of creditors, and creditors vote on whether they accept the proposed deal, or if they would prefer for the company to enter liquidation.

The traditional approach to agreeing this type of deal, called a Deed of Company Arrangement, is for an interested party to contribute enough money to persuade creditors to vote for the deal, and not liquidation.  But that doesn’t have to be the case.  The deal proposed does not necessarily have to present a better immediate financial return to creditors, it just has to convince creditors there is more value in saving the business, as compared to ending it. At Restructuring Works we like to call it, the Love DOCA.

There are many factors that could sway creditors either way on such a decision: the value to creditors of keeping a client, the perceived viability of the business, the “friendliness” of the creditor base, the potential for saving jobs, the nature of the business in question and the perceived value of the business to the community.

I’ve never seen a Love DOCA proposed, let alone accepted.  But times have changed.  It seems to me that there may well be a bundle of businesses that were eminently viable until around March 2020, when they had to shut the doors for a lengthy period because of COVID-19.  The circumstances for those businesses could well fit the Love DOCA.  The deal to creditors might be as simple as: forgive my debts and you’ll get a viable client trading on – say “no” to the DOCA and you’ll end up with a former client in liquidation, no prospect of a dividend, and no client trading on into the future.

The Love DOCA may just become quite popular in the months to come.

Brad Vincent

Brad Vincent