Understanding Deeds of Company Arrangement: A guide for directors

It’s do-able to undo, with turnaround experts.

Solving the right problems at the right time can be the difference between a business surviving or failing. A Deed of Company Arrangement (DOCA) aims to maximise the chances for a company to continue to exist while providing a better return for creditors than an immediate winding up. A DOCA is one option creditors have to consider and vote on, following the initial a voluntary administration appointment. 

A DOCA is essentially a formal agreement between a company and its creditors. It serves as a blueprint for how the company plans to manage and satisfy its debts. The primary goal of a DOCA is to enhance the company's chances of continuing, or at the very least, preserving parts of its operations. It's also seen as a preferable alternative to winding up the company, potentially offering creditors a better return.

Directors leverage DOCAs to:

• Optimise a turnaround­—A DOCA is designed for optimal business turnaround results to save the business.

• Hit pause­—Directors get a mortarium on creditor action during the initial voluntary administration phase.

• Gain certainty—Directors gain certainty for business trading conditions with creditors under the DOCA, allowing business to rehabilitate.

• Keep business relationships—Trade creditors get an increased return and retain their customer/client relationship.

• Have a positive impact on stakeholders—Employees keep their job; creditors keep a customer; landlords keep a tenant; shareholders retain value.

• Get flexibility in structure—DOCA can be a lump sum, instalments, or a percentage from profits, creditors’ trusts or even a buyout from a third party.

• Bind all creditors—Unsecured and secured creditors are bound to the extent of any shortfalls on their securities and releases the company from its debts, at least to the extent provided for within the DOCA terms and conditions. 

If creditors greenlight the DOCA, it must be signed within 15 business days, unless a court allows its extension. A delay beyond this window will lead the company to an automatic liquidation. 

DOCA term and conditions provide for:

• Who will be appointed as the deed administrator (can be the voluntary administrator, as no conflict arises­).

• The property available to pay creditors.

• How the company will be released from its debts included in the DOCA.

• When the DOCA will terminate and how.

• How and in what order the company’s assets proceeds are distributed (creditors’ trusts, instalments, lump sum, percentage of profit etc.).

 The DOCA remains in effect:

• For the duration specified in its terms or until all obligations are met.

• No default or breach is left unrectified.

• Unless creditors resolve to terminate the DOCA at the required meeting (10% of the value of all creditors must request this meeting).

• Unless a creditor applies to court to terminate or vary the DOCA and is subsequently granted.

• The deed administrator deems it beneficial to call a creditors’ meeting to amend the DOCA terms, with the directors’ consent.

Other key considerations 

Directors and their advisors should be aware of the following:

• Implications for director guarantees: any personal guarantees a director has given remain enforceable after the initial voluntary administration appointment (as a moratorium applies). The clearance of company debt via a DOCA or subsequent liquidation doesn’t absolve a director's personal liability.

• Tax losses: Often, tax losses remain intact under a DOCA but can be reduced if creditors are not receiving 100 cents-in-the-dollar. Directors should seek expert tax advice to clarify any implications relative to individual circumstances.

• Non-compliance implications: If directors don’t satisfy the DOCA’s terms this creates a default; and if not rectified within the set in the deed administrator’s default notice, the DOCA is breached and potentially initiates the company's liquidation.

• Dividend payments: A deed administrator monitors and manages the DOCA. They pay dividends to the DOCA’s creditors and lodge annual reports to ASIC[1].

• Amendments post-execution: Yes, creditors retain the right to modify or terminate a DOCA after it's been signed, provided they obtain the company's consent for changes.

In summary, a DOCA, while intricate, offers a structured approach for companies to work through financial challenges. Directors are empowered to propose a DOCA to their creditors, however any third party may propose a DOCA. It’s with the Worrells team’s skill and endorsement that creditors can be confident of business viability and increased returns when compared to an evaluated liquidation scenario and its expected outcomes.

Business can be tough. Before you throw in the towel, we help you consider what can be done to turn around a business, exploring restructuring options that can buy you valuable time to get back on your feet. It’s do-able to undo, with turnaround experts.

[1] https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-creditors/deed-of-company-arrangement-for-creditors/#who_monitors_the_doca