Deed of Company Arrangement
A deed of company arrangement (DOCA) is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up of the company, or both.
If creditors vote for a proposal that the company enter 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, even if they voted against the proposal. It also binds owners of property, those who lease property to the company and secured creditors, if they voted in favour of the deed. In certain circumstances, the court can also order that these people are bound by the deed even if they didn’t vote for it.
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.
In some cases the proposed DOCA (or proposed variation to a DOCA) involves the creation of a creditors’ trust.
A creditors’ trust is a separate legal arrangement used to accelerate a company’s exit from external 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. Because there are different and additional risks for creditors where a DOCA proposal involves a creditors’ trust, insolvency practitioners have certain obligations about the information provided to creditors in order to ensure creditors are fully informed of their choices.
Because there are different and additional risks for creditors where a DOCA proposal involves a creditors’ trust, insolvency practitioners have certain obligations about the information provided to creditors in order to ensure creditors are fully informed of their choices.
For more information on creditors’ trusts please refer to Regulatory Guide 82.
How will I get paid in a DOCA?
Before any dividend is paid to you for your debt or claim, you will need to give the deed administrator sufficient information to prove your debt. You may be required to complete a claim form (this is called a ‘proof of debt’ in a liquidation). You should attach copies of any relevant invoices or other supporting documents to the claim form, as your debt or claim may be rejected if there is insufficient evidence to support it.
When submitting a claim, you may ask the deed administrator to acknowledge receipt of your claim and advise if any further information is needed.
If the deed administrator rejects your claim after you have taken the above steps, first contact the deed administrator. You may also wish to seek your own legal advice. This should be done promptly. Depending on the terms of the deed, you may have a limited time in which to take legal action to challenge the decision.
The order in which creditor claims are paid depends on the terms of the deed. Sometimes the deed proposal is for creditor claims to be paid in the same priority as in a liquidation. Other times, a different priority is proposed.
The deed must ensure employee entitlements are paid in priority to other unsecured creditors unless eligible employees have agreed to vary their priority.
Before you decide how to vote at the second creditors’ meeting, make sure you understand how the deed will affect the priority of payment of your debt or claim.
You may wish to seek independent legal advice if the deed proposes a different priority to that in a liquidation, or if creditors approve such a deed.
If you have a query about the timing of the payment, discuss this with the deed administrator.
Who monitors the DOCA?
It is the role of the deed administrator to ensure the company (or others who have made commitments under the deed) carries through these commitments. The extent of the deed administrator’s ongoing role will be set out in the deed.
Creditors can also play a role in monitoring the deed. If you are concerned that the obligations of the company (or others) under the deed are not being met, you should take this up promptly with the deed administrator. Matters that may give rise for concern include deadlines for payments or other actions promised under the deed being missed.
Creditors also have the right when a DOCA is proposed and considered at the second creditors’ meeting to negotiate consequences of failure to meet such deadlines into the terms of the deed. Any request to vary the deed proposal to include such consequences should be made before the deed proposal is voted on.
The deed administrator must lodge a detailed list of receipts and payments with ASIC every six months.
Contact Guy Baxendale for a confidential and obligation free chat about your business needs.
Mobile: 0404 544 919
Phone: 02 8315 2146
Fascimile: 02 9362 1113