Voluntary Administration and Deeds of Company Arrangement (DOCA) continue to have significant influence on major restructurings among Australian businesses. A Deed of Company Arrangement, often called a DOCA, is essentially the ‘deal’ that is proposed to a company’s creditors in a Voluntary Administration (VA). The aim of a DOCA is to maximise the chances of a company’s survival, or to provide a better return for creditors than immediately liquidating the company. The DOCA procedure is extremely flexible and tailored to your business’ individual situation. It can be used for many purposes, including to:
- Recapitalise the company,
- Compromise the claims of unsecured creditors or in relation to unprofitable parts of the business,
- Settle court cases,
- Reorganise the business and affairs of the company, and
- Implement changes of control.
A DOCA can also be beneficial to deal with unprofitable or closed trading locations and resolve a director or shareholder dispute to allow a party to take control of the company’s shareholding.
If you’re considering initiating Voluntary Administration for your business to propose a DOCA, you should understand what a DOCA is, how it works and how it may affect the outcome of a Voluntary Administration.
How to Propose a Deed of Company Arrangement
During the Voluntary Administration process, as a company director, you can submit a Deed of Company Arrangement proposal to the appointed Voluntary Administrator. The DOCA proposal can be very flexible. This is so a DOCA can be designed to suit the company's individual financial situation.
Generally, a DOCA will provide certainty for the company by confirming the amount it is required to pay and any assets it intends to sell. These funds are paid to the DOCA Administrator to be held in a DOCA fund which is distributed to creditors. Creditors will receive a cents in the dollar return after paying the DOCA Administrator's costs. For example, if your company is unable to pay all outstanding creditor debts in full, the DOCA may propose it pays $5,000 per month for 24 months which will provide an estimated return to creditors of 40 cents in the dollar.
The DOCA proposal will generally include these operational provisions:
- How much money the company will pay to the DOCA fund,
- Whether the money will be paid by a lump sum or by instalments. If by instalments, their amount and how regularly they are paid will be specified,
- Which, if any, assets will be sold and the proceeds paid to the DOCA fund,
- Whether any related creditors, such as the director, agree not to receive a return in the DOCA,
- The order in which creditors will be paid, and
- The potential consequences of violating the DOCA.
The Voluntary Administrator will assess the proposal and compare the possible outcomes of the proposed Deed of Company Arrangement with the likely outcome in liquidation. They will then report the outcomes to your creditors and provide a recommendation as to which option is in the best interests of creditors. Creditors will then be able to vote on the future of the company at the second meeting of creditors, from the following options:
- End the Voluntary Administration and return the company to the directors’ control,
- Approve the DOCA, or
- Wind up the company and appoint a liquidator.
Execution of the Deed of Company Arrangement
At the second meeting of creditors, creditors are asked to vote on the Deed of Company Arrangement proposal. In order for the DOCA to be approved, the meeting must pass a resolution and there needs to be a majority in number and also value i.e. at least 51%. The DOCA binds all unsecured creditors, owners of property, those who lease property to the company and secured creditors who vote in favour of the DOCA.
If creditors vote for a DOCA, the company must execute the DOCA within 15 business days after the end of the second creditors meeting, unless the court allows a longer time. If the DOCA is not executed within the relevant period, the company will automatically go into liquidation, with the voluntary administrator becoming the liquidator.
Creditor Payments Under a Deed of Company Arrangement
Payment of dividends to creditors under a DOCA are similar to payments of a dividend in a liquidation, set out by the Corporations Act 2001. The DOCA Administrator will call for Proofs of Debt from creditors, admit or reject claims and then pay a dividend. The order in which creditor claims are paid depends on the terms of the DOCA. Generally, 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. However, the DOCA must ensure employee entitlements are paid in priority to other unsecured creditors unless eligible employees have agreed to vary their priority.
Revive Financial Can Assist Your Company with a Voluntary Administration
If your company is experiencing financial difficulty, it is vital to act promptly and obtain independent, professional advice about the best course of action to take in your circumstances. This is where Revive Financial can assist.
As a company director, you have the ability to appoint a Voluntary Administrator to take control of the company and deal with creditors. This provides you with some breathing space, takes the pressure off you as a director and allows you to submit a Deed of Company Arrangement proposal to pay all or part of the company’s creditors.
If you’re unsure where to start, get in touch with us today on 1800 534 534 and we’ll help you through the Voluntary Administration Process. Acting promptly will not only ensure you fulfill your duties as a director, but will allow the greatest possible likelihood of being able to achieve a successful outcome for your business.