What is a Deed of Company Arrangement?

A voluntary administration most often involves the director(s) proposing a Deed of Company Arrangement to creditors. This happens when an administrator convenes a meeting, in which one of the three courses of action noted below is adopted: [1]

• that the company executes a Deed of Company Arrangement;
• that the administration should end; or
• that the company be wound up.

If it is resolved to enter into a DOCA, it commences when the deed is signed by both the company and the deed's proposed administrator. [2]

Defining a Deed of Company Arrangement ("DOCA")

A DOCA is generally a compromise offer prepared with the assistance of the voluntary administrator, and put to creditors, which they can vote to approve or reject. [3] It usually involves a sum of money being contributed either:

• by the director personally; or
• another third party whom creditors would otherwise have no direct recourse to (e.g., a relative of the director or related company),

which, if approved, would see creditors receive some or a better return than if the company were to be put into liquidation.

For example:

• A DOCA may provide that a relative of the director will contribute $50,000 which, when pooled with the company’s existing funds, will see creditors ultimately receive 20c in the dollar, as opposed to receiving 5c in the dollar if the company were to go into liquidation.
• Alternatively, a DOCA may include some other ‘deal’ of benefit to creditors. For instance, a company may have a number of related party creditors who, as a term of the DOCA, will agree not to participate for a dividend if the DOCA is approved, giving ordinary creditors a higher return than if the company were to go into liquidation.

There is considerable flexibility as to the terms a DOCA can incorporate. However, a DOCA should include the following:

• (a) the administrator of the deed;
• (b) the property of the company (whether or not already owned by the company when it executes the deed) that is to be available to pay creditors’ claims;
• (c) the nature and duration of any moratorium period for which the deed provides;
• (d) to what extent the company is to be released from its debts;
• (e) the conditions (if any) for the deed to come into operation;
• (f) the conditions (if any) for the deed to continue in operation;
• (g) the circumstances in which the deed terminates;
• (h) the order in which proceeds of realising the property referred to in paragraph (b) are to be distributed among creditors bound by the deed;
• (i) the day (not later than the day when the administration began) on or before which claims must have arisen if they are to be admissible under the deed. [4]

What happens if a DOCA is approved?

A proposed DOCA is tabled at the second meeting of creditors, which generally occurs within five weeks of the voluntary administrator being appointed.

To be approved, the DOCA needs to be endorsed by a majority of creditors (i.e., more than 50% of creditors) who collectively represent at least 50% of the total value of the unsecured debts owed by the company.

If approved, the DOCA is to be executed within 15 business days and will then bind:

• the company;
• the officers of the company;
• the unsecured creditors, even those who voted against it.

However, a DOCA will not bind a secured creditor unless the secured creditor agrees to be bound by the DOCA [5] or the Court orders that it be bound by the DOCA. [6]

The voluntary administrator is generally then appointed as the deed administrator to administer the DOCA.

Once the transactions contemplated by the DOCA are finalised, ordinarily the deed administrator resigns, and control of the company reverts back to the directors.

What happens if a DOCA is not approved?

If the DOCA is not approved, or is approved but not executed, then the company will generally go into liquidation, usually with the voluntary administrator being appointed as the liquidator. [7]

How can DSA Law help?

If you have an insolvency issue or question, please Contact Us or one of our Commercial Lawyers at DSA Law on (03) 8595 9580 so we can assist you with your concerns.

[1] Corporations Act 2001 (Cth) s 439C.

[2] ibid s 444B(6).

[3] ibid s 438A.

[4] ibid s 444A.

[5] ibid s 444D(2).

[6] ibid s 444F(2).

[7] ibid s 446A.