Explaining a Deed of Company ArrangementMarch 19th, 2017
When a company goes intovoluntary administration, there are three possible outcomes.
- The company is deemed viable and returned to the directors’ control;
- A Deed of Company Arrangement is designed, stating the company’s intentions going forward, or;
- The company is wound up and put into liquidation.
What is a Deed of Company Arrangement?
Designed to maximise the chance of a company to continue its business, a Deed of Company Arrangement (DOCA) is a binding arrangement between the company and its creditors. Another purpose is to ensure that creditors receive a better return in the case of the company being wound up. Essentially, the DOCA helps the company avoid being wound up by looking at which part of the business is viable and what can continue trading as normal. The DOCA sets out how the assets of the company will be dealt with if the company is ever in danger of being liquidated, or if it has already entered voluntary administration.
Creditors can choose to enter into a DOCA, and in this case, the deed must be signed within 15 business days of the creditors’ meeting, unless given more time by a court. If this does not happen, the company automatically goes into liquidation. Importantly, even if they have decided against the DOCA during the meeting, the arrangement binds all unsecured creditors and all owners of property. Secured creditors are only bound by the agreement if they voted for it. However, there are certain circumstances where a court can order those secured creditors be bound by the agreement even if they did not vote for it.
Additionally, a DOCA does not prevent a creditor from taking action under a personal guarantee to reclaim their debt. While subject to a DOCA, the company must include ‘subject to a Deed of Company Arrangement’ on all documents. During this time, directors do retain control of the company however there are some restrictions.
Monitoring the DOCA
When the company executes a DOCA, the administrator generally becomes the deed administrator. However, if required, the creditors can appoint a different person to handle the DOCA. The reason it is generally the same person is because the administrator is already familiar with the company and the situation. The role of the deed administrator is outlined in the DOCA. This may also include the extent of the deed administrator’s ongoing role. If a creditor is concerned that obligations of individuals or the company are not being met (for example, deadlines are not being met) he or she should make these concerns known to the deed administrator. The creditors may also decide the consequences for individuals or the company if the terms of the DOCA are not met.
There are certain things the DOCA must include:
- Who is to appointed the deed administrator
- Identification of any property that may be available to pay creditors
- Nature and term of moratorium
- How the company will be released from its debts
- When the DOCA will terminate and how
- What restrictions the directors are bound by
- The order in which the proceeds of the company’s assets are to be distributed.
A creditors’ trust
In some cases, a DOCA may involve the creation of a creditors’ trust – a separate legal agreement accelerating a company’s exit from external administration. There are different and additional risks involved when a creditors’ trust is formed. Essentially, claims are transferred to the trust and any return is received from the trustee of the trust rather than the deed administrator. In the case of a creditors’ trust, there are additional regulations applying to insolvency practitioners regarding information provided to creditors.
How the debt is paid
Once a DOCA is created, all creditors will need to give the deed administrator proof of the debt or claim. Copies of invoices and other relevant supporting documents should be included on the claim form (or proof of debt form).
Generally, there is an order by which debts are paid. This will be outlined in the DOCA. Employee entitlements are given priority over other unsecured creditors, unless otherwise stated by eligible employees.
Knowing the best solution
The instability that is usually associated with a DOCA can be daunting. But it’s important to remember that the DOCA is created to find the best possible solution for all involved – the company and the creditors. The aim of the DOCA is to keep a company solvent and active while still finding the best solution for creditors. Ultimately, it hopes to avoid the company being subject to the process of winding up.
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