What is a deed of company arrangement?

A deed of company arrangement (DOCA) is a legally-binding arrangement between a company and its creditors detailing how the company’s affairs will be dealt with if the company enters voluntary administration. The DOCA is generally proposed by a third party, such as the director, and is administered by a deed administrator. While a company is subject to a DOCA, they must state that they are “subject to a deed of company arrangement” on all public documents and contracts. 

What is the purpose of a Deed of company arrangement?

The DOCA aims to:

• Maximise the chances of the company continuing its business operations; and 
• Provide a better return for creditors by allowing them to receive any outstanding debts before the company becomes insolvent. 

What should a deed of company arrangement cover?

A DOCA should cover how assets of a company are to be dealt with in order to be effective. A DOCA must include: 

• Who is to be appointed DOCA administrator;
• Details of all property that is available to pay creditors;
• How and when the DOCA is set to terminate;
• The extent to which the company will be released from its debts;
• Detail of the claims which lead to the DOCA;
• The order in which any proceeds of the company’s assets are to be distributed; and
• The nature and term of any moratorium.

A moratorium is a temporary suspension of an activity until future consideration warrants lifting the suspension. For example, a moratorium included in a DOCA may prevent creditors from commencing legal proceedings or taking possession of company property. 

How is a DOCA put in place?

The DOCA is proposed to creditors by the voluntary administrator. A DOCA must be approved by both:

• 50% in the number of creditors; and
• 50% by the value of the total amount owed to creditors. 

When the creditors vote for the company to enter a DOCA, the company must sign the deed within 15 business days of the creditors’ meeting. Otherwise, the company will automatically go into liquidation and the voluntary administrator will become the liquidator. 

What are the rules regarding payment of DOCA procedures?

While individuals and businesses will usually know how much money they are owed, providing specific cases and filing legal documents can involve a complex procedure.  

As a creditor, you will need to provide the deed administrator the right documents to prove your debt. This process may require you to complete a proof of debt claim form (Form 8). You should always attach copies of all relevant documents used to support your claim including invoices and receipts. If the deed administrator rejects your claim, follow the steps outlined in the notice of rejection and seek legal advice on your options to appeal the decision. This should be done promptly as the DOCA may outline that you have limited time to challenge the decision. 

The terms of the DOCA determine the order in which the creditors’ claims are paid. Oftentimes the DOCA terms state that creditor claims are to be paid in the same priority order as in a liquidation. Other times, a different priority is proposed. 

As a business owner, it is important to deal with all claims in a professional and responsible manner. The DOCA can release the company from the burden of some debts, and lay down rules and timelines for other debts to be paid. The DOCA also affects the payment and prioritisation of outstanding employee entitlements and the fees and expenses associated with voluntary administration.  

Who monitors the DOCA?

The deed administrator’s role is to make sure the company carries out its commitments. The extent of the deed administrator’s role is set out in the DOCA. Creditors can also play a role in monitoring the DOCA. If you are concerned the obligations of the company under the DOCA are not being met, you should take this up with the deed administrator. 

The consequences of failing to meet deadlines can also be included into the terms of the DOCA. Any request to vary the DOCA proposal to include consequences should be made before the DOCA proposal is voted on. Creditors can resolve to vary the terms of a DOCA after a DOCA has been executed. 

The annual accounts of receipts and payments in the DOCA must be lodged with the Australian Securities and Investments Commission (ASIC) by the deed administrator. 

What is a creditors’ trust?

A DOCA sometimes involves the creation of a creditors’ trust. A creditors’ trust is a legal arrangement used to accelerate a company’s exit from external administration. The creditors’ claims are transferred to a newly created trust and any return is received from the trustee, not the deed administrator. Once the creditors’ claims are moved to the trust, the DOCA terminates. The creditors’ trust is used to minimise the risk associated with administration and asset sales while ensuring the successful sale of the company. External administrators have certain obligations to ensure creditors are fully informed of their choices when a creditors’ trust is proposed. 

What is voluntary administration?

Voluntary administration is an insolvency procedure where an external administrator is appointed when a company enters financial troubles. The external administrator is appointed by the directors.

What happens when a company goes into voluntary administration? 

There are three possible outcomes when a company goes into voluntary administration:

• The company is deemed viable and returned to the director’s control;
• A deed of company agreement is designed; or
• The company is wound up and put into liquidation.

Legal advice

A deed of company arrangement can be confusing. If you are still needing further clarification, Legal Kitz is here to help with any legal enquiries. Click here to book a FREE consultation with one of our highly experienced solicitors today or contact us at [email protected] or by calling 1300 988 954.