Deed of Company Arrangements (DOCAs)
What is a Deed of Company Arrangement?
A DOCA is a formal agreement between a company and its creditors and any other relevant third parties to satisfy company debts. It sets out terms and conditions, the extent and nature of obligations, warranties and indemnities, and the relationships between those who are a party to it. A DOCA releases the company from its debts to the extent provided for within the terms and conditions. It also binds all creditors, both unsecured and secured, to the extent of any shortfalls on their securities.
The purpose of a DOCA is to maximise the chances for a company to continue to exist, whether that be in whole or in one aspect of its business. Alternatively, a DOCA will provide a better return for creditors than immediate winding up of a company.
A DOCA is usually implemented by company directors, yet, it is not limited to only directors, as a third party may propose a DOCA.
Once creditors have voted for the DOCA, the company is obliged to execute the DOCA within 15 business days of the creditors’ meeting, unless the court allows a longer period. If execution does not occur within 15 days, the company will automatically go into liquidation, and the administrator will become the liquidator.
Once implemented, a DOCA lasts for as long as is provided for in its terms, and until all obligations under it are satisfied. Alternatively, a DOCA ends when a creditor applies to the court to terminate and is subsequently granted. The DOCA must address its term and moratorium period, essentially being a “stay”, which prevents actions such as the winding up of the company, secured parties enforcing security interests, lessors/third parties assuming possession of leased or owned property and court or enforcement proceedings against the company or its property.
A company must advertise its status on all public documents, while subject to a DOCA.
DOCA and Secured Creditors
A secured creditor is only bound by a DOCA if they are a party to the deed, or agree to be bound by it. The court can order to limit the rights of a secured creditor, but this situation is not common. If a secured creditor suffers a shortfall, that debt then falls within the provisions of the DOCA.
DOCA and Directors’ Guarantees
Creditors holding guarantees from directors or other parties are bound by the moratorium during the voluntary administration period. Guarantees are enforceable once a DOCA is signed, or the company is wound up. The release of the company’s debt under the terms of the DOCA does not discharge a guarantor’s liability for any shortfall.
Variation to DOCA
Creditors can vary or terminate a DOCA by resolution at a creditors meeting. The administrator must convene the meeting at the request of at least 10 percent of the value of all creditors. Alternatively, the administrator may convene a creditors’ meeting if it is deemed beneficial. Any amendment to the DOCA terms must have the company’s consent. Creditors can apply to the court for the DOCA to be varied or terminated.
DOCA and Tax Losses
A company proposing a DOCA is likely to have tax losses. These losses are usually preserved; however, they may be lost or reduced if a company fails to pay its creditors 100 cents in the dollar. Directors should seek tax advice before proposing a DOCA to contemplate tax losses being available at the end of the DOCA.
Non-Compliance With DOCA
If the DOCA terms are not satisfied, it is considered to be in default. Usually, a default notice will be issued by the deed administrator. If the default is not rectified within the period set out in the notice, the agreement will be breached. The DOCA may contain enforcement provisions or the deed administrator may have access to guarantees given in support of the DOCA. The DOCA may also be terminated by:
- The provisions of the agreement, automatically terminating the DOCA;
- Passing a resolution at a creditors’ meeting; and
- An application to court and the subsequent granting of an order.
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