Insolvency

A Deed of Company Arrangement (DOCA) is one of the options available as a consequence of a company having been placed into Voluntary Administration.

A Deed of Company Arrangement is the end result of a proposal accepted by a company's creditors and usually will involved either;

• a moritorium of the company's debts for a set period of time
• a composition that sees creditors accept something less than 100 cents in the dollar on their debts
• a plan to repay the outstanding amount by installments
• a combination of any of the above arrangements

It is noted that prior to a Deed of Company Arrangement may flow as one of the consequences of a company entering a Voluntary Administration (VA). During the VA, the Administrator is required to consider and report to creditors on the financial position of a company and, where the directors wish to put a proposal to the creditors, the Administrator must provide an assessment of the proposal together with a recommendation as to whether the proposal would be in the best interest of the creditors.

The test for a DOCA proposal is whether creditors of the company would receive a higher dividend under the proposed DOCA by comparison to an immediate liquidation scenario.

A DOCA will be approved by creditors if, where a poll is called, at least 50% in number and value of all creditors voting at the second meeting of creditors vote in favour of the proposal. If a poll is not requested, the proposal will pass on the voices.

A DOCA becomes legally binding on all unsecured creditors once it is executed by the company and the Deed Administrator. A Company has 15 days to sign the Deed after creditors resolve to accept it.

The Voluntary Administration will usually become the Deed Administrator who will then administer the DOCA and make any required distribution(s) to creditors in accordance with the terms of the DOCA.

A DOCA can be extremely flexible and may be used to enable a company to continue to trade (under the supervision of a Deed Administrator) or in circumstances where the directors wish to make an offer to avoid some form of personal liability. A few examples of a DOCA may be as follows:

• An immediate one off payment (usually a third party contribution made by a director or shareholder) to creditors in full and final settlement of their claims.
• An immediate payment to creditors (usually a third party contribution made by a director or shareholder) with the possibility of a further payment to be made from the proceeds of litigation or through the realisation of assets.
• A series of payments to be made from the profits of ongoing trading for a specified period.

The above listing is by no means an exhaustive listing of the use of a DOCA.

There are numerous advantages to directors of entering into a Deed of Company Arragement. These include;

• ending creditor pressure
• avoiding a company being placed into liquidation
• retaining and developing a business with a restored or restructed balance sheet and removal of old debt
• avoidance of possible actions such as insolvent trading claims and voidable transactions
• retention of tax benefits such as carrying forward past losses to apply to future profits

If a company is unable to fulfil is obligations under a DOCA, it can either;

Apply to have the terms of the DOCA varied - a meeting of creditors will be required to vote on this issue.

Be placed into liquidation - either by way of an automatic trigger for such a failure in the DOCA or by way of a creditor vote on the issue.