This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances.
Your company is in voluntary administration. The administrator has prepared a report. Creditors are meeting next week. And somewhere in that report is a proposal for a Deed of Company Arrangement.
What does that mean for you as a director? What does it mean for your creditors? And how does a DOCA compare to liquidation?
What Is a Deed of Company Arrangement?
A Deed of Company Arrangement (DOCA) is a binding agreement between an insolvent company and its creditors that governs how the company’s affairs will be dealt with after voluntary administration. It is authorised under Part 5.3A of the Corporations Act 2001 (Cth), specifically section 444A.
A DOCA allows the company to avoid liquidation. Instead of being wound up and its assets distributed, the company continues to operate under the deed’s terms. Creditors receive a defined return. The administrator (now DOCA administrator) oversees compliance.
The key feature: a DOCA binds all unsecured creditors of the company, even those who voted against it, once the deed is executed.
How Does a DOCA Arise?
A DOCA cannot appear out of nowhere. It arises from the voluntary administration process. Here is how it works:
- A voluntary administrator is appointed (usually by the board or a secured creditor).
- The administrator investigates the company’s affairs, typically over 20 business days.
- The administrator prepares a report and recommendation for creditors.
- At the second creditors’ meeting, creditors vote on three options: execute a DOCA, return the company to the directors, or place the company into liquidation.
- If creditors vote for the DOCA, the deed must be executed within 15 business days of the meeting.
A DOCA proposal can come from the directors, a third party (such as a buyer or investor), or in rare cases the administrator. Directors who want to avoid liquidation should work with the administrator early to develop a credible proposal.
What Does a DOCA Typically Contain?
Section 444A(4) of the Corporations Act sets out the mandatory provisions of a DOCA. Beyond those, the terms are negotiated. A typical DOCA will include:
- Contribution pool: The amount to be made available to creditors (can come from directors personally, third parties, or company assets).
- Priority of payment: How the pool is distributed. Employee entitlements generally retain priority.
- Duration: How long the deed runs before the administrator is released.
- Moratorium: A stay on creditor enforcement during the deed period.
- Return on claims: What cents-in-the-dollar creditors will receive.
- Director conduct: Conditions on the directors continuing to manage the company.
How Does the Creditors’ Vote Work?
At the second creditors’ meeting, a DOCA proposal is passed by a dual majority: a majority in number of creditors voting AND a majority in value of the debt represented. This dual threshold protects both small creditors (who have numbers) and large creditors (who have value).
If the vote is a tie in either limb, the chairperson has a casting vote. If the result is a bare majority by number but not value, the Court can be asked to rule on the outcome.
Secured creditors are generally not bound by a DOCA unless they vote to accept it. That is an important distinction: a DOCA binds unsecured creditors, but a bank holding a fixed charge over company assets retains its enforcement rights unless it opts in.
DOCA vs Liquidation: When Is a DOCA Better?
The fundamental question for creditors is: will I receive more from a DOCA than from liquidation? If the DOCA offers a better return than the estimated liquidation dividend, creditors should rationally support it.
For directors, the calculus is different. A DOCA can preserve:
- The business as a going concern
- Employment for staff
- Relationships with key customers and suppliers
- The director’s own ability to manage the company post-deed
Liquidation, by contrast, ends the company. Assets are realised and distributed. Directors lose control immediately upon the liquidator’s appointment.
A DOCA is not always better. If the company’s business cannot realistically generate returns under the deed terms, creditors will see through the proposal. A credible DOCA requires real money behind it, usually a capital injection from the director or a third party, not just a promise to trade out of trouble.
What Happens When a DOCA Ends?
A DOCA terminates when its conditions are fulfilled: the contribution pool is distributed and creditors are paid out in accordance with the deed. On termination, the company is released from its debts to participating creditors. The DOCA administrator is discharged.
If a DOCA is breached, creditors or the administrator can apply to the Court to terminate the deed. The Court has broad powers under section 445D of the Corporations Act to set aside or vary a DOCA that is being breached, was entered into fraudulently, or whose terms are not being met.
Termination of a DOCA due to breach usually results in the company being placed into liquidation.
Director Liability Under a DOCA
A critical question for directors: does a DOCA release you from personal liability?
The short answer is no. A DOCA binds the company and its creditors. It does not release directors from personal liability claims, including:
- Insolvent trading claims by the liquidator (if the DOCA later fails)
- Director Penalty Notices from the ATO for unpaid PAYG and SGC
- Personal guarantees given to creditors
- Voidable transaction claims (unfair preferences, uncommercial transactions)
A director who contributed personal funds to a DOCA pool may have a right to be indemnified from those funds in certain circumstances. This is complex territory requiring specific advice.
Frequently Asked Questions
Can creditors challenge a DOCA after it is executed?
Yes. A creditor can apply to the Court under section 445D of the Corporations Act to terminate or vary a DOCA on grounds including: the company’s affairs were not adequately investigated, the deed was entered into fraudulently, or the terms are not in creditors’ interests. Applications must be made promptly after execution of the deed. This is general information only and is not legal advice. Obtain professional advice specific to your circumstances.
Do I need a lawyer to propose a DOCA?
You are not legally required to have a lawyer, but it is strongly advisable. A DOCA proposal that lacks commercial credibility or fails to address secured creditor interests will be rejected by creditors. Directors who want to develop a viable DOCA proposal should engage lawyers experienced in insolvency and restructuring as early as possible in the administration period. This is general information only and is not legal advice. Obtain professional advice specific to your circumstances.
Can Boss Lawyers help if my company is in voluntary administration?
Yes. Boss Lawyers regularly acts for directors and creditors in voluntary administrations and DOCA negotiations in Brisbane and across Queensland. If your company is in administration or you have received notice of an upcoming creditors’ meeting, contact Boss Lawyers on 1300 267 711 for advice about your options. This is general information only and is not legal advice. Obtain professional advice specific to your circumstances.
If your company is facing insolvency or you are a creditor dealing with an insolvent company, our insolvency lawyers in Brisbane can help you understand your rights and options. Call us on 1300 267 711.
