- A DOCA under sections 444A to 444J of the Corporations Act binds all creditors of the company once executed, including those who voted against it (section 444D).
- Courts have confirmed that a properly drafted DOCA can extinguish not only current debts but also future or long-tail payment rights arising from pre-administration contracts.
- Creditors with ongoing contracts such as leases, supply agreements, and loan facilities may find their entire future entitlement under those contracts is extinguished by a DOCA they did not vote for.
- Understanding what a proposed DOCA will and will not release is critical before the creditors’ meeting vote. Once a DOCA is executed, the release is binding.
- Creditors who believe a DOCA unfairly releases long-tail obligations have limited but important remedies, including applying to court to terminate the DOCA under section 445D.
When a company enters voluntary administration and creditors vote on a deed of company arrangement, most creditors understand that their current unpaid invoices will be addressed under the DOCA. What many creditors do not realise is that a DOCA can also extinguish their future payment rights under contracts that will continue after the administration. Australian courts have confirmed that a properly drafted DOCA can release long-tail payment obligations, not just the debts that existed at the appointment date. For creditors with ongoing contractual relationships with the company, the consequences can be significant and permanent.
What Is a DOCA and How Does It Bind Creditors?
A deed of company arrangement (DOCA) is a binding agreement between a company in voluntary administration and its creditors that provides an alternative to winding up the company. Under section 444A of the Corporations Act 2001 (Cth), a DOCA must specify certain matters including the property of the company available to pay creditors, the nature and duration of any moratorium, the order of priority of payments, and the conditions under which the DOCA terminates.
Once executed, a DOCA binds all creditors under section 444D, including creditors who voted against the DOCA and creditors who did not attend the meeting. This is one of the most powerful features of the voluntary administration regime: it prevents dissenting minority creditors from undermining a restructuring that the majority supported.
Section 444H provides that a DOCA releases the company from its debts to the extent specified in the deed. The deed may be drafted to release the company from all claims by creditors, or only from claims arising before a particular date, or from all current and future claims arising under specified contracts.
Long-Tail Payment Rights: What the Courts Have Said
The term “long-tail payment rights” refers to obligations that arise under pre-administration contracts but that will continue to generate payment obligations over an extended future period. Classic examples include:
- Commercial leases: A landlord may be owed rent from before administration (a current debt) but also has the right to receive rent for the remaining term of the lease (a future obligation under a pre-administration contract)
- Loan facilities: A lender may be owed repayment installments that extend years into the future under a facility executed before administration
- Supply and distribution agreements: A supplier or distributor may have ongoing minimum purchase commitments or exclusivity fees that were agreed before administration commenced
- Licence agreements: A licensor may be entitled to ongoing royalties under a pre-administration licence that the company continues to use after the DOCA is executed
Australian courts, including the Full Federal Court, have confirmed that the phrase “claims and demands” in section 444H is broad enough to capture future payment obligations arising under pre-administration contracts. A DOCA that purports to extinguish “all claims and demands” against the company can therefore extinguish a landlord’s future rent entitlement, a lender’s future installment rights, or a supplier’s future purchase commitments.
This is not an accident of drafting. The policy rationale is that a company emerging from a DOCA should be able to do so with certainty about its obligations. If creditors with ongoing contracts could assert future claims in full notwithstanding the DOCA, the restructuring would be undermined by obligations the DOCA was intended to compromise.
Why This Matters: The Creditor’s Perspective
For creditors with long-tail payment rights, the stakes at the creditors’ meeting are higher than they appear. A creditor who calculates their claim based on what they are currently owed may be significantly undervaluing their exposure to the DOCA. If the DOCA extinguishes future payment rights under an ongoing contract, the creditor is not just compromising the current arrears; they are surrendering the right to receive payments under the contract for its remaining term.
Consider a commercial landlord with a 10-year lease, three years into the term, who has $50,000 in unpaid rent at the administration date. If the DOCA offers 20 cents in the dollar on all creditor claims, the landlord might calculate their entitlement under the DOCA as $10,000. But if the DOCA also extinguishes the landlord’s right to receive rent for the remaining seven years of the lease (say $700,000), the landlord’s true position is far more significant. Voting to accept the DOCA without understanding this is a serious mistake.
The same analysis applies to:
- Banks with facilities that have years remaining
- Equipment financiers with ongoing repayment schedules
- Trade creditors with supply agreements that include minimum order commitments
- Franchisors with franchisee royalty entitlements
- Technology licensors with recurring licence fees
What Creditors Should Do Before the Creditors’ Meeting
If you are a creditor with an ongoing contractual relationship with a company in administration, the following steps are critical:
- Read the DOCA proposal carefully. The administrator’s report under section 439A must include a copy of the proposed DOCA (or a summary of its key terms). Identify whether the DOCA purports to release “all claims” or only claims “arising before the appointment date.” The language matters enormously.
- Calculate your total exposure. Quantify not just what the company currently owes you but the present value of all future payment obligations under your ongoing contracts. This is your true DOCA exposure.
- Assess whether your contract will continue. Under section 444G, a DOCA binds creditors but does not necessarily novate or terminate the underlying contracts. If the DOCA is executed and the company continues trading, it may continue to use your premises, equipment, or intellectual property. Whether new obligations arising after the DOCA date are covered by the old DOCA is a separate question and depends on the DOCA’s terms.
- Consider a proof of debt that captures future entitlements. Some creditors with long-tail rights can lodge a proof of debt that captures the discounted present value of future obligations. Whether this is accepted by the administrator depends on the proof of debt process and the DOCA terms.
- Vote on full information. If the DOCA terms are not clear on whether future payment rights are released, request clarification from the administrator before the meeting. Voting without this clarity can result in surrendering rights you did not intend to surrender.
- Consider applying to court if the DOCA is unfair. Under section 445D of the Corporations Act, a creditor can apply to court to terminate a DOCA on grounds including that it is oppressive or unfairly prejudicial to one or more creditors. This is a high threshold, but a DOCA that extinguishes long-tail payment rights for next to nothing while leaving related party creditors better off may satisfy it.
The Administrator’s Perspective: Drafting the DOCA
From the administrator’s and company’s perspective, the ability to extinguish long-tail payment rights is essential to making a DOCA workable. A company that emerges from administration burdened by the full future obligation under every pre-administration contract has not achieved a genuine restructuring. The whole point of the DOCA regime is to give a financially distressed company a fresh start with certainty about its obligations.
However, this creates an obligation on administrators to be transparent about the scope of releases in the DOCA proposal. Section 439A reports that are vague about whether long-tail rights are being released expose the administrator to claims that creditors were not adequately informed. Creditors who voted for a DOCA on the basis of incomplete information may have grounds to challenge it.
Frequently Asked Questions
Can a DOCA release future rent under a commercial lease that is still running?
Yes. Australian courts have confirmed that a properly drafted DOCA can extinguish future rent obligations under a pre-administration lease. Whether a particular DOCA does so depends on its specific terms. Landlords facing a tenant in voluntary administration should carefully review the proposed DOCA language and calculate the value of future rent before voting at the creditors’ meeting.
I voted against the DOCA. Am I still bound by it?
Yes. Under section 444D of the Corporations Act, a DOCA binds all creditors of the company once it is executed, regardless of how they voted at the creditors’ meeting. The only exceptions are creditors whose debts arise after the DOCA is executed (who are not “creditors” for the purpose of the old DOCA) and certain employee entitlements. Dissenting creditors’ primary remedy after the DOCA is executed is to apply to court under section 445D to have the DOCA terminated.
What is the difference between a DOCA and voluntary administration?
Voluntary administration is the process that leads to a DOCA. When a company enters voluntary administration, an administrator is appointed to manage the company, investigate its affairs, and report to creditors on the best outcome. The outcome options at the creditors’ meeting are: execute a DOCA, return the company to its directors, or wind up the company. A DOCA is therefore the instrument that implements the restructuring outcome chosen by creditors. The administration process is the gateway; the DOCA is the destination.
Can I terminate my contract with the company after a DOCA is executed?
Section 444G does not prevent a creditor from terminating a contract under the contract’s own terms, but care is needed. During voluntary administration, section 440D prevents termination of contracts that would harm the administration without court leave. After the DOCA is executed, termination rights may depend on whether the DOCA itself addresses ongoing contracts and on the specific terms of the contract. Some DOCAs include provisions preventing creditors from terminating contracts on the basis of the insolvency alone. Legal advice before purporting to terminate is essential.
If you are a creditor facing a proposed DOCA or you need advice on your rights and obligations in a voluntary administration, our insolvency lawyers in Brisbane advise creditors on DOCA negotiations, proof of debt processes, and court applications. Contact Boss Lawyers on 1300 267 711.
This is general information only and is not legal advice. You should obtain professional advice specific to your circumstances. Mark Harley, Principal Solicitor, Boss Lawyers Pty Ltd.
If you are a creditor facing a DOCA vote and are concerned about the release of long-tail payment rights under pre-administration contracts, acting quickly is essential. The commercial litigation lawyers Brisbane at Boss Lawyers advise creditors on DOCA terms, s 445D court applications to terminate, and creditor committee strategy. Call 1300 267 711.
