What Is a Deed of Company Arrangement, and When Does It Save a Business?
A company enters voluntary administration. Creditors are owed money. Directors and shareholders want to save the business rather than see it liquidated. A Deed of Company Arrangement — commonly called a DOCA — is the legal mechanism that gives those parties the opportunity to do that. It binds creditors to a compromise arrangement on their debts in exchange for the company continuing to operate, or at least for a better return than a liquidation would produce. But it only works if the return to creditors is genuinely better, and whether it is depends heavily on what goes into the deed.
A DOCA is a tool for the right situation — not every failing company is a DOCA candidate.
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The Voluntary Administration Gateway
A DOCA can only arise out of a voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth). The sequence is: directors resolve to appoint an administrator when the company is insolvent or likely to become insolvent; the administrator takes control of the company; creditors are convened to two meetings; and at the second creditors’ meeting, the creditors decide the company’s fate.
At the second creditors’ meeting, creditors have three choices: they can resolve that the company be wound up, that the administration end and the company be returned to its directors, or that the company execute a DOCA. If a DOCA proposal has been put to them, creditors can vote to accept it.
What a DOCA Contains
A DOCA is a formal document that must be executed within 15 business days of the second creditors’ meeting, or such longer period as a court allows. It must specify, among other things, the property available to creditors, the order of priority for distributing that property, the conditions the company must meet, and what happens if the company fails to meet those conditions. The essential commercial promise of a DOCA is this: creditors will receive more from this arrangement than they would receive as unsecured creditors in a liquidation.
A deed fund — the assets available to be distributed to creditors — can include contributions from directors, related parties, or third-party investors, as well as assets of the company itself. Where the business is fundamentally viable but faces a specific financial crisis, a DOCA allows the business to be preserved and a structured payment made to creditors, often at a lower total cost than liquidation.
The Creditors’ Vote: What It Takes to Approve a DOCA
A DOCA proposal is approved at the second creditors’ meeting by a resolution of creditors. Under the Corporations Act, the required majority is a majority in number and a majority in value of creditors voting. If a simple majority in number vote in favour but not in value, or vice versa, the administrator must make the casting decision. In practice, the attitude of major secured and unsecured creditors, including the ATO, is often determinative of whether a DOCA proposal can attract the required support.
When a DOCA Makes Sense: The Comparison Exercise
The administrator is required to provide creditors with a report comparing the expected return under the DOCA with the expected return in a liquidation. Creditors use this comparison to make an informed decision. A DOCA proposal that offers a materially better return than the liquidation estimate will generally receive creditor support. One that offers a marginally better return, or that is contingent on events whose outcome is uncertain, may not.
A DOCA is most likely to succeed where the company’s underlying business is genuinely viable, the financial difficulty stems from a specific event or period rather than structural unprofitability, there is a realistic source of additional funds to improve the deed fund, and the administrator can produce a credible estimate showing creditors will receive a better outcome than liquidation.
The Effect on Directors and Related-Party Claims
A DOCA that is executed and complied with releases the company from its pre-administration debts to creditors who were bound by the deed. However, this release does not automatically extinguish claims against directors personally — including insolvent trading claims, unreasonable director-related transaction claims, or Director Penalty Notice liability. Creditors may bargain for a release of director-related claims as part of the DOCA negotiations, but this requires explicit agreement and cannot be assumed.
A DOCA is a negotiated commercial outcome. Its success depends on the quality of the proposal and the strength of the administrator’s advice.
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Frequently Asked Questions
Q: What is the difference between a DOCA and liquidation?
A: Liquidation ends the company’s operations: the liquidator realises the company’s assets, pays creditors in the statutory priority order, and the company is deregistered. A DOCA allows the company or its business to continue operating (or to be sold as a going concern) while making a structured payment to creditors, typically offering a better return than an immediate liquidation would produce.
Q: Can a DOCA be proposed by the directors?
A: Yes. Directors can put a DOCA proposal to the administrator, who then assesses it and presents it to creditors alongside their own analysis of the expected return compared to liquidation. The directors can also recruit third parties, including investors or related parties, to contribute to the deed fund as part of the proposal.
Q: What happens if the company fails to comply with the DOCA?
A: Non-compliance with a DOCA’s conditions typically results in the deed being terminated and the company going into liquidation. The deed will specify what constitutes a default and what the consequences are. Creditors or the administrator can apply to court to terminate the deed and appoint a liquidator where the company is in breach.
Q: Do all creditors have to accept the DOCA?
A: No. Creditors vote at the second creditors’ meeting, and a majority by both number and value is required to approve the DOCA. Creditors who voted against the deed are nonetheless bound by it if it passes. There is, however, a mechanism for dissenting creditors to apply to court to set aside a DOCA that is oppressive or that provides an unreasonable and unjust outcome.
Q: Does a DOCA protect me as a director from personal liability?
A: Not automatically. A DOCA releases the company from its debts to bound creditors, but director personal liabilities — including insolvent trading, DPN liability, and unreasonable director-related transaction claims — are not released unless the deed specifically provides for it and creditors agree. This is a critical distinction that directors often misunderstand.
Q: How long does a voluntary administration and DOCA process take?
A: The voluntary administration process typically runs for 20 to 25 business days, culminating in the second creditors’ meeting. If a DOCA is approved, it must be executed within 15 business days of that meeting. The administration phase therefore typically resolves within 5 to 6 weeks, though the implementation of the DOCA’s terms may extend over months or years depending on the structure of the arrangement.
