The Advantages of Holding a Deed Of Company Arrangement (DOCA)
A Deed of Company Arrangement, or DOCA, is an arrangement between a company that has entered into administration and the company’s creditors.
DOCAs are a form of company restructuring provided for under Part 5.3A of the Corporations Act 2001 (Cth) (“the Act”) the other alternatives being liquidation and returning the company to the directors.
DOCA – The Administration Process
Phase 1 – Appointment of a voluntary administrator
A decision to appoint a voluntary administrator for a company is made by either:
- The directors (by resolution of the board and in writing); or
- A secured creditor (with a security interest in all or substantially all of the company’s property); or
- A liquidator/provisional liquidator.
The period of voluntary administration commences on the appointment of the voluntary administrator.
Phase 2 – 1st Meeting of Creditors
The voluntary administration must convene the first meeting of creditors within eight (8) business days of being appointed (unless the court allows for an extension of time).
At least five business days’ notice of the meeting must be given to creditors.
Creditors are entitled to vote at this meeting to:
- Replace the administrator
Where a creditor intends to replace the administrator, they must approach a registered liquidator before the meeting and get a written consent from that person that they would be prepared to act as voluntary administrator.
- Create a committee of inspection
Creditors may elect members to same to assist and advise the voluntary administrator, monitor the voluntary administrator, approve certain steps in the administration, and give directions to same. Note: the voluntary administrator must have regard to but is not always required to comply with such directions.
Phase 3- Investigation and Report
The voluntary administrator investigates and reports to creditors on alternatives.
Phase 4 – 2nd Creditors Meeting
The 2nd creditors meeting must be convened within 25 business days after being appointed (or 30 business days were the appointment is around Christmas/Easter), unless the court allows an extension of time.
At least five business days’ notice of the meeting must be provided to creditors.
Creditors are entitled to vote at this meeting to:
- Return the company to the control of the directors
- Accept a Deed of Company arrangement.
Note: the DOCA must be signed by the company within 15 business days following the meeting unless the court allows for an extension of time
- Place the company into liquidation effective immediately. (Administrator becomes company liquidator).
Deeds of Company Arrangement
DOCAs are conceived as a flexible, simple, and expedient scheme of arrangement and is regarded as the most common mechanism for company restructuring of distressed entities.
What is a holding DOCA?
A “holding DOCA” is not a term provided for in the Act, however the Australian Securities and Investment Commission – Regulatory Guide 82 provides the following description of a Holding DOCA (Deed Of Company Arrangement):
“holding DOCAs are typically used as a means of providing more time for a voluntary administrator (or the directors or third parties) to develop proposals for restructuring or otherwise resuscitating the company, thereby avoiding the need for the voluntary administrator to seek an extension from the court of the convening period for the second creditors’ meeting under s439A. Typically, holding DOCAs do not contain any concrete provisions on the future of the company or any immediate benefits for creditors”
What are the benefits of a Holding DOCA?
Holding DOCAs can be an effective tool for companies facing solvency difficulties to deal with creditors while avoiding the hardships of liquidation. Key benefits include:
The terms of a holding DOCA can be highly flexible.
- Holding DOCAs may provide for a successful restoration of a company to solvency;
- The holding DOCA may enable the company’s business to continue from which suppliers may benefit;
- It may provide a greater return to creditors than if the company is wound up; and
- The restructuring of the company’s debts may result in higher return to unsecured creditors.
Are “Holding DOCAs” valid?
While holding DOCAs are not a long-term solution to an organisation’s solvency issues, they can be an effective and valid means to allowing a company to avoid liquidation.
Case example: Mighty River International Limited v Hughes and anor (as deed administrators of Mesa Minerals Ltd)
In this matter, the High Court considered the validity of holding DOCAs as a means to continuing an administration. Ultimately, the Court determined that the use of a ‘holding’ DOCA could be valid in certain circumstances.
Mesa Minerals Limited (subject to deed of company arrangement) (“Mesa”) is a listed mining company. Mighty River International Limited (“Mighty River”) was a shareholder and a creditor of Mesa.
The directors of Mesa entered into a resolution to appoint voluntary administrators (“Vas”) to Mesa. The VAs subsequently issued a report to creditors under s 439A of the Act which recommended that is was not in the best interests of creditors to end administrator or to enter the company into liquidation.
The VAs recommended that creditors resolve to execute a DOCA which:
- did not exclude the possibility of winding up Mesa in the future where this arrangement is ultimately determined to be in creditors’ best interests; and
- allowed the VAs an opportunity to explore a restructuring and/or recapitalisation of Mesa which may provide a more beneficial outcome for creditors as opposed to an immediate winding up.
Terms of the Holding DOCA
A DOCA was entered into which contained terms providing as follows:
- An ongoing moratorium on creditors’ claims during which no creditors could pursue claims against Mesa.
- Contemplated that VAs would further investigate any claims that Mesa had against third parties; and seek proposals for restructuring with a view to having Mesa’s shares continue trading on the ASX (with report on possible variations to the company structure to be provided to creditors within six months).
- Subject to variation of the DOCA, there would be no property available for distribution to creditors.
Challenge to Validity of Terms of the Deed Of Company Arrangement (DOCA)
Mighty River challenged the DOCA on the following three grounds:
- The terms of the DOCA were contrary to the objective and provisions of Part 5.3A of the Act specifically by aiming to circumvent the requirement in s439A(6) for a Court order to extend the period during which the second creditors’ meeting must be convened.
- The DOCA failed to identity property available for distribution to creditors contrary to the provisions under s444A(4) of the Act.
- The DOCA was void since the VAs failed to form the opinion required by s438A(b) of the Act being that the DOCA was in the best interest of company creditors (and the then existing provisions of s439A(4) accompanying reports and statements to set out required opinion – now repealed provision).
While their Honours disapproved of the term ‘holding’ DOCA since the term does not appear in the Act and obscures proper analysis of the terms for validity, they nonetheless held the ‘holding’ DOCA was properly constituted and valid under Part 5.3A of the Act and fulfilled the formal requirements of same.
Their Honours also found that an instrument conferring and creating genuine rights and duties is permitted to incidentally extend time for VAs investigations pending a subsequent variation to the DOCA.
It was also held that the moratorium on creditors’ claims was not contrary to the objectives of the Act since:
- The DOCA increased the chance for company survival or otherwise provided a greater return to creditors than one that would result from the immediate liquidation of the company.
- Preceding the enactment of Part 5.3A of the Act, moratorium-only schemes of arrangement were considered valid and by consideration of the purpose of DOCAs (intended to provide greater flexibility to management of company affairs) DOCAs with similar moratorium terms were also permissible.
- The interests of creditors are not compromised by extending the prescribed period of time within which the administrator is to convene a meeting of creditors to make decisions about the affairs of a company
With respect to the failure to specify any property for distribution to creditors, it was held that s 444A(4)(b) of the Act required a DOCA to specify the property, if any, to be available to pay creditors’ claims and that the intended flexibility of DOCAs would be undermined should the provision for distribution of property (even of nominal value) be required.
The Court also noted that there are numerous examples of DOCAs that involve no property of the company being made available for distribution, yet they continue to be consistent with the intended flexibility of approach to DOCAs. Such examples include:
- A deed of company arrangement may provide for a debt for equity swap.
- Creditors’ claims may be replaced with rights as beneficiaries of a creditors’ trust, with the trust funded by third parties.
- Shares transfers may bolster a DOCA where shares of the company’s members are transferred to creditors.
- The inclusion of a deed of moratorium, which allows the company to trade out of solvency difficulties.
Ultimately, the ‘holding’ DOCA was upheld as valid.
How can we help?
If you are a company director or major creditor of a company suffering solvency issues, you may be able to access the benefits of a holding DOCA for the short term operation and administration of your organisation.
Contact our Insolvency team today to discuss your options.
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