COVID 19 – HOLDING DOCA - THE SOLUTION TO THE LIQUIDITY TRAP AND BUILDING FINANCIAL BRIDGES
What is a DOCA?
A Deed of Company Arrangement (DOCA) is a mechanism that has been commonly used for insolvent or near insolvent companies in the Australian commercial landscape for some many years.
The introduction of Part 5.3A of the Corporations Act, now some 25 years ago, is intended to give a company, with the approval of creditors, some relief from immediate claims and to give the company breathing space to re-organise its affairs.
The intention was that by the time of the second meeting of creditors, and armed with the report of the administrators, the creditors would be in a position to decide the company’s future which could be one of three options:
The adoption of a DOCA; or
The immediate winding up of the company; or
The administration be terminated and in effect, the company handed back to director(s).
The intention was that the future of the company would be resolved by adopting one of the above steps.
For some time however, insolvency practitioners and insolvency lawyers developed what had become known as a holding DOCA which in effect provided more time for a voluntary administrator to develop proposals for restructuring or otherwise resuscitating the company.
There was some controversy as to whether these DOCAs were invalid but in the High Court decision hearing of Mighty River International Ltd-v-Hughes & Ors which was handed down in 2018, the Court held that holding DOCAs are valid.
With the devastating impact that COVID 19 is having on our social fabric with regard to the health of some and the finances of many, is a holding DOCA a mechanism to hold off the liquidity trap that many businesses are in.
We think that there are good reasons to think that it will be part of the solution, and if you are experiencing cash flow difficulties or think that your business is on the brink of insolvency but is otherwise a good and profitable business and worth saving, we may be able to assist in “building that bridge” with the use of a holding DOCA until our social and working lives return to normal.
Please do not hesitate to contact our office on 03 9428 1033 for a free consultation.