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What is a Deed of Company Arrangement?
One possible outcome of the voluntary administration process is that a Deed of Company Arrangement (DOCA) be voted on and agreed to by the company's creditors at creditors' meetings. DOCAs are strictly regulated by the Corporations Act including how a DOCA can be varied or terminated and can be subject of scrutiny by the courts on the application of an interested party.
A DOCA is an arrangement between the company's creditors and the company for the purpose of achieving the best available outcome for creditors.
A DOCA provides a moratorium period to the company and in this way gives the company an opportunity to restructure its debts and equity with the ultimate goal of returning to normal trading and providing the maximum return to creditors.
Who is bound by a DOCA
Secured creditors who vote in favour of a DOCA and all unsecured creditors are bound by the DOCA once passed. Secured creditors who do not vote in favour are not bound by it. In addition, the directors, officers, members and the deed administrators are also bound by the terms of the deed.
Execution of DOCA
There is a strict timeline as to when a DOCA must be executed. If a proposed DOCA is not executed within 15 business days then the company is taken to have passed a special resolution for the winding up of the company.
What must be included in a DOCA
Under the Corporations Act, a proposed DOCA must specify following:
the administrator of the deed;
the property of the company (whether or not already owned by the company when it executes the deed) available to pay creditors’ claims;
the nature and duration of any moratorium period for which the deed provides;
to what extent the company is to be released from its debts;
the conditions (if any) for the deed to come into operation;
the conditions (if any) for the deed to continue in operation;
the circumstances in which the deed terminates;
the order in which proceeds of realising the property of the company is to be distributed amongst creditors bound by the deed;
the day (not later than the day when the administration began) on or before which claims must have arisen if they are to be admissible under the deed.
A deed administrator is required to give the same priority to employee creditors as they would have received in any other circumstances where the company was in administration or liquidation. That is, employees will generally rank above the unsecured creditors.
What is a Scheme of Arrangement?
Unlike DOCA, the use of a Scheme of Arrangement (Scheme) does not require the company to be insolvent in order to adopt a Scheme but it can be used in such circumstances. A Scheme is a court-approved arrangement that binds the company and the members and creditors identified in the Scheme documents. In an insolvency context, it typically involves the forbearance of debt owed to existing creditors and may include a swap of debt for equity. Therefore it is also can be used by financially distressed companies as well as mergers and takeovers that may not involve an insolvent company.
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