Deed of Arrangement (DOCA) in Australia: How It Works

Cash flow crunches and unexpected debts can happen to any business. If your company is under pressure but still viable, a deed of arrangement (more accurately, a Deed of Company Arrangement or “DOCA”) can be a practical way to restructure debts and keep trading.

In this guide, we’ll explain what a DOCA is in plain English, when it’s worth considering, how the process works, and what to look out for as a director. We’ll also touch on alternatives and the key documents that often sit alongside a restructuring.

If you’re feeling overwhelmed, you’re not alone - the goal here is to give you clear options so you can protect your business and move forward with confidence.

What Is A Deed Of Arrangement (And Do We Mean A DOCA)?

In Australia, when people say “deed of arrangement” for a company, they usually mean a Deed of Company Arrangement (DOCA). A DOCA is a binding agreement between a company and its creditors that sets out how the company’s debts will be dealt with after it has entered voluntary administration.

A DOCA is a type of deed, which is a formal legal instrument. It’s negotiated and proposed by an administrator, then voted on by creditors. If approved, it allows the business to compromise debts, pay them over time, sell assets, or otherwise restructure - all with the aim of producing a better return to creditors than immediate liquidation.

It’s different from an informal repayment plan because it’s legally binding on all unsecured creditors (and sometimes secured creditors for the covered shortfall) once approved. It also differs from personal insolvency options, which apply to individuals rather than companies.

When Should A Small Business Consider A DOCA?

A DOCA is worth exploring when your company is insolvent (or likely to become insolvent) but the underlying business has a realistic path to survival and creditors are likely to get a better outcome than liquidation.

Typical indicators a DOCA may be suitable include:

• Your core business is sound, but recent shocks or one-off events have disrupted cash flow.
• You can offer a better return to creditors over time than a liquidator would achieve from an immediate asset sale.
• There’s interest from investors or buyers to inject funds if debts can be compromised through a formal process.
• You need breathing space to complete a sale of business, novate key contracts, or downsize operations.

As directors, you should also stay across your duties and solvency obligations. If you’re unsure about the company’s ability to pay its debts when due, it’s important to act promptly and consider the right steps - including a board solvency resolution and obtaining professional advice.

How Does A DOCA Work? Step-By-Step

Here’s the typical journey from distress to a DOCA, in simple steps.

1) Enter Voluntary Administration

Directors appoint a registered administrator when the company is, or is likely to become, insolvent. This triggers a moratorium that pauses most creditor enforcement while options are assessed.

2) Investigations And Proposal

The administrator assesses the company’s affairs and works with directors to prepare options. If continued trading is viable, the administrator may put forward a DOCA proposal to creditors. This proposal will explain expected returns and why it beats liquidation.

3) Creditors’ Vote

At the second creditors’ meeting, creditors vote on whether to accept the DOCA, wind up the company, or return control to directors. If a majority in number and value vote for the DOCA, it becomes binding on all unsecured creditors and certain secured creditors for any relevant shortfall.

4) Execute The DOCA

The deed is executed (usually within 15 business days of the vote) and sets out the binding terms: how much will be paid, over what timeframe, conditions precedent, asset sales, releases, and the administrator’s role (now as deed administrator).

5) Perform The DOCA And Exit

The company (under the deed administrator’s oversight) meets obligations under the DOCA. When completed, the company is released from covered debts and can continue trading outside of external administration.

Key Terms To Negotiate In A DOCA

While every DOCA is tailored, typical provisions you’ll see or negotiate include:

• Contribution mechanics: lump-sum contributions, instalment payments from future profits, or proceeds from a business or asset sale.
• Timeline and milestones: dates for payments, completion of any sale, and when creditor claims must be lodged.
• Moratorium and releases: the scope of claims compromised under the DOCA and any releases granted to the company. This may interface with separate deeds of release with specific creditors or stakeholders.
• Treatment of employees and tax debts: priorities and how entitlements or ATO claims are addressed.
• Control and reporting: who runs the business during the DOCA and how progress is reported to creditors.
• Default and termination: what happens if the company misses a payment or fails a condition, and when the DOCA may convert to liquidation.

If the plan includes selling the business, you’ll often need to manage contract transfers. Tools like contract assignments or novations and, in some cases, a well-structured asset sale agreement will be critical for a smooth exit.

DOCA Vs Liquidation: Pros, Cons And Alternatives

It’s helpful to step back and compare your options - a DOCA is not the only path.

Benefits Of A DOCA

• Better returns to creditors where the business has value beyond a fire sale.
• Breathing room to restructure, sell assets in an orderly way, or complete a business sale.
• Preservation of jobs, supplier relationships and goodwill that would be lost in liquidation.
• Clear, binding framework that stops ad hoc demands and keeps everyone aligned.

Risks And Limitations

• It requires creditor support - if creditors don’t vote it up, the company usually goes to liquidation.
• Cash flow pressure can persist if contributions are ambitious or trading conditions worsen.
• Directors must remain vigilant about the company’s position and compliance during the process.

Common Alternatives To Consider

• Informal workouts: negotiate directly with key creditors without formal administration. This can work for a small number of creditors but lacks the binding force of a DOCA.
• Business sale before administration: sell assets or the business as a going concern, then wind down the shell. The choice between a share sale vs asset sale will affect tax, liabilities and transfer logistics.
• Voluntary liquidation: if the business is no longer viable, an orderly wind-up can minimise costs and provide clarity.

Each option has moving parts. This is a good moment to get tailored legal and accounting advice so you can compare real-world outcomes for your business and your creditors.

Key Legal Considerations And Helpful Documents

Even in a fast-moving restructuring, setting the right legal foundations reduces risk and confusion. Consider the following practical areas.

Board Governance And Director Duties

Record decisions carefully, keep minutes and stay engaged with the administrator. When weighing up options, remember the business judgment rule under section 180(2) of the Corporations Act - it protects directors who make informed, rational decisions in good faith for a proper purpose. For a refresher on that rule, see this overview of the business judgment rule.

If you have given personal guarantees, understand how a DOCA interacts with those obligations. The DOCA binds the company and its creditors, but it doesn’t automatically release a guarantor unless the guarantee terms or the deed specifically deal with it - separate negotiation may be needed.

Shareholders And Control

Restructures often raise questions about control, dilution and new capital. If you have co-founders or investors, ensure your Shareholders Agreement is current, and be clear on how decision-making and share transfers will work during the process.

Constitution And Execution

Check your Company Constitution for execution and authority provisions. You’ll need to properly authorise appointments, deed execution and any asset or share transactions tied to the DOCA.

Transferring Contracts And Assets

If the restructure includes a sale or carve-out, expect to deal with consent requirements, PPSR registrations and customer or supplier contracts. A planned approach to assignments, novations and releases will help avoid last‑minute roadblocks.

Settlement And Releases

Alongside the DOCA, you may need targeted settlements - for example with landlords, critical suppliers or litigation opponents. A tailored Deed of Release and Settlement can finalise disputes and reduce ongoing risk as you implement the plan.

If A Sale Is Part Of The Plan

When selling the business or assets during a DOCA, you’ll need a robust transaction suite. Decide early whether the buyer will acquire shares or assets (the share sale vs asset sale choice impacts liabilities, consents and timing) and ensure the key contracts and IP move across cleanly.

Frequently Asked Practical Questions

Do suppliers have to keep supplying during a DOCA? The DOCA itself doesn’t force a supplier to continue if their contract allows termination for insolvency; however, many choose to keep supplying if payments are made and the plan looks viable.

Can secured creditors be bound? A DOCA binds unsecured creditors and can deal with any shortfall for secured creditors that participate, but it typically won’t stop a secured creditor enforcing their security unless they agree or the Corporations Act restrictions apply. Your administrator will advise on the specific security positions.

What happens if the company defaults under the DOCA? The deed will set out consequences of default, which often include termination and conversion to liquidation. Clear reporting and conservative cash flow planning help avoid this outcome.

Key Takeaways

• A “deed of arrangement” for companies in Australia is a DOCA - a binding restructuring deal approved by creditors during voluntary administration.
• Use a DOCA when your business is viable and likely to deliver creditors a better outcome than liquidation, but needs a formal framework to compromise debts.
• The process involves appointment of an administrator, a proposal and vote, execution of the deed, and careful performance until completion.
• Key terms include contributions, timing, releases, employee and ATO treatment, control and default provisions - negotiate these with your administrator.
• Alternatives include informal workouts, pre-administration sales, or voluntary liquidation. Compare these paths based on returns, risk and timing.
• Directors should stay on top of governance, guarantees and approvals, and line up supporting documents like releases, assignments and a current Shareholders Agreement where relevant.

If you’d like a consultation on using a deed of company arrangement for your small business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.