If your company cannot dock in a safe harbour, in a voluntary administration, the administrators may consider a ‘holding DOCA’ to buy more time to develop proposals for restructuring or resuscitating the company
What is voluntary administration?
If a company is insolvent or likely to become insolvent, the directors may appoint voluntary administrators to take control of the whole company with a view to resolving its future quickly. Voluntary administrators may also be appointed by a liquidator, provisional liquidator, or a secured creditor.
Within eight business days of being appointed, voluntary administrators must hold a meeting of the company’s creditors unless the Court grants an extension of time.
The voluntary administrators must investigate the affairs of the company, including its property and financial affairs.
Unless the Court grants an extension of time, the voluntary administrators must hold the second meeting of creditors within 25 days of being appointed.
There are generally three options available at the second meeting of creditors:
- Return the company to the control of the directors, ending the voluntary administration
- Agree a DOCA (deed of company arrangement) – see below
- Appoint a liquidator to wind up the company
What is the position of the company’s creditors during the voluntary administration?
- Unsecured creditors cannot enforce their claims against the company without the consent of the administrator or the Court
- Landlords cannot recover their property
- Secured creditors cannot enforce their security, except in some limited circumstances
- Personal guarantees cannot be enforced without the Court’s consent
Who are unsecured creditors?
An unsecured creditor is a person or entity that is owed money by a company and does not have security – such as a charge over property in respect of the debt.
Unsecured creditors include:
- Suppliers of goods and services
- Retail customers who have paid for goods not yet delivered
- Employees
- Contingent creditors – eg a person or entity with a claim against a company, such as for breach of contract, misleading or deceptive conduct or negligence, upon which the Court has not yet given judgment, and a settlement has not been reached.
What is a DOCA?
A DOCA is an agreement reached between the company and its creditors. It is the predominant vehicle to restructure a company that has entered voluntary administration.
A DOCA aims to:
- Facilitate the continuation of the business or part of it; and or
- Provide a better outcome for the creditors than would be available in an immediate winding-up of the company.
A DOCA is voted on at the second meeting of creditors. It is passed by creditors voting 50% in number and 50% in value of debt. A DOCA is binding on all creditors, whether or not they vote for it. There are often legal issues arising around voting and some challenges, which non-approving or excluded creditors could advance.
Time limit for approving DOCA
The administrators are usually required to hold the second meeting of creditors within 15 to 25 business days of their appointment. At this second meeting, the administrators present their findings about the affairs of the company and present their proposal for a way forward, which may include a proposed DOCA.
But, here’s the problem. Although the DOCA process was developed with the need for speed in dealing with a company in financial difficulties, and as an alternative to a scheme of arrangement, 25 days is often too short for the administrators to properly understand the affairs of the company and develop the best possible proposal for its future.
The Corporation Act 2001 provides a mechanism for the administrators to ask the Court for an extension of time to convene the second meeting of creditors. If an extension is granted, the administrators would have more time to investigate the affairs of the company and come up with proposals. This breathing space could prove vital in resuscitating the company. But, a Court application can be costly and distracting, and there is no guarantee that a Court would grant the extension.
So, is there an alternative to approaching the Court for an extension of time to convene the second meeting of creditors? Yes, the Mighty River – a ‘holding DOCA’.
What is a holding DOCA?
In Mighty River International Ltd v Hughes [2018] HCA 38, a majority decision, the High Court of Australia approved the use of holding DOCAs (albeit not the use of the term itself).
Although the Corporations Act does not use the term ‘holding DOCA’, it is widely used in the insolvency industry. It amounts to a DOCA which effectively places the company in a holding pattern and buys the administrators more time to investigate the affairs of the company and develop further plans for restructuring.
A holding DOCA is voted on at the second meeting of creditors and effectively agrees a holding pattern. As with a normal DOCA, creditors must pass a resolution agreeing to the holding DOCA. If there is a majority in the number of creditors and value of debt, the holding DOCA can be passed notwithstanding dissenting creditors.
A holding DOCA, especially in these uncertain times, gives the administrators more time to consider restructuring options for the company and, in the meantime, stays any creditor claims.
A holding DOCA should:
- contain a stay of creditors’ claims for a set time period
- provide regular reporting to creditors
- identify any assets available to pay creditors, even if the DOCA says no assets are available
Before executing a holding DOCA (or any DOCA), the administrators must ensure there is sufficient information to enable them to express an opinion about whether it is in the interests of the company’s creditors:
- for the company to execute the holding DOCA
- for the administration to end
- for the company to be wound up
Comment
The use of a holding DOCA is clearly different to the safe harbour regime because a company in safe harbour has not undergone a formal insolvency procedure. In safe harbour, the directors are shielded from personal liability while they, in effect, trade their way out of insolvency. Given directors are now shielded from personal liability arising from insolvent trading occurring the in next six months as a result of Coronavirus Economic Response Package Omnibus Bill 2020, there may be less uptake of the safe harbour regime. Nevertheless, creditors may still be looking to enforce contracts and debts, so companies should still consider the voluntary administration regime seriously.
Holding DOCAs have several benefits, including keeping employees on board, the business continues trading as far as possible, and creditors agree, or are forced, to defer enforcement of their debts.
A further obvious benefit of a holding DOCA is that, in effect, it avoids the need for a distracting and sometimes costly Court application to extend the time to convene the second meeting of creditors.
Further Information
For more information about holding DOCAs and voluntary administration, contact Trevor Withane: