COVID-19: Can a Holding DOCA help your business
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The COVID-19 pandemic and social distancing measures introduced to combat it are having an unprecedented impact on the economy and subjecting many businesses to financial distress. In this challenging time, directors may need to consider what options are available should their businesses struggle to stay afloat. One of the options is a ‘holding’ Deed of Company Arrangement (‘DOCA’).
What is a holding DOCA?
In essence, a holding DOCA contemplates that in exchange for an extension of the moratorium on creditor action, the administrators will conduct further investigation and develop plans to turnaround or restructure the business. Unlike generic DOCAs, a holding DOCA does not involve the distribution of dividends to settle creditors’ interests against a distressed company once and for all. Instead, as its name suggests a holding DOCA is an interim instrument that prolongs the administration process, pending a final decision about the company’s future being made by a stipulated date.
Pursuant to ASIC Regulatory Guide 82, a holding DOCA should define the timeframe of the extended moratorium, disclose the amount of assets available for distribution and keep creditors informed about the administrators’ progression. Moreover, there must be sufficient ground for administrators to recommend that a holding DOCA is in the best interests of creditors, as opposed to resolving to end the administration or an immediate liquidation.
Benefits of a holding DOCA
While holding DOCAs are not a long-term solution to a company’s underlying solvency issues, they can be an effective and valid vehicle to avoid or postpone liquidation. A holding DOCA provides some breathing room to explore and develop a program to recapitalise, turnaround or restructure a company, without the cost in time and money associated with applying for a Court order to do so.
The respite afforded by a holding DOCA is especially valuable in times like now, as the uncertainty and economic challenges arising from COVID-19 means that it is difficult for companies to raise capital or dispose assets at a reasonable price in the current market. Once the crisis is over and trading restrictions eases, management can then evaluate the company’s viability and have the deed administrator convene a meeting of creditors to amend the holding DOCA and effectuate a substantive final resolution of creditor claims.
Key takeaway
Although adopting a holding DOCA could be a useful strategy for certain companies, it is important to note that it is not a magic bullet for all businesses in financial distress. For instance, the extension of deed administration means more professional fees will be incurred hence may further aggravate a company’s financial woes. Moreover, the abundance of uncertainty at the moment may mean that voluntary administrators could find it difficult to justify recommending a holding DOCA.
As always, the right solutions depend on the particular circumstances of the relevant company including its underlying business fundamentals, industry and ability to meet the challenges of a post-Covid world which could be radically different from the one prior. In order to survive the storm ahead, the temporary lifeline facilitated by a holding DOCA must be coupled with genuine effort to revitalise the business, and directors should seek qualified professional advice and consider the wide range of solutions available.
The team at Collins Wentworth are experienced in business financial matters. If you wish to know more about how we can assist you, contact us today.
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