How a Deed of Company Arrangement may help your business survive post-COVID
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The government’s relief packages have provided a lifeline to businesses hit by COVID-19. However, as we approach the halfway mark for support measures which are mostly designed to last six months, business owners must consider how their businesses can survive in the post-COVID economy once the government turns off the stimulus tap by the end of September.
If you have a sound underlying business that is burdened by excessive debt, a voluntary administration followed by a Deed of Company Arrangement (DOCA) can be the solution.
A DOCA is a flexible instrument that allows the contemplation of a variety of solutions to settle a company’s liabilities. Proposed by company directors for creditors to consider during a voluntary administration, a DOCA aims to provide creditors with a better outcome than an immediate liquidation, while enabling the company to shake off excessive debt and trade on as a going concern.
To enter into a DOCA, a company needs to first appoint a voluntary administrator to conduct a formal restructure process. Upon appointment, a moratorium on creditor actions against the company will be imposed while the administrator takes control of the company, conducts investigation into its affairs and advises creditors in determining the company’s future.
During this process, company directors may work with the administrator to formulate a DOCA proposal. The content of DOCA is highly malleable and can be tailored to suit a business depending on its circumstances. For instance, it may contemplate a compromise of debts with payment in lump sum, as regular instalments or as a percentage of the company’s future profit over a defined period, or to postpone a final decision until a further time (known as a ‘holding DOCA’).
Once a DOCA is proposed, the voluntary administrator would make a reasoned recommendation on whether it is in the creditors’ interests to accept the proposal. Creditors will vote whether to accept the DOCA proposal or instead wind up the company in the second meeting of creditors. Should a majority in value and a majority in number of creditors vote for the DOCA proposal, the resolution would be carried and DOCA would bind all unsecured creditors and secured creditors who voted in favour. The company would then be handed back to its directors, execute the DOCA and perform its obligations under the Deed Administrator’s supervision.
The benefit of a DOCA extends beyond maximising a company’s chance of survival and providing creditors with a superior return than what they would receive in a liquidation scenario. Most importantly, by enabling a business to trade on as a going concern, its employees can keep their jobs, landlord keep a tenant, suppliers keep with a customer and customers keep a supplier.
Admittedly, DOCA is not a silver bullet that can solve the trouble of every financially distressed company. For those without a viable underlying business, the relief afforded by a DOCA may only be delaying the inevitable. However, if your business is one that can return to profitability once the debt burden is eased, now is the time to seek professional advice and restructure.
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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