When Directors are faced with their business being in severe financial distress, directors will explore the various options available to them regarding dealing with the future of their business. Those options are many, which includes entering into voluntary administration.
This article aims to outline to the readers how a company may restructure its financial affairs through the formal appointment of an administrator and then entering into what is known as a deed of company arrangement. The focus will be on how the offer under a Deed of Company Arrangement (DOCA) is developed.
Essentially, a deed of company arrangement is an offer put forward to creditors during a voluntary administration. Usually, the terms of the DOCA set out a financial compromise to be paid in a timeframe to creditors to who the company owes monies.
The key driver of a DOCA is that this compromise is put to creditors must be a better outcome than if the company was to be wound up.
The reason why directors or parties (known as proponents) businesses choose to go down the path of offering a deed of company arrangement is usually as a result of them wanting the company to continue in existence, or they have a willingness to avoid liquidation which provides substantial powers to a liquidator to pursue claims under the Corporations Act.
To a lesser extent, the directors may want to protect and then use tax losses that can be achieved through the restructure enabling the new business coming out of the DOCA to access compromised tax losses which can be applied against any future profits they hope to achieve due to the restructure. Therefore, proponents should carefully consider whether these losses are available and seek appropriate tax advice in this regard.
The great benefit of a deed of company arrangement is that the structure and approach with dealing with compromising the creditor position can really be put into any form provided it achieves a return that's better than liquidation. Creditors are the stakeholders that ultimately determine whether to accept the offer made under a DOCA or whether to wind up the company.
Accordingly, to assist clients with undertaking this DOCA option, some considerations that might be relevant to them and which we have seen in a DOCAs put to creditors can include the following;
An offer can be in the form of a lump-sum contribution
The contribution can be made in the form of several payments made over a period of time.
The contribution can be made which is reliant on the outcome of a certain recovery or resolution, such as a litigation claim.
The contribution can be made towards creditors classed in different priority groups such as employees, trade creditors, other creditors and statutory creditors. In other words, the DOCA can define its own priority on creditors, which may be different to how those creditors are treated in liquidation under section 556 of the Corporations Act.
Related party creditors are often either not participating as a creditor or subordinating their claims so that their claim survives the DOCA.
It's important to note that a DOCA cannot overcome the secured position that a secured creditor may have over the company's assets. Therefore, to have the secured creditor agree and/or adjust their security over the company's assets requires a separate agreement outside of the creditor approval passed at the major meeting of creditors held during the voluntary administration period.
The DOCA can also have terms whereby certain assets are sold, transferred to a party or retained by the company post DOCA.
Sometimes the structure of the DOCA offer includes a creditors trust structure. The main reason why parties use a creditor's trust structure is that the remaining company is not obligated to disclose to any stakeholders in the future of that business that it is still subject to a DOCA. The impact of the voluntary administration and then the DOCA can often have a severe brand impact on the business, and so proponents often want to distance themselves from this process as quickly as possible.
There are no restrictions against the length of time a DOCA can be completed (effectuated). This means that when a proponent of a DOCA puts forward their offer to creditors, there are no rules around how long the DOCA and potentially the payment made throughout the period has to be. I have seen DOCAs last over five years.
The key to all the different kinds of approaches in terms of a DOCA is always to be subject to the creditors' attitude and willingness to accept those terms. In some sense, this is the 'gamble" the proponents have to work out in order to win over the creditors and gain their support.
Given that the majority of DOCAs ultimately compromise creditor claims with part payment of what is actually owed by the company combined with a timeframe to make payment, proponents wanting to put forward a DOCA should factor into their offer, terms that will be attractive enough for creditors to support.
Sometimes additional funds may be needed to deal with aggressive and emotional creditors stemming from poor behaviour by the company and its directors prior to the appointment of voluntary administration. These emotive creditors can sometimes forgo the commercial logic of accepting the DOCA simply because they want to punish the proponents. If the terms of the DOCA requires a lengthy payment plan by the proponents, this can increase the likelihood that creditors will vote against it. Careful consideration to lengthy DOCA's terms should be approached cautiously with a strong sense of the "temperature gauge" of creditors wanting to support.
Proponents should discuss with the appointed voluntary administrator and their legal advisors whether the terms are realistically going to be accepted by creditors. Thankfully, the reality of the voluntary administration and the requirement by the voluntary administrator to either recommend for or against the DOCA usually involves various discussions prior to setting out their recommendation whether to support the DOCA if they are of the view that the creditors are sufficiently emotive enough which could cause the proponents to make the DOCA offer more attractive.
A proponent of a DOCA needs to be aware what the various issues creditors will consider when determining whether to vote in favour of supporting the DOCA.
These considerations can include.
How much of a return will I receive and how much will I need to compromise with regards to my debt?
How long will it be before I receive a payment?
Is the payment contingent on a certain outcome or recovery of an asset?
What security or personal guarantees have been offered up by the proponents or relevant individuals?
Are related parties participating in the distribution of funds under the DOCA?
Will I receive a better return under a liquidation scenario?
What type of claims is available to the Liquidator if the company was to be wound up and how likely will a financial recovery be achieved from those claims?
How certain is the provision of funds or realisation of assets likely to occur under the terms of the DOCA?
Will the company continue to trade after entering into a DOCA, and if so, will the creditor continue to obtain future orders or contracts from the company?
Are the proponents and or directors been involved in a previous insolvency process?
If there is a secured creditor, what is the attitude and support being provided by the secured creditor, and is there any likelihood of enforcement by a secured creditor after entering the DOCA?
When a business or company is experiencing financial difficulty and want to continue trading following a restructure, the opportunity to restructure through a DOCA becomes very relevant.
At Cathro & Partners, we work with finance brokers and other advisors to assist them in investigating and analysing businesses to create greater visibility around financial performance and potential future challenges that may come into that business.
The aim of our firm is that we get asked to get involved much earlier in the process. Rather than being engaged as an insolvency practitioner looking at formal insolvency solutions like voluntary administration and liquidation, we are engaged to undertake a role that includes restructuring, undertaking a possible turnaround process and/or often preparing and investigating accounts reports for consideration. These engagements often require C&P to work alongside management, their financiers and finance brokers. Plus, its advisers to rectify the early warning signs that may start to creep into a business but are identified early enough to be rectified to avoid insolvency and ultimate failure.