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A DOCA is a scheme under voluntary administration which is agreed to between directors and creditors that involves a company continuing to trade, whilst adopting different strategies and structures to deal with their debts to creditors. Voluntary administration provides directors with the possibility of saving the company's business without making transfers of assets to the prejudice of creditors. A common reason for creditors opting for the company to execute a DOCA is their belief that in the circumstances of the particular company there is some possibility of a higher return than they would get in a liquidation. In some cases that higher return could come from an improvement in the company's operations as the result of compromising and restructuring the company's liabilities. The restructuring of liabilities could involve creditors taking equity in exchange for debt. In some cases the solution may be to sell off peripheral businesses and reconstruct the company's core business. In some cases the proprietors of the company may be prepared to provide the company with more finance by way of share capital or subordinated debt. In another case there may be no option but to conduct the business only until it can be sold as a going concern. Proper and detailed advice may be necessary in this regard if you are considering entering a DOCA, or if you are a creditor to a company that has entered into a DOCA.

There are certain advantages for directors in a DOCAwhich render it an attractive option if a company has solvency issues. Unlike winding up, voluntary administration gives directors an incentive to assist the administrator to try to salvage the company. But the decisions will be made by meetings of creditors. Whether creditors will be sympathetic to a plan devised by the administrator can depend on whether they want the company to continue. The motivations of creditors can differ. For example, the company may be one of a small number in a particular market and suppliers of stock to the company may not want to see it go out of business because of their fear of concentration of buying power in competing companies. In addition, a director may be subject to adverse repercussions if they allow a company to enter into receivership or liquidation. In the past, directors of a failing company have been tempted to transfer all its assets to a newly-formed and so-called “Phoenix” company to carry on much the same business in the same premises. Creditors of the old company would be frustrated. In some cases the directors would be personally liable for breach of fiduciary duties but recovery often required expensive litigation. Also, a director or manager of a failed company may be prohibited from being involved in the management of any companies in future. This prohibition can also extend to a director who has been the subject of a liquidator's adverse report.  Entering a DOCA and appointing an administrator is a defensive strategy that can mitigate a director from any liability or claims of insolvent trading. Insolvent trading is a serious offence which carries civil penalties and personal liabilities. Appointing an administrator may constitute ‘all reasonable steps to prevent the company from incurring the debt’ and if appointment cannot be achieved with board approval, a director can apply to the court for a winding up order. Therefore if you are involved in the management of a company that is experiencing solvency concerns it is highly advisable to seek sound legal advice from an experienced Bankruptcy and Insolvency Lawyer to ensure that your interests are protected.

There are various consequences for creditors that agree to a DOCA. If the administration is conducted in an impartial fair manner, the company can continue to operate and may be able to repay its debts and step out of administration. However there are various risks that creditors should be advised about. First is that a DOCA does not have to be scrutinised by the court before it comes into force therefore its integrity depends on the insolvency practitioners. If the administrator does not adequately investigate the company's affairs or fails to inform the creditors fully, the creditors may approve a compromise DOCA which is against their interests. In some cases winding up in insolvency would have been a better course because then a liquidator might recover compensation from directors if the company had engaged in insolvent trading or recover property which passed from the company under voidable transactions which, only in a winding up, could be set aside under insolvency law as uncommercial transactions or unfair preferences. The administrator must specify, in the statement of opinion to the second creditors' meeting, whether there are any transactions that appear to the administrator to be voidable transaction. As a practical matter, whether any proceedings could be taken to obtain recoveries may depend on creditors being willing to indemnify the liquidator against liability for costs.

Sometimes the administrator chosen by the directors may not be sufficiently independent of them. There are mechanisms to protect against this conflict of interest, which include a declaration at the first creditors meeting of the administrator’s relationship with the company, its related parties and those with a financial interest. Another risk for creditors is where the passing of a creditors' resolution in favour of a DOCA more in the interests of the directors and shareholders than the creditors as a result of imbalanced voting powers- this may be set aside by the court. If you are a creditor of a company in administration obtaining proper legal advice from a Bankruptcy and Insolvency Lawyer can be immensely informative and advantageous to protect your interests.

If you would like further information or wish to discuss your DOCA matter with an experienced Bankruptcy and Insolvency Lawyer please do not hesitate to contact us by telephone on (02) 9233 4048 or by email to info@navado.com.au. 

 

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