DOCA’s Demystified: Who is Bound and to What Extent?
Background
A deed of company arrangement (DOCA) is a deed executed under Part 5.3A of the Corporations Act 2001 (Cth) (CA).
The purpose of Part 5.3A of the CA is to regulate and administer the affairs of an insolvent company in a way that maximises the chances of the insolvent company’s business surviving in some form, or achieves a better return to creditors than an immediate winding up of the company; CA s 435A; Lehman Brothers Holdings Inc v City of Swan [2010] HCA 11, [20]-[21].
A DOCA is essentially a compromise between the insolvent company and the majority of creditors regarding the company’s debts and liabilities. The CA requires DOCAs to specify certain matters, such as the extent to which the insolvent company is to be released from its debts; see CA ss 444A(4) and 444DA. The DOCA then releases the company from its debts, only to the extent that the DOCA provides for the insolvent company to be released from its liabilities and creditors are bound by it; CA s 444H.
The CA does not otherwise expressly limit the terms on which creditors may lawfully agree to compromise their claims against the company; Lehman Brothers, [38]-[39].
However, the binding effect of a DOCA arises from CA ss 444D and 444G. In substance, this limits the scope of the arrangements the company and its creditors can enter into; Lehman Brothers, [40]-[41].
Who’s caught in the net? Understanding the reach of CA Part 5.3A in light of ss 444D and 444G…
Section 444G is straightforward. It expressly provides that a DOCA binds the company itself, it’s officers and members, and the deed administrator.
The position of creditors is less clear-cut. The DOCA binds all creditors “so far as [it] concerns” claims against the insolvent company arising on or before the date specified in the deed. However, a DOCA will not prevent a secured creditor from dealing with or enforcing their interest unless the terms of the DOCA provide otherwise and the secured creditor voted for the DOCA at the second meeting of creditors; CA s 444D. This limits the scope of the arrangements the insolvent company may enter into with its creditors.
Section 444D focusses on claims against the insolvent company only; it does not recognise or deal with interlocking or dependant claims against multiple companies in the same corporate group. Therefore, the terms of the DOCA cannot bind creditors to give up claims against entities other than the insolvent company or release those other entities from creditors’ claims. This is the case even if the other entities are related to the insolvent company; Lehman Brothers, [50]-[53].
Section 444D also limits the extent to which creditors are bound by reference to the date specified in the DOCA (Relevant Date). A DOCA may bind creditors with claims that arose on or before the Relevant Date, including contingent claims for future breaches of an obligation that pre-existed the Relevant Date. In other words, if an insolvent company entered into a contract with a creditor before the Relevant Date, then breached its contractual obligations after the Relevant Date, the DOCA would apply to the creditor’s claims against the insolvent company; Specialised Welding Australia Pty Ltd v Disselkoen [2024] FCA 1184, [50]-[51].
However, a DOCA cannot bind creditors to give up claims or release the insolvent company from obligations that arose after the Relevant Date, regardless of whether those rights and obligations are contained in a new agreement or expressed as a variation to a pre-existing agreement. For instance, if an insolvent company entered into a contract with creditor before the Relevant Date, then subsequently agreed to variations to the contract effective from after the Relevant Date, the DOCA would not release the company from its obligations, or bind the creditor to give up claims arising from the variations; Specialised Welding, [55]-[58].
Key takeaways
1. Binding effect of a DOCA determined by statute: The binding effect of a DOCA stems from CA ss 444D and 444G.
2. Secured creditors: A DOCA cannot prevent secured creditors from enforcing their interests unless the DOCA applies to their claims and they voted in favour of the DOCA.
3. Related entities and interlocking claims: A DOCA cannot bind creditors to give up claims against entities other than the insolvent company, or release entities other than the insolvent company from legal obligations.
4. Contingent Claims: A DOCA can bind creditors to give up claims against the insolvent company for future breaches of existing obligations. However, it cannot bind creditors to give up claims against the insolvent company for breaching obligations that arose after the relevant date – even if those obligations arise from a variation to a pre-existing agreement.