The current economic challenges are causing an increase in companies across a range of industries entering administration or liquidation.
If a company can no longer pay its debts, the directors may appoint an independent administrator to take control of the company, investigate its financial position and make recommendations on how to proceed. This process is a voluntary administration.
A Deed of Company Arrangement (DOCA) is a binding agreement entered into between a company in voluntary administration and its creditors that sets out how the company’s affairs will be dealt with, including the company’s assets and debts.
When a company enters voluntary administration, a DOCA can be entered to:
- help the company to avoid liquidation and continue to operate; and
- provide company creditors with a better chance of recovering debts than would be the case if the company was placed into liquidation.
A DOCA releases a company from a debt if the deed provides for the release and the creditor is bound by the DOCA (s. 444H Corporations Act 2001).
Once a DOCA is in place, a creditor’s recovery options against the company are limited as they are bound by the repayment regime set out in the DOCA.
Importantly, however, while a DOCA binds the company and its directors, it does not extinguish personal guarantees given by directors for company debts. Release of a company’s debt under a DOCA does not affect a creditor’s rights under a guarantee or indemnity (s.444J Corporations Act).
A director will still be liable under a personal guarantee and a creditor can seek to recover a debt from a director personally under a personal guarantee.
Directors should therefore be mindful of any personal guarantee that they have given before considering voluntary administration.
If you are a director of a company facing financial difficulty or are a creditor who is owed a debt by a company please reach out to our dispute resolution team for advice.
