In recent years, we have seen the deed of company arrangement or "DOCA" being used in Australia by sophisticated investors as a restructuring tool of choice. This is primarily due to the swiftness in which a DOCA can be implemented and its flexibility to effect a broad range of restructuring transactions with relative ease. However, with DOCAs being utilised in increasingly complex situations, sophisticated stakeholders are devising new and innovative ways to disrupt them – we have even seen a stakeholder seek to have administrators removed from office in an effort to thwart a DOCA proposal before it was put to a creditor vote.
In this article we consider the circumstances in which we have seen DOCAs challenged, when the Court may be willing to intervene, and outline practical considerations for those promoting and assessing DOCA proposals.
DOCAs and Setting Them Aside
A DOCA, which sets out the terms of a restructuring transaction for an insolvent company, is a contract that can only be entered into as part of the voluntary administration regime in Australia. If recommended by the administrators, the DOCA terms will be detailed in a report to creditors,1 and approval sought from 50% of the creditors present and voting (who together hold more than 50% of the outstanding debts of the company) at a meeting of creditors held to determine the future of the company.2 If approved, the administrators and deed proponent have 15 business days to sign the DOCA, following which, it becomes binding on the insolvent company, its creditors, officers and members.
Notwithstanding the DOCA coming into force, it can be subsequently terminated and set aside by Court order pursuant to section 445D of the Corporations Act. Whether the Court will make such an order is a two-step test. First, the Court must be satisfied that one of the grounds in section 445D has been established,3 which include:
- information about the DOCA was false or misleading;
- there was a material omission from such information;
- effect cannot be given to the DOCA without injustice or undue delay;
- the DOCA is oppressive or unfairly prejudicial to one or more creditors; or
- a material contravention of the DOCA terms has occurred.
Second, the Court must determine whether to exercise its discretion to terminate the DOCA, which involves an assessment as to whether it is in the interests of creditors as a whole that the DOCA be set aside or against public interest if the DOCA is allowed to remain on foot.4
Guidance for the Promotion of DOCAs
The Courts have acknowledged that the legislation assumes that creditors are the ones best placed to determine what is in their best interests – so where a creditor vote has occurred, a termination order will not be made lightly.5 Having said that, the following features should be carefully considered by DOCA proponents and insolvency practitioners when promoting a DOCA to ensure as best as possible that the DOCA withstands a subsequent attack:
- Purpose – The predominant purpose of the DOCA must be aligned with the objects of the voluntary administration regime, being to provide for the affairs of an insolvent company to be administered in a manner that maximises the chances of that company or its business continuing in existence, or if that is not possible, results in a better return for its creditors and members than an immediate winding up of the company.6 Where the DOCA is being promoted for some other or ulterior purpose, the DOCA could be set aside as an abuse of process.7 For example, where the predominant purpose of a DOCA is to extinguish the debt owed to a single creditor and prevent an inevitable liquidation (and investigations into insolvent trading), that DOCA is liable to be set aside.8 Similarly, where the effect of a DOCA is to bypass an investigation into certain transactions or to shield directors from investigation, the DOCA may be set aside on the grounds that effect cannot be given to it without injustice.9
- Reporting – As creditors vote solely on the information made available to them in the administrators’ report to creditors, it is of paramount importance that the report is accurate and details all information necessary to allow the creditors to make an informed decision on how to vote. Inaccuracies or omissions are an easy target for disgruntled underbidders or stakeholders seeking to have a DOCA set aside. Ideally, the full form DOCA would be appended to the report to creditors. However, where this is not possible, the DOCA proponent should be given an opportunity to comment on the relevant sections of the report that outline the DOCA proposal, its terms and effect, to ensure its accuracy and completeness.
- Creditor profile – It goes without saying that a thorough understanding of the creditor profile of an insolvent company is essential in the promotion of any DOCA. While in the vast majority of cases a DOCA will propose a compromise of creditor claims, DOCAs that single out a specific creditor and treat them differently to other creditors in the same class are often challenged. While the Courts have acknowledged that the DOCA process itself means that it is to be expected that some creditors will gain a benefit and some creditors will lose a benefit,10 where the is no objective or rational basis for a certain creditor being treated differently,11 the DOCA risks being set aside on the basis it is oppressive or unfairly prejudicial. This is so even where the relevant creditor claim is disputed by the deed company.12
- Related Parties – Caution should always be exercised when related parties are party to, instrumental in approving, or beneficiaries under, a DOCA. Whether a vote is carried by related creditors has been established as a relevant consideration in making an order under section 445D of the Corporations Act.13 DOCAs that contain releases in favour of directors and related parties of the deed company,14 or that result in the extinguishment of liquidator claims against related parties,15 have been set aside by the Courts.
- Process – The process undertaken by administrators to identify the favoured DOCA can become crucial to the viability of the DOCA. That is, unless the process followed by the administrators to identify the DOCA is defensible, the DOCA itself risks coming under attack. Where available, administrators should retain an independent sale adviser, interrogate all bids for the insolvent company and be comfortable that the preferred DOCA represents the best outcome for creditors (and, if relevant, members) that is capable of completion. The administrators should also be comfortable that the DOCA will result in a superior return to creditors than would result in a winding up of the insolvent company. This relies on a sound understanding of the counterfactual – where evidence can be adduced that recovery actions in a liquidation will likely be significant, this will put pressure on the DOCA and whether it is in fact in the best interests of the creditors.
Conclusion
While the flexibility and efficiency of the DOCA makes it an attractive technique to achieve a restructuring in Australia, its implementation should always be carefully considered by insolvency practitioners and DOCA proponents alike to ensure it can withstand any subsequent challenge. DOCA proposals should always be considered with regard to the objectives of Part 5.3A of the Corporations Act, including those that provide for unequal treatment of creditors,16 or that see significant claims that would be available in a liquidation avoided.
1 As required by section 75-225 of the Insolvency Practice Rules (Corporations) 2016 (Cth).
2 If the DOCA purports to deal with secured property, the relevant secured creditor(s) must also vote in favour of it for the DOCA to be binding on those secured parties: s444D(2), Corporations Act 2001 (Cth).
3 Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 4) [2024] FCA 112 at [248].
4 Commissioner of State Revenue (Qld) v McCabe (No 2) [2024] FCA 662 at [46]; Commissioner of State Revenue (NSW) v Gleeson (as administrators of Dalma Form Speciality Pty Ltd) [2024] FCA 908 at [125].
5 Re Academy Construction & Development Pty Ltd [2024] NSWSC 808 at [60].
6 Section 435A, Corporations Act 2001 (Cth).
7 Gleeson at [149].
8 Canstruct at [124].
9 Cresvale Far East (in liq) v Cresvale Securities Ltd (2001) 37 ACSR 394 at [190].
10 Re Academy Construction at [60].
11One common example of differential treatment of creditors is where certain suppliers of goods or services are critical to the ongoing trading of a business. Such key suppliers may receive preferential treatment under a DOCA to facilitate continuity of trading – this will largely be a matter for the deed proponent insofar as the ongoing commercial relationship with the relevant supplier is concerned.
12 Re Academy Construction at [71].
13 Sino Group International Ltd v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110 at [71].
14 Re Academy Construction at [102].
15 Horton Asset Pty Ltd v HMSY Group Pty Ltd [2025] FCA 1051.
16 Re Academy at [60] (citing Deacon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 at [202] – [203]).
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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