When a startup’s runway hits zero and the bridge round falls over, most founders assume the story ends in liquidation: a liquidator sells what can be sold, the company is deregistered, and everything it held — contracts, licences, customer relationships, the brand — dies with it. But Australian insolvency law offers a second exit from voluntary administration that is built for rescue rather than burial. A deed of company arrangement (DOCA) is a binding compromise between an insolvent company and its creditors under Part 5.3A of the Corporations Act 2001 (Cth). Done well, it can cut the debt load, return the company to its directors or a new owner, and preserve the things a liquidation would destroy. For a startup whose value lives in contracts, IP and people rather than plant and equipment, that difference can be everything.
You Can Only Get There Through Voluntary Administration
There is no standalone DOCA process. The path runs through voluntary administration: the directors resolve that the company is insolvent or likely to become insolvent and appoint an administrator under section 436A. From appointment, a statutory moratorium freezes most creditor claims and enforcement, buying breathing space while the administrator investigates.
The administration comes to a head at the second creditors’ meeting, where section 439C gives creditors three options: hand the company back to its directors (rare), wind it up, or accept a DOCA proposal. A resolution needs a majority of voting creditors in both number and value; if the two limbs split, the chairperson — usually the administrator — has a casting vote. This is why the composition of the creditor pool matters so much in practice. In many failed startups the largest creditors by value are the ATO, employees, and sometimes the investors themselves via convertible notes — and a proposal that pays a better dividend than liquidation, faster, is the argument that wins the room. The administrator must also tell creditors, in their report before the meeting, whether the DOCA is in their interests compared with liquidation.
If creditors vote for the deed, the company must sign it within 15 business days (section 444B) unless the court allows longer. Miss that deadline and the company slides automatically into liquidation.
What a DOCA Can Actually Do
Part 5.3A prescribes very little about a deed’s content, which is precisely its power. Common structures for startups include:
- A deed fund paying cents in the dollar. Directors, shareholders or a new investor contribute a lump sum; creditors’ claims are compromised in exchange for a dividend better than the liquidation alternative, and the company emerges debt-free.
- Recapitalisation. An acquirer or existing investor funds the deed in exchange for control of the cleaned-up company. Where existing shareholders won’t cooperate, section 444GA even allows the court to authorise a transfer of their shares — with leave granted where the transfer would not unfairly prejudice members, which in practice means where the shares have no residual value.
- Trade-on arrangements. The company keeps operating under the deed administrator’s oversight while creditors are paid over time from revenue.
Once executed, the deed binds all creditors as to their claims, including those who voted against it (section 444D). But secured creditors keep their right to realise their security, and owners and lessors keep their property rights, unless they voted in favour (or the court orders otherwise) — your venture debt provider with a general security agreement keeps its enforcement rights unless it signs on, which is why any DOCA in a venture-debt-backed startup gets negotiated with the secured lender first. Employees get statutory protection too: unless eligible employees vote to waive it, the deed must preserve their priority for entitlements at least equal to what liquidation would deliver (section 444DA).
Why a DOCA Beats Liquidation for the Right Startup
The point of a DOCA is that the company itself survives — same ACN, same contracting entity. That matters more for startups than for most businesses:
- Contracts and licences stay on foot. Enterprise customer agreements, key supplier arrangements and regulatory licences don’t need to be novated to a purchaser. The ipso facto stay in section 451E reinforces this: for contracts entered into from 1 July 2018, counterparties generally cannot terminate merely because the company entered administration. The stay itself runs only until the administration ends — which happens when the deed is executed, unless the court extends it — but rights triggered by the fact of the administration or the company’s financial position before then remain permanently unenforceable under section 451E(4). Termination rights for actual non-performance survive throughout.
- IP doesn’t have to be sold at fire-sale value. In liquidation, a startup’s IP is typically auctioned for a fraction of what it cost to build. Under a DOCA, it stays in the company.
- No liquidator claw-backs. Voidable transaction claims — unfair preferences, uncommercial transactions — and insolvent trading recovery actions are only available in a liquidation. A DOCA takes them off the table while it remains on foot, and permanently if the deed runs to completion — but if the deed fails and the company is wound up, those claims revive, calculated from the original administration date. Keeping that exposure parked is often a significant part of why directors and related parties are willing to fund the deed.
What a DOCA Won’t Fix
Founders should be equally clear-eyed about the limits. A DOCA releases the company’s debts, not yours: personal guarantees survive (section 444J), and a director penalty notice liability for unpaid PAYG, GST or super that has already locked down is unaffected. Shareholders generally don’t vote on the deed, and in any genuine rescue their equity is heavily diluted or transferred — the DOCA saves the company, not the cap table. And a deed obtained on misleading information, or one unfairly prejudicial to a creditor, can be terminated by the court under section 445D, with liquidation the usual sequel. The ATO, frequently the largest creditor, votes commercially but takes a dim view of proposals that look like phoenix activity or leave its debt behind while directors keep the business.
One more alternative deserves a mention: if your company’s total liabilities (excluding employee entitlements) don’t exceed $1 million, the small business restructuring regime in Part 5.3B may achieve a similar debt compromise more cheaply, with directors staying in control throughout. For most funded startups, though, liabilities exceed that cap quickly, and Part 5.3A remains the main game.
The Bottom Line
A DOCA is not a way to dodge creditors — it has to beat liquidation on the numbers, and creditors get the vote. But for a startup with real underlying value trapped under an unpayable debt load, it is the mechanism that lets an investor, an acquirer or the founders themselves buy the company a second life with its contracts, IP and team intact. The window to use it well is early: administrators appointed with cash still in the bank and a deed proposal already sketched out get far better outcomes than those appointed at the point of collapse. If your startup is heading toward the edge, get advice while a rescue is still fundable.
This article is general information only, not legal advice — whether a DOCA is available or sensible depends entirely on your company’s creditor profile and funding options. Viridian Lawyers advises Australian startups and their directors on distressed situations — safe harbour planning, restructuring, recapitalisations and negotiating with creditors and investors. If your runway is shorter than your plan, get in touch.
