Following the publication of various local rules on debt-for-equity conversion, the State Administration for Industry and Commerce (“SAIC”) published the Administration Measures on Registration of Debt-for-equity Conversion (Consultation Draft) (the “Draft Measures”) for public comments on 18 August 2011. The release of the Draft Measures marks an important step in regulating and formalising, at the national level, the registration of debt-for-equity conversion as a form of non-cash capital contribution to a company. Highlights to note are as follows:
- Under the Draft Measures, an eligible debt incurred by a PRC incorporated company may be converted into shares/equity interests of such a company by registration with the relevant SAIC. However, with respect to (i) a debt in a foreign-invested company or (ii) a debt which is held by a foreign creditor and has been registered with the State Administration of Foreign Exchange, the conversion into shares/equity interests in that company must (a) comply with the relevant laws and regulations on foreign investment and (b) be approved by the relevant approval authority.
- The Draft Measures set out three types of debts that are eligible to be converted into shares/equity interests:
- debt arising under a contract between a creditor and a company, where the creditor has performed the contractual obligations and the conversion is not prohibited by the laws, regulations or decisions of the State Council or the articles of association of that company;
- debt affirmed by an effective court judgement; and
- debt included either in the company’s reorganisation plan or settlement agreement (during the period for bankruptcy reorganisation or settlement), in each case approved or acknowledged by the court
A debt-for-equity conversion will be treated as a form of non-cash capital contribution to the registered capital of a company with the aggregate amount of non-cash contribution by way of debt-to-equity conversion and other forms of non-cash contribution capped at 70 per cent. of the total registered capital of a company.
- Debt proposed to be converted into shares/equity interests by a company must be valued by a qualified asset valuator and the amount of the converted non-cash capital contribution cannot exceed the value assigned to such debt.
For further information regarding this Alert please contact Fang Jian and Nicola Mayo.