Research On The Legal Issues Of Debt-to-equity Swap In The Reorganization Procedure

Debt for equity swap is one of the most significant ways to minimize the financial burden of the enterprises as well as to restore their operation.In the corporation reorganization,debt for equity swap is necessary and has its own particularity.As one of the main methods of successful corporation reorganization,the conversion of debt for equity could not only minimize the debt of the enterprises,but also could it restore the operation of the enterprises and offer the opportunities for creditors to take back full investment.Researching into the debt for equity swap in the reorganization procedure is good for both the development of Chinese Bankruptcy Law and theoretical system of debt for equity swap as well as the guidance for the practice of bankruptcy reorganization of the enterprises.As our country mainly focused on the political debt for equity swap in history,commercial debt for equity experienced a slow development.Moreover,the debt for equity swap in the reorganization procedure is like crossing the river by feeling the stone.As a result of a lack of relevant regulations,it seems to be much more difficult to carry out the debt for equity swap in the reorganization procedure.In view of this,this essay will focus on the specific legal issues people may meet during the planning,approval and implementation of the reorganization project.In addition,the author will offer a proposal about how to establish a sound debt for equity swap legal system in the reorganization procedure.This essay is formed by introduction,main text and conclusion.There are four sections of the main text.Section 1 of the main text is the fundamental theory about the debt for equity swap in the reorganization procedure,aimed at describing the concept,classification,nature and feature of the debt for equity swap as well as the range of the debt that could be swapped and the pattern of swap.Debt for equity swap is short for transformation from obligatory rights to stock rights,namely,the company’s creditors are supposed to accept the equity holding rather than take back their money.People divide the debt for equity swap into political debt for equity swap and commercial debt for equity swap,depending on whether it is leaded by the market or the government.The debt for equity swap in the reorganization procedure which is the debt for equity swap with the consent of the creditors and the debtors is deemed to be the commercial debt for equity swap.However,as this procedure is closely related to the bankruptcy institution,it seems to have different features compared with the commercial debt for equity swap.The essence of debt for equity swap in the reorganization procedure is a way of debt repayment with equity holding.The creditors accepted the equity holding passively.This result in the situation that there is a limitation of voting with the autonomy of will.There is also an uncertainty in the result of the debt for equity swap.People have to decide which kind of debt should be swapped during the swap procedure.In general,the obligatory rights listed in the reorganization proposal approved by the court and the supplementary rights listed in the judgment could be swapped in the procedure,regardless of the nature of the obligatory rights.Whether the obligatory rights of the reorganization procedure could be transferred or not will have no influence on the equity holding of the creditors.As long as the obligatory rights belong to the monetary rights or could be switched to monetary rights and have been approved by courts,these rights should be treated equally without discrimination and could be switched into equities of the company.As for the pattern of the debt for equity swap,the debtor could choose the pattern of capital increase or the pattern of equity transfer.Section 2 of the main text illustrates the necessity and limitation of the debt for equity swap in the reorganization procedure.The aim of the reorganization procedure is to spare no efforts to avoid bankruptcy of the enterprises and protect creditors’ rights at the same time.The debt for equity swap in the reorganization procedure is beneficial to release the financial burden of the enterprises and alleviate the problems about cash flow.It is also beneficial for creditors to acquire opportunities to withdraw full investments.The debtors will also improve their rate of liquidity and optimize the structure of the enterprises.However,there is a limitation in the debt for equity swap: Firstly,social moral hazard problems could be easily initiated when the debtors evade debts through debt for equity swap.Secondly,the obligatory rights terminated after the debt for equity swap.As a result,the secured creditor will obtain the risks of losing the real rights granted by the way of security.Thirdly,the assessment system is still not well equipped,which will easily result in the risks of false funding.Fourthly,the stock rights are paid off after the payment of obligatory rights.The obligatory rights have priority when compared with stock rights.Fifthly,the debt for equity swap will not bring cash flow and will not solve the financing problems of the enterprises.The section 3 of the main text is the key section of the essay,mainly focusing on the specific legal issues of the reorganization procedure.As the debt for equity swap legal system is still not well equipped,a number of specific legal issues that may appear during the debt for equity swap in the reorganization procedure could not be solved properly.In order to promote the development of debt for equity swap practice as well as the complementation of bankruptcy theory,the author will proceed from practice and analyze the formulation,approval and execution of the reorganization project.There will be conflict of interests between diverse debtors,legal bond as a result of equity holding of the commercial banks,the voting matter of capital contributors and the adjustment of the rights and interests of shareholders during the formulation phase of the reorganization project.The approval phase of the reorganization project will also refer to problems about the standard,according to which the court will force the approval of the reorganization project.During the execution phase of the reorganization project,there will be problems about operation of pledge of equity rights and withdrawal mechanism.Getting the correct understanding of the problems above and solving them effectively will promote the launch of the debt for equity swap reorganization practice.The section 4 of the main text will focus on the recommendations about optimizing the debt for equity swap in the reorganization procedure.There are five specific points.The first stage is to improve the relevant institution and relevant legal system,which is the theoretic basis of the successful debt for equity swap.The second stage is to define the proper standard for debt for equity swap,providing a strict control of selecting the objects of the debt for equity swap.The third stage is to improve the procedure of capital verification of obligatory rights and fix the certain proportion and the time of debt for equity swap.The fourth stage is to search the development mode for debt for equity swap and design the reasonable pattern for the swap.The fifth stage is to develop the multi-level capital market and broaden the mechanism for equity withdrawal.