New Regulation on Debt to Equity in China

On November 23rd, 2011 the State Administration for Industry and Commerce (SAIC) issued a regulation on swap of Debt to Equity. This regulation will come into force on January 1st, 2012.

Due to the international financial crisis, many enterprises, especially small- and medium-sized enterprises get into financial difficulties. SAIC issued this regulation to help these enterprises reducing their debt burden and to help bankrupt enterprises realizing their restructuring plan.

According to this regulation, if the debtor is a company limited or a stock company established in China and it is about one of the following claims, the creditor can transform his claim into the equities of the debtor with the result that the registered capital of the debtor will be increased:

1. claim arising from a contract, in case that the creditor has already fulfilled his contractual obligations and the transformation does not break the mandatory provisions of laws, administrative regulations, decisions of the State Council or the Articles of Association;
2. claim ascertained in a final court decision;
3. claim ascertained in a bailout plan that is approved by the bankruptcy court or in a settlement that is acknowledged by the bankruptcy court during the period of reorganization or reconciliation.

In case of joint creditors, the creditors shall have made the plan for allocation before the transformation. The total value of the transformed claim and the distributions in kind shall not exceed 70% of the total registered capital of the company. A legally established accounting firm shall be engaged to review the transformation and to issue a test certification. After the transformation, the company registration shall be modified accordingly.

Legal consequence: This regulation enables an investment through claims, however, still with a restriction, namely the creditor can only transform a claim due to him directly, but not a claim assigned to him by a third party.

Contact

Raymond Kok, Shanghai