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Restructuring of debt

The law which provides new opportunities for debt restructuring entered into force in the Russian Federation at the end of 2009: debt-for-equity swap (D4E) – a conversion of debt into shares.

As a result, companies have gained the following opportunities:
- a direct mechanism to restructure the debt owed to creditors, which is  was less costly and less risky, is established;
- an effective tool to restore the solvency indicators without borrowing money prior to the commencement of the bankruptcy process;
- a tool for additional motivation of the management (without application of option schemes), stipulating for paying salaries and emoluments partially in shares in the capital of the employer (up to 20%), in accordance with the provisions of the employment contract.

  Meanwhile the following limitations are applied:
- credit organizations may not resort to conversion of debt into shares;
- claims which can be set off against the payment for the shares (participatory interest) must be monetary claims (for example, the obligation to repay loans, credits, to pay for the goods under a contract of sale or for the work under a contractor agreement, to pay a commission or agency fees and etc.);
- regarding Joint-Stock Companies;
- only in cases of placement of additional private-traded shares. It is necessary to take into account the fact that the Charter of an Open Joint-Stock Company may restrict private subscription;
- no set off is allowed if the statute of limitations regarding the judicial recovery of debt has expired (natural obligation);
- offseting cash claims for compensation of damage to life or health, as well as for permanent alimony is declared void.
To convert debt into shares the following is to be performed:
- modification of the charter, if it restricts the possibility of placement of shares by private subscription;
- the consent of creditors for the cash claims against the company to be repaid by conversion of debt into shares (stakes) in such company;
- conducting due diligence to prove the acceptance of set-off and the existence of additional restrictions subject to the general and special regulations of the applicable law, the recommendations of the Federal Financial Markets Service of Russia and the established judicial practice;
- the consent of the required number of shareholders (members) of the company, executed as the resolution of the general meeting.
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