During the period when offshore corporate structures were particularly popular, many Ukrainian companies obtained additional financing from their foreign parent or holding companies in the form of shareholder loans. Such loans were often granted for long periods and, in practice, were not always intended to be repaid in the ordinary course of business.
Sooner or later, however, the question of settling the outstanding debt arises. What should be done when the loan reaches maturity? How can the debt be settled efficiently? And if the foreign holding company is no longer required as part of the corporate structure, how can it be liquidated while it still has outstanding receivables?
Following the adoption of the Law of Ukraine on Limited Liability Companies and Additional Liability Companies in 2018, Ukrainian businesses gained access to an effective restructuring mechanism widely used internationally — a debt-to-equity swap.
In simple terms, a debt-to-equity swap involves converting an existing debt owed by a company into equity in that company. Instead of receiving repayment of the loan in cash, the creditor converts its claim against the borrower into an equity interest. This mechanism has long been used in international corporate restructurings and has also become relevant in Ukraine, particularly in the context of simplifying and restructuring legacy offshore structures.
Let us consider the procedure using a typical Ukrainian corporate structure established during the 2010–2014 period. Such a structure could consist of three levels: an ultimate holding company incorporated in Belize or another offshore jurisdiction; a Cyprus holding company owned by it; and a Ukrainian operating subsidiary owned by the Cyprus company. The Ukrainian subsidiary receives financing from the foreign holding company in the form of a loan to fund its commercial activities.
An important feature of this mechanism is that the relevant statutory procedure applies to limited liability companies (LLCs) and additional liability companies (ALCs). If the Ukrainian borrower has a different legal form, it may be necessary to consider a corporate reorganization or an alternative restructuring mechanism.
The debt-to-equity conversion generally involves the following steps:
If the resulting amount of share capital is no longer commercially necessary, a subsequent reduction of the company's share capital may be considered, subject to the applicable corporate procedure and creditor protection requirements.
Upon completion of the restructuring, the original loan receivable is extinguished in exchange for the relevant equity interest, thereby removing the outstanding loan from the corporate structure.
The duration and complexity of the process depend on the amount and terms of the loan, the corporate structure, the parties involved, and the applicable banking, tax, foreign exchange, and corporate requirements.
A debt-to-equity swap may also form part of a broader restructuring aimed at simplifying an international corporate structure. If a foreign holding company is no longer required, the settlement or conversion of its outstanding receivables may remove one of the obstacles to its subsequent liquidation. Once its assets and liabilities have been properly dealt with, the company may be liquidated in accordance with the laws of its jurisdiction of incorporation.
A properly structured debt-to-equity conversion can therefore provide an effective mechanism for dealing with substantial intra-group debt while also facilitating the simplification of legacy international corporate structures and reducing unnecessary maintenance costs.
Sooner or later, however, the question of settling the outstanding debt arises. What should be done when the loan reaches maturity? How can the debt be settled efficiently? And if the foreign holding company is no longer required as part of the corporate structure, how can it be liquidated while it still has outstanding receivables?
Following the adoption of the Law of Ukraine on Limited Liability Companies and Additional Liability Companies in 2018, Ukrainian businesses gained access to an effective restructuring mechanism widely used internationally — a debt-to-equity swap.
In simple terms, a debt-to-equity swap involves converting an existing debt owed by a company into equity in that company. Instead of receiving repayment of the loan in cash, the creditor converts its claim against the borrower into an equity interest. This mechanism has long been used in international corporate restructurings and has also become relevant in Ukraine, particularly in the context of simplifying and restructuring legacy offshore structures.
Let us consider the procedure using a typical Ukrainian corporate structure established during the 2010–2014 period. Such a structure could consist of three levels: an ultimate holding company incorporated in Belize or another offshore jurisdiction; a Cyprus holding company owned by it; and a Ukrainian operating subsidiary owned by the Cyprus company. The Ukrainian subsidiary receives financing from the foreign holding company in the form of a loan to fund its commercial activities.
An important feature of this mechanism is that the relevant statutory procedure applies to limited liability companies (LLCs) and additional liability companies (ALCs). If the Ukrainian borrower has a different legal form, it may be necessary to consider a corporate reorganization or an alternative restructuring mechanism.
The debt-to-equity conversion generally involves the following steps:
- The shareholders of the Ukrainian borrower adopt the necessary corporate resolutions to increase the company's share capital by converting the creditor's claim under the loan into an equity contribution.
- The borrower and the creditor execute the relevant debt conversion and corporate documents. Depending on the circumstances of the transaction and applicable banking and regulatory requirements, coordination with the servicing bank and other institutions may also be required.
- Following completion of the debt-to-equity conversion, the company's corporate records and the relevant state register are updated to reflect the revised share capital and ownership structure.
If the resulting amount of share capital is no longer commercially necessary, a subsequent reduction of the company's share capital may be considered, subject to the applicable corporate procedure and creditor protection requirements.
Upon completion of the restructuring, the original loan receivable is extinguished in exchange for the relevant equity interest, thereby removing the outstanding loan from the corporate structure.
The duration and complexity of the process depend on the amount and terms of the loan, the corporate structure, the parties involved, and the applicable banking, tax, foreign exchange, and corporate requirements.
A debt-to-equity swap may also form part of a broader restructuring aimed at simplifying an international corporate structure. If a foreign holding company is no longer required, the settlement or conversion of its outstanding receivables may remove one of the obstacles to its subsequent liquidation. Once its assets and liabilities have been properly dealt with, the company may be liquidated in accordance with the laws of its jurisdiction of incorporation.
A properly structured debt-to-equity conversion can therefore provide an effective mechanism for dealing with substantial intra-group debt while also facilitating the simplification of legacy international corporate structures and reducing unnecessary maintenance costs.