During the peak popularity of offshore business structuring, many Ukrainian enterprises attracted additional financing from foreign parent companies in the form of loans. The loans were issued for long terms and did not always provide for repayment, due to the inconveniences involved in that process. But sooner or later, the time comes to settle debts, and once the loan term expires, a number of questions arise — what should be done with this debt? How can it be repaid with minimal effort? And if the need arises to remove this offshore entity from the business structure — how can a foreign company be liquidated when it has receivables outstanding?
Thanks to the law on LLCs and ALCs adopted in 2018, an effective international tool for solving such problems has become available to Ukrainian business — the debt-to-equity swap. In essence, this is the conversion of a loan into the share capital of a subsidiary company. This tool has long proven itself effective in global practice, and in Ukraine it is only now starting to gain popularity. This has become especially relevant amid the height of deoffshorization.
Let us examine the procedure using an example of a classic Ukrainian business structure from the 2010–2014 period. A classic three-tier structure, in which: there is a parent company registered in Belize (or any other offshore jurisdiction); it establishes a holding company in Cyprus and funds its share capital to the required amount; the Cyprus holding company establishes a subsidiary company in Ukraine, which receives the loan for the further conduct of commercial activities.
An important feature of the procedure is that the law applies — and, accordingly, the possibility of converting a loan into share capital is available — only to two organizational and legal forms of enterprises: limited liability companies and additional liability companies. If the loan was received by an enterprise of a different form, it must either be reorganized, or another way of resolving the matter must be sought.
The procedure begins with a decision by the general meeting of the founders of the borrowing company to increase the borrower company's share capital by the amount of the loan.
After the decision is made, an agreement is concluded between the subsidiary and parent companies on the offset of the debt, along with a number of accompanying documents. The entire procedure is carried out in coordination with the servicing bank, which must confirm the transaction at the final stage.
Once the loan conversion procedure is completed, a repeat meeting of the founders decides on reducing the affiliated company's share capital to the required amount.
At this point, the matter of the loan debt is fully closed. The entire procedure takes around 9 months and has many nuances that are important to take into account during its implementation.
If a business needs to restructure and give up its holding company, it becomes possible to legally liquidate the parent company. Once the loan has been repaid and provided there is no outstanding payable/receivable debt, the company can be liquidated in accordance with the procedure established by law.
Thanks to this procedure, it is possible to legally close multi-million-dollar debts owed to foreign parent companies, as well as to remove an unnecessary offshore entity from the structure — one that only increases maintenance costs.