AGREEMENT TO CONVERT THE LOANS INTO A CAPITAL CONTRIBUTION – ISSUES THAT NEED NOTES

Currently, the Covid-19 epidemic situation is lasting and showing no signs of stopping. Many enterprises are worried when faced with their financial risks and cannot hold out for long before the production stoppage. Another more significant concern is that foreign loans are close to maturity. This makes many enterprises have to choose the last move, which is to conduct an agreement to convert the loans into a capital contribution of enterprises to solve immediate financial pressure and wake up after a long sleep because of the epidemic. But no matter how the move is, it also comes with potential risks. Therefore, when the enterprise conducts an agreement to convert the loans into a capital contribution, it must understand the current legal regulations to make the process more favorable.

Agreements to convert loans into capital contribution is a popular trend

The agreement to convert the loan into a capital contribution in the enterprise is not new. It has existed in Vietnam for many years, expressed through specific forms such as converting bonds into shares or destructive debt settlement activities through converting bad debts into contributed capital, which credit institutions usually perform. Or loans or liabilities based on a contract of sale, service provision contracts are standard: debt capital enterprises are taking advantage of to invest in business activities. When due, the enterprise is obliged to repay the lender or supplier. Therefore, the enterprise must conduct an agreement to convert these loans; this debt to the lender becomes the capital contribution of the enterprise.

• Quote 1: X Seafood Joint Stock Company (JSC X): 2019 and the first six months of 2020, X JSC faces difficulties due to unstable input materials, financial costs increased, banks stopped providing credit, weak corporate governance causes production and business activities to stagnate, X JSC suffered losses, the outstanding balance of bank loans and people sold large fish. The main creditors are credit institutions that have coordinated to restructure the Company's operations by converting debt into equity. By December 9, 2020, the Company was granted a new business registration certificate by the Department of Planning and Investment. Accordingly, Y Joint Stock Commercial Bank (one of the credit institutions jointly restructuring) officially became the largest shareholder, owning 25 million shares equal to 50% of the charter capital of X JSC (X JSC has a charter capital of 500 billion dongs) and participated in the comprehensive restructuring of production and business activities of JSC X.

• Quote 2: Company A has 100% Japanese investment capital. Company A has a short-term loan of 60.00 USD from the parent company. The payment is coming soon, but the Company has not been able to pay. Therefore, Company A has converted this loan into the Company's investment capital so that it can continue to develop its business.

It can be seen that, although not a new activity, the agreements to convert loans into capital contribution in enterprises is becoming more and more popular and is a practical, timely solution for enterprises in recent years. To be more precise, the current law does not have any provisions prohibiting converting loans into capital contributions.

There are not many regulations on the agreement to convert loans into capital contribution

From a legal perspective, Article 34.2 Circular No. 03/2016/TT-NHNN guiding several contents on foreign exchange management for borrowing, foreign debt repayment of enterprises, there are regulations on one of the forms of debt repayment not through loan accounts, foreign debt repayment is "Repayment of debt by shares or capital contribution of the borrower following the provisions of law." This regulation explicitly creates an essential legal basis for the agreement to convert foreign debt into capital contribution and shares. When agreeing to convert debt into equity (capital contribution, shares), the borrower is responsible for registering with the State bank of the loan change.

Besides, with the form of an agreement to convert debts from domestic loans, from the payables under the contract of sale of goods or service contract, there are not many governing documents, so the legal basis is mainly based on the internal agreement parties.

From the above provisions, it can be seen that the agreement to convert the loans into capital contribution brings a high economic value to the borrower, revive and promote business development. However, besides the above positive aspects, enterprises should also consider and firmly grasp the provisions of the law to avoid unnecessary risks.

Notes when conducting the agreement to convert the loan into capital contribution

The agreement to convert the loan into a capital contribution is a civil agreement, so the parties are free to decide for themselves and self-responsibility. However, it should be noted that this conversion will lead to the formation of shareholder status, capital-contributing members of the former lender. Therefore, the parties should pay attention to the following points:

Firstly, the parties need to go through the internal procedures of the enterprise to approve the addition of new members and shareholders, change the proportion of capital contribution in the enterprise.

Secondly, when agreeing, the parties need to make a document or contract on converting the loan into a capital contribution. These documents should clearly state the conversion time, the amount of conversion, etc. or the percentage of capital that the capital investor will own in the business after completing the conversion procedure. In addition, when conducting an agreement, the parties need to carry out operations at a competent State agency to record new shareholders and capital contributors.

Thirdly, foreign-invested enterprises need to consider the capital ownership ratio of foreign investors. If the conversion of the loan into capital contribution, shares resulting in foreign investors occupying more than 50% of charter capital or in the cases specified in the Law on Investment, the enterprise needs to carry out the procedures for registration of capital contribution, purchase shares and capital contributions for foreign investors.

In general, the agreement to convert the loan into a capital contribution is an open direction and activities to promote struggling enterprises to continue restructuring to develop production, business, foster economic recovery. Along with this positive side, when conducting the conversion agreement, enterprises should also pay attention to the procedures and the current legal regulations to be more convenient in the negotiation process and avoid unnecessary risks.

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