A scheme of arrangement under Section 230 can provide for the conversion of a company’s debt into equity. The conversion is a compromise with the creditors, and it is approved by the class of creditors that is affected. The scheme must address the conversion ratio, the valuation, the issuance of shares, and the treatment of the creditors who do not consent.
The Creditor Consent
The conversion is approved by the requisite majority of the creditors in the class—a majority of persons representing three-fourths in value of the creditors present and voting. The consent must be informed, and the creditors must be provided with the valuation and the terms of the conversion.
The Valuation
The conversion ratio is determined by the valuation of the company and the debt. The valuation must be conducted by a registered valuer, and it must reflect the fair value of the shares. The creditors who convert the debt into equity become shareholders, and their shareholding is determined by the conversion ratio.
The Share Issuance
The shares are issued to the creditors in accordance with the scheme, and the issuance must comply with the Companies Act and the FEMA where the creditor is a non-resident. The issuance may require the approval of the shareholders by a special resolution under Section 62, depending on the terms of the scheme.
The Limits
The scheme cannot be used to compel a creditor to convert the debt into equity without the approval of the class. The dissenting creditor within the approving class is bound by the scheme, but the creditor who is outside the class is not. The scheme must therefore ensure that the classes are properly constituted.
A technically sound debt-equity conversion scheme addresses the valuation, the consent, the issuance, and the tax consequences. A defect in any of these elements can result in the scheme being rejected or challenged.
Call to Action
Anuj Desai & Associates advises companies and creditors on the conversion of debt into equity through a Section 230 scheme—from the creditor consent and the valuation to the share issuance and the tax consequences. If you are considering a debt-equity conversion, we can help you structure the scheme.
📧 office@anujdesaiassociates.com
📞 9619456656
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