Debt-for-Equity Swap and Reorganisation Law in the People’s Republic of China

Abstract

The importance of debt-for-equity swaps has come to the fore once again when a lethal combination of a lack of liquidity and a lack of new bank finance and capital injection on a perceived deterioration in covenant strength, associated with the vagaries of the most recent global economic crisis and the credit crunch suffered by financial markets has hit most companies throughout the world, as a result of which they have struggled to service a high level of debt and, consequently, lapsed into the brink of insolvency. Since, using their respective countries’ reorganisation mechanisms, a plethora of financially distressed businesses have successfully salvaged themselves from a potential insolvency with a clean slate, reorganisation law has proven to be an ideal area for observing the legal process of restructurings involving debt-for-equity swaps in a legal system within which it operates. The key contribution of this Article is two-fold. This Article provides insights into debt-for-equity swaps through the prism of the reorganisation law of the People’s Republic of China (PRC), and also uncovers some important differences between the “law on the books” and the “law in action.” Criticising the weaknesses of the reorganisation procedures or judicial weaknesses of the PRC in addressing the problems of businesses in financial difficulty, however, falls outside the scope of this Article.