In Russia, a legal mechanism for converting loans in business entities has been in effect since 2014. Since the business community needed a new model of investment and protection against default and subsequent bankruptcy, it was proposed to introduce a conversion model as a way to ensure the fulfillment of obligations, i.e., the inclusion of the lender in the composition of the company’s participants. How does this procedure work and what difficulties did companies and investors encounter?
How to conclude a convertible loan agreement?
At the first stage, a general meeting of the company’s participants is convened, at which a question with the following wording must be put: “to approve the conclusion of a convertible loan agreement and increase the authorized capital based on an application from a third party for its acceptance into the Company and making a contribution, against which the lender’s monetary claims to the company for obligations under the convertible loan agreement, which will be concluded between and the lender on the following terms, will be offset”
- The decision of the general meeting of participants is subject to notarization in accordance with the current legislation. Even if the charter provides otherwise, the results of the meeting must be certified by a notary. In addition, a period for permission to conduct the conversion is established, so special attention should also be paid to this condition.
- It is very important to explain in detail to the notary the terms of the loan conversion, since the lender will most likely submit a request for conversion and acquisition of shares to the same notary.
The convertible loan agreement is concluded in notarial form, since information about it will be contained in the Unified State Register of Legal Entities in the following form in the section “Information about the convertible loan agreement entered into the Unified State Register of Legal Entities”:
- reason for entering information: conclusion of a convertible loan agreement
- information about the convertible loan agreement: number, date
- information about the notary who certified the agreement: full name
- information about the lender
- information about the maximum size of the lender’s share in the authorized capital of the company that it can receive in the exercise of its right: nominal value and size.
What to do in case of non-repayment of a convertible loan?
If the borrower fails to fulfill the obligation to repay the loan, the lender has the right to submit a request to the notary to accept him as a member of the company. The specified request is sent to the company within 2 business days, and the notary waits for objections from it within 14 business days.
If no objections are received or if the company sends consent to the conversion, the notary sends to the Federal Tax Service of Russia an application R13014 to amend the information from the Unified State Register of Legal Entities, including a change in the size of the authorized capital, about the company’s participants. The shares of the remaining participants of the company in percentage terms in this case also change taking into account the new share of the third participant.
Results of loan conversion:
- Increased authorized capital,
- New participant in the corporate structure,
- Changed shares of the remaining participants (in percent),
- Exclusion of information about the convertible loan agreement from the Unified State Register of Legal Entities.
Please pay special attention!
The minutes of the general meeting of participants must contain a clause on the need to amend the charter in terms of increasing the authorized capital, otherwise the tax authority will refuse state registration of the changes.
To summarize this article, a convertible loan agreement is one of the mechanisms for investing in a business entity. As a guarantee of debt repayment, the lender is given the opportunity to include a third participant (lender) in the composition of participants and subsequent participation in corporate management.
The article was prepared and written by lawyers of the “GeoBuro” company on August 16, 2024.