A Study On The Legal Issue Of Marketization Of Debt-to-Equity Swap

Debt-to-equity swap system is one of the important means to resolve non-performing loans of banks and reduce the debt burden of enterprises.In the 1990 s,China used policy debt-to-equity swap to solve non-performing loans of banks and debts of state-owned enterprises.In order to gradually reduce the leverage rate of enterprises,a new round of debt-to-equity swap system was introduced again in 2016.The debt-to-equity swap system is based on market regulation and carried out within the legal framework to minimize government administrative intervention.Although the decision-making of market-oriented debt-to-equity swap has been made at the national level,many top-level designs need to be further studied because of the short time to put forward and the exploratory stage of operation.Only after a series of system design and technical preparation can market-oriented debt-to-equity swap be fully promoted.Therefore,based on the actual needs,this paper starts from the concept of market-oriented debt-to-equity swap,clarifies the legal problems in the process of market-oriented debt-to-equity swap operation,and puts forward solutions,hoping to provide institutional reference for the practice of market-oriented debt-to-equity swap operation.The essence of market-oriented debt-to-equity swap is to convert the creditor's rights of enterprises into equity.For creditors,creditor's rights can be realized through equity conversion,and it is possible to obtain higher benefits.When the enterprise's funds meet temporary difficulties and cannot pay the debts due,if the enterprise is liquidated immediately,creditors usually can only get a very small liquidation ratio,and for the unliquidated part can not be recovered,which becomes a legal silent loss.After debt-toequity swap,creditors become shareholders of the company.They can obtain equity returns through dividends,dividends and trading stocks in the secondary market.The equity returns of creditors may even exceed the amount of debt and get excess returns.Compared with bankruptcy liquidation,debt-to-equity swap is more conducive to improving the liquidation rate of creditors.Secondly,for debt enterprises,marketoriented debt-to-equity swap can resolve corporate debt,solve the urgent need for enterprises,and give enterprises a chance to rebirth.Finally,for the whole market economy,market-oriented debt-to-equity swap not only gives investors more investment channels,but also reduces potential financial risks and stabilizes market development.Of course,any system is not perfect,security and efficiency can never be taken into account,so is the market-oriented debt-to-equity swap system.There are many legal difficulties in the implementation process of market-oriented debt-to-equity swap.Firstly,the definition of the scope of convertible claims.At present,the legal provisions only include bank claims,operational claims,financial lease claims,supplier claims,etc.,while excluding inter-enterprise lending claims,such provisions have certain unreasonableness.In practice,inter-firm lending is an important way of financing for enterprises,especially for small and medium-sized enterprises.Because of the difficulty of lending to bank institutions,inter-firm creditors account for the majority of total creditors' rights.If debt-to-equity swaps between enterprises are not allowed,in essence,small and medium-sized enterprises will be excluded.Therefore,the issue of the boundary of creditor's rights still needs to be discussed.Secondly,the protection of the rights of shareholders who have converted shares.It is also a difficult problem that how to set up the converted shares to protect the interests of the converted shareholders and protect the interests of the company from being infringed.Thirdly,the legal restriction of debt-to-equity swap in commercial banks.Banks are the biggest creditors of enterprises,but the commercial bank law of our country stipulates that banks should operate separately and that venture capital is not allowed.The essence of market-oriented debtto-equity swap is a kind of equity investment,so it conflicts with the relevant provisions of the banking law.In order to solve the above legal dilemma,first of all,compare the implementation experience of foreign debt-to-equity swap,and absorb its beneficial practices.Because the United States has developed earlier in the field of debt-to-equity swap,and has rich experience in practice,and has much in common with China's market-oriented debt-toequity swap system,Korea and China's policy-oriented debt-to-equity swap system are similar,and both have achieved success to a certain extent,so the debt-to-equity swap system of these two countries is analyzed in detail.After comparative analysis,it is believed that we can draw lessons from the following three aspects: establishing special implementing agencies to implement debt-to-equity swap;incorporating debt-to-equity swap system into the legal track;and attaching importance to the internal management reform of enterprises.Secondly,it draws lessons from the failure of domestic debt-toequity swap to provide ideas for solving the legal dilemma of market-oriented debt-toequity swap.Market-oriented debt-to-equity swap is developed on the basis of policyoriented debt-to-equity swap.Both of them are essentially identical and have common points in specific operations.The focus of this paper is to propose solutions to the above legal dilemma.Firstly,a complete market-oriented debt-to-equity swap mechanism should be established in the overall situation.In the early stage,a special law on debt-to-equity swap should be formulated.When the time is ripe,the debt-to-equity swap system can be incorporated into the scope of company law.Secondly,in view of the specific implementation problems,the following suggestions for improvement are put forward.As for the boundary of creditor's rights,the creditor's rights formed by inter-enterprise lending should be included in the scope of equity conversion,and the scope of equity conversion creditor's rights should be expanded.For equity protection,creditor's rights should be converted into preferred shares.As for the legal restriction of debt-to-equity swap of commercial banks,it can be implemented by asset management companies in the early stage.When the time is ripe,the restriction can be relaxed at the national level to allow mixed operation of banks.