Capital Contribution in the Form of Creditor’s Rights
Capital contribution in the form of creditor’s rights refer to the situation that shareholders use their creditor’s rights against the company or creditor’s rights against the third parties to make capital contribution. Article 48 of the revised Company Law of the PRC clearly stipulates and recognizes that shareholders of a company can make capital contribution in the form of creditor’s rights.
Capital contribution in the form of creditor’s rights mainly involves the following situations：
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Company shareholders use their creditor’s rights against the third parties as their capital contribution.
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Company shareholders use their creditor’s rights against the company to offset their corresponding capital contributions in the company.
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The creditors of the company convert their creditor’s rights against the company into equity in that company, transforming from creditors to shareholders, which is commonly known as debt for equity swap.
According to the revised Company Law of the PRC and relevant regulations, capital contribution in the form of creditor’s rights shall meet the following conditions:
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The creditor’s rights used for capital contribution must be true, lawful and transferable in accordance with the law.
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The creditor’s rights used for capital contribution must be evaluated by qualified asset appraisal institutions, and the corresponding amount of capital contribution shall be determined based on the evaluation results.
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When shareholders use their creditor’s rights against the third parties as their capital contribution, they must sign a creditor’s rights transfer agreement with the company and notify the debtor of the transfer of creditor’s rights.
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When shareholders use their creditor’s rights against the company to offset the corresponding subscribed capital, the company must maintain in a normal operation status and have sufficient solvency, the company cannot be insolvent or have fallen into bankruptcy proceedings.
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When the creditors of the company convert their creditor’s rights against the company into equity in that company, they must sign a debt for equity swap agreement with company.
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The company must convene a shareholder meeting and passe a resolution on the corresponding amendments of the articles of association. For example, changing the capital contribution form to creditor’s rights contribution, confirming completion of capital contribution, adding new shareholders and so on.
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The revised articles of association must be filed with the company registration authority.
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The company must publicize the relevant changes through the National Enterprise Credit Information Publicity System upon completion of the filing of changes.
Although capital contribution in the form of creditor’s rights provides shareholders with more flexible options for contribution, creditor’s rights contribution, especially when shareholders use their creditor’s rights against the third parties to make capital contribution, are more risky than other forms of capital contribution. Therefore, in order to avoid possible legal risks such as false capital contributions, before accepting shareholders' creditor’s rights contribution, the company should investigate and verify the authenticity, legality and validity of the creditor’s rights used as capital contribution, and ensure that shareholders follow and complete the capital contribution procedures in accordance with the company's articles of association and relevant laws and regulations.
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