In situations of excess debt, the board of directors often wants to bring about restructuring by convincing the company’s creditors to waive their loans or account credits and convert these into equity of the company. This type of restructuring is very common, especially among smaller, owner-run companies. Although this process does not provide the company with any new funds, the equity situation is improved. In particular, this lack of cash inflow is one reason why certain authors consider this type of restructuring in situations of excess debt to be inadmissible. They see this as encompassing so-called “below par issuance”. Other authors believe that this type of transaction should be permitted if it results in the excess debt being removed (or in combination with other restructuring measures). This is also supported by the argument that the other creditors of the company enjoy an improved situation with the conversion of liabilities into equity.
In its auditing work, PRÜFAG accepts the conversion of liabilities into equity at companies with excess debt, to the extent that the excess debt is completely removed by the restructuring measure(s).
