Risks for enterprises to note when converting loans into contributed capital

The conversion of loans into equity – commonly referred to as a Debt/Equity Swap (“DES”) – is increasingly prevalent in the internal financial structuring of companies, particularly where shareholders or capital contributors seek to legitimize funds previously injected into the company. However, this mechanism also represents a financial arrangement that entails significant legal risks, especially where it is implemented in an ad hoc manner without a clear legal basis. This article highlights the key legal risks that companies should carefully consider prior to undertaking such a transaction. 

1. Legal nature of DES  

In essence, a loan and an equity contribution represent two entirely distinct legal relationships. A loan arises from a loan agreement, under which the borrower is obliged to repay both principal and interest in accordance with the agreed terms.¹ In contrast, an equity contribution refers to an asset contributed by a member or shareholder to the company in order to acquire ownership status as a member or shareholder of the company. 

When a company converts a debt relationship into an equity relationship, from a legal perspective, this involves the settlement of the loan agreement in parallel with the implementation of procedures for increasing the company’s charter capital. From a technical standpoint, this is a form of capital increase through the issuance of shares or capital contributions in exchange for outstanding debts owed by the company to individuals or organizations (creditors). Instead of repayment in cash, the company “repays” through ownership interests and economic rights in the company. If these two steps are not clearly separated and properly implemented in accordance with applicable regulations, the entire transaction may be exposed to the risk of invalidity or rejection by the competent authorities. 

2. Common risks often overlooked by companies 

2.1. Non-compliance with foreign exchange regulations  

For foreign-invested companies that borrow from parent companies or international lenders, a DES must strictly comply with the regulations of the State Bank of Vietnam, in particular: 

a) Foreign loans must be registered or notified with the State Bank of Vietnam. 

If a medium- or long-term foreign loan has not been registered with the State Bank of Vietnam in accordance with Circular No. 12/2022/TT-NHNN, such loan is considered non-compliant from a foreign exchange management perspective. Converting a non-compliant loan into equity may trigger a series of regulatory violations. 

b) Upon conversion into equity, the company must carry out procedures to amend the purpose of the loan and report the termination of the loan as a result of the conversion.  

Failure to comply with foreign exchange reporting requirements may result in the company being unable to remit profits overseas in the future or being subject to significant administrative penalties for violations relating to cross-border capital flows. 

2.2. Non-compliance with corporate and investment procedures 

a) Corporate aspects 

When carrying out a DES, the company is required to complete procedures for increasing its charter capital with the Department of Finance. However, in practice, many companies merely record the transaction in their internal books while failing to register the change with the competent authorities, resulting in the new capital contribution having no legal validity. 

As a consequence, the additional shareholders or members are not legally recognized as holding the corresponding ownership rights, and the loan may still legally be deemed outstanding. This may subsequently hinder corporate actions such as capital transfers or profit distribution. 

b) Investment aspects 

If the creditor is a foreign investor who is not yet a member or shareholder of the company, the receipt of equity through the conversion of debt constitutes a transaction subject to capital contribution and share/equity acquisition registration procedures under the Law on Investment. Failure to complete such procedures may render the transaction invalid from an investment law perspective. 

In addition, for foreign-invested companies, if a DES is implemented without amending the Investment Registration Certificate, the transaction may not be recognized as valid and may expose the company to administrative penalties. 

Furthermore, where the DES results in a change in the foreign investor’s ownership ratio, the company must assess compliance with market access conditions applicable to its business lines. Certain sectors impose foreign ownership caps or specific conditions. Without prior assessment, the conversion may cause the company to fall out of compliance with the legal requirements necessary for its continued operation. 

3. Conditions for a valid DES  

To ensure legal compliance and mitigate risks, companies should implement a DES in accordance with the following steps: 

3.1. Step 1: Review the legal validity of the debt  

Ensure that the loan is supported by a valid loan agreement, disbursement records, and that all required foreign exchange registration procedures (if applicable) have been duly completed. 

3.2. Step 2: Reconcile and confirm outstanding debt 

Prepare a debt reconciliation statement duly acknowledged by both parties, covering principal, interest, and any related costs. 

3.3. Step 3: Agree on the conversion 

Execute a DES agreement specifying the conversion price and the corresponding amount of equity to be issued. 

3.4. Step 4: Comply with internal governance procedures 

The decision to increase charter capital must be approved by the competent authority in accordance with the company’s legal form, ensuring compliance with statutory voting thresholds and the company’s charter. 

3.5. Step 5: Register changes with competent authorities 

Submit the application for changes to enterprise registration with the Department of Finance within the prescribed timeline (within 10 days from the completion of capital contribution4),² and update the list of members/shareholders accordingly. 

For foreign-invested companies, procedures for adjustment of the investment project must be carried out with the investment registration authority (Department of Finance or the Management Board of industrial zones). 

In the case of converting foreign loans, the company must also complete the relevant procedures with the State Bank of Vietnam. 

3.6. Step 6: Ensure proper accounting and tax compliance 

The transaction must be properly recorded in the accounting books in accordance with Vietnamese Accounting Standards, ensuring that no intermediate entries obscure the substance of the transaction. 

The company should also review previously deducted interest expenses and, where necessary, adjust the relevant tax filings accordingly. 

Conclusion: A DES is not a simple technical exercise but a complex legal transaction requiring close coordination among the legal, finance, and accounting functions of a company. The risks outlined above – including potential invalidity of the transaction, internal disputes, and tax reassessments – can be effectively mitigated if the process is properly structured and implemented in compliance with applicable regulations, with appropriate legal advice obtained from the outset.

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^{(1) Article 463 Civil Code 2015.}

^{(2) Point a Clause 2 Article 87, Clause 4 Article 123 Law on Enterprises 2020.}

Submission date: 19 April 2026

Related articles 

1. Feasibility of converting the loan into contributed capital and shares in a company

2. Legal Issues To Be Noted When Converting Loans Into Contributed Capital

 

Disclaimers:

This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.

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Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Business and Investment and contact our team of lawyers in Vietnam via email info@apolatlegal.com.

 

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