Debt-for-Equity Swaps in New Zealand: Legal Points for Converting Loans

If your business has been funded with shareholder loans or investor loans, you might reach a point where the monthly repayments (or the balance sheet pressure) start getting in the way of growth.

That’s where a debt-for-equity swap in New Zealand can help: instead of paying the loan back in cash, you convert all or part of the debt into shares in the company.

Done well, a debt-for-equity swap can strengthen your balance sheet, make it easier to raise fresh capital, and align everyone around long-term growth. Done poorly, it can trigger disputes between shareholders, tax surprises, or Companies Act issues that create real risk for directors.

Below, we break down what a debt-for-equity swap is, when it makes sense, and the key legal steps to get it right in New Zealand.

What Is A Debt-For-Equity Swap (And What Are You Actually “Swapping”)?

A debt-for-equity swap is where a creditor (often a shareholder, founder, director, or investor) agrees to:

• forgive some or all of the company’s debt owed to them; and
• receive shares in the company instead.

In practical terms, your company’s liabilities decrease, and its equity increases. That can make your company look (and be) financially healthier.

Common NZ Scenarios Where This Comes Up

• Founder funding early costs via shareholder loans, then converting those loans once the business is stable.
• Investor bridge funding where the “loan” is really a temporary structure until a valuation is agreed.
• Cashflow pressure where the company can’t (or shouldn’t) repay the loan, but the business is viable.
• Preparing for a capital raise where new investors want a cleaner balance sheet before they invest.
• Restructuring as part of a broader turnaround plan (sometimes alongside new funding).

Is It The Same As “Turning A Loan Into Shares”?

Yes. In everyday language, “converting a shareholder loan into shares” or “converting an investor loan into equity” is typically describing a debt-for-equity swap.

The key is that there’s still a formal legal process underneath it. You don’t want to treat it like a casual accounting adjustment.

When Does A Debt-For-Equity Swap Make Sense For Small Businesses?

A debt-for-equity swap can be a smart move, but it’s not always the right one. From a small business perspective, you usually consider it when you’re balancing cashflow, control, and fundraising.

Potential Benefits

• Improved balance sheet: reducing liabilities can help your company meet banking or investor expectations.
• Better cashflow: removing repayment obligations can free up money for operations and growth.
• Alignment: the lender becomes more invested in long-term success rather than short-term repayment.
• Fundraising readiness: a simpler debt position can make due diligence easier for future investors.

Common Trade-Offs (That You Should Be Comfortable With)

• Dilution: existing shareholders may end up with a smaller percentage ownership.
• Control shifts: new shares might change voting power and decision-making.
• Expectations change: a “lender mindset” is different from a “shareholder mindset” (dividends, exits, governance).

A Quick Reality Check: Is The Company Solvent?

If your company is under serious financial stress, you need to be extra careful. Directors still have duties, and some transactions can be challenged later (for example, if the company later goes into liquidation).

This doesn’t mean a debt-for-equity swap can’t happen in tough times, but it does mean the process and documentation matter even more.

Key Legal Steps Under New Zealand Company Law

In New Zealand, most debt-for-equity swaps are implemented by issuing new shares to the lender in exchange for the lender forgiving the debt (or agreeing to treat the debt as satisfied).

This brings the process squarely under the Companies Act 1993, plus whatever your constitution and shareholder arrangements say.

1) Check Your Company’s Rules First (Constitution + Shareholder Arrangements)

Before anyone agrees to numbers, start by checking:

• Does your company have a Company Constitution?
• Are there restrictions on issuing shares, different share classes, or director/shareholder approval requirements?
• Do you have a Shareholders Agreement with pre-emptive rights (existing shareholders get first right to buy new shares) or consent requirements?

Also keep in mind that, under the Companies Act, shareholders generally have statutory pre-emptive rights by default for new issues of shares (unless your constitution modifies or removes those rights). That means you can’t assume you’re free to issue new shares to the lender without first checking whether existing shareholders must be offered those shares first, or whether a waiver/consent process is required.

If you skip this step, you can accidentally breach internal governance rules, which can trigger disputes and (in some cases) claims that the share issue wasn’t properly authorised.

2) Decide The Commercial Terms (How Much Debt Converts, At What Valuation, And What Shares)

Once you’ve confirmed the company can legally issue shares, you’ll need to agree key terms, including:

• Debt amount: is it the principal only, or principal plus accrued interest?
• Conversion price / valuation: what is each share “worth” for the purpose of the conversion?
• Share class: ordinary shares, non-voting shares, preference shares, or another class (if your constitution allows it)?
• Control: will the new shares change voting power or board rights?
• Conditions: does the conversion happen immediately, or after a milestone (e.g. next funding round)?

This is often where disagreements happen, because founders and investors may have different views on valuation and control. It’s usually cheaper to resolve this upfront than to “fix it later”.

3) Follow The Correct Process To Issue Shares

Most debt-for-equity swaps are implemented as a share issue for non-cash consideration (the consideration is the forgiveness or satisfaction of the debt).

Key legal points typically include:

• Director resolutions: directors generally need to approve the share issue and ensure it’s in the best interests of the company. A properly drafted Directors Resolution can be a practical starting point.
• Director confirmation on value (non-cash consideration): where shares are issued for non-cash consideration, directors should make sure they follow the Companies Act requirements around being satisfied (on reasonable grounds) that the value of the consideration is at least equal to the issue price, and that the terms are fair and reasonable to the company. In practice, that means documenting how the debt amount, any interest, and the agreed valuation/conversion price were reached.
• Shareholder approvals: depending on your constitution/shareholder arrangements (and the class of shares), you may need shareholder approval as well (including consents/waivers relating to pre-emptive rights).
• Solvency considerations: while the solvency test is most commonly discussed for distributions, directors should still be making careful, well-documented decisions-especially if the company is under financial pressure.
• Company records: the share register must be updated, and you may need to file updates with the Companies Office (depending on what changes).

If you want a deeper overview of the legal mechanics behind an issue of shares, it’s worth understanding that the “paperwork step” is not optional-this is how you make the conversion enforceable and clear.

4) Be Careful If The Lender Is An Existing Shareholder Or Director (Related Party Dynamics)

In small businesses, the lender is often already “inside the tent” (a founder, shareholder, or director). That can be convenient, but it can also create risk if other shareholders later claim the deal was unfair.

Practical safeguards often include:

• Clear documentation of the agreed valuation and why it’s reasonable.
• Transparent communication with other shareholders (especially if they’re being diluted).
• Managing conflicts of interest at board level (e.g. the director who is also the lender may need to declare their interest and follow a careful process).

5) Consider Whether You’re Making A “Regulated Offer” Of Shares

If your conversion is happening with a small number of existing investors/shareholders, securities law may be relatively straightforward. But if you’re issuing shares more broadly, you may be stepping into the Financial Markets Conduct Act 2013 territory.

Whether disclosure requirements apply depends on the structure and who the shares are being offered to. This is one of those “it depends” areas where getting advice early can save you from a compliance headache.

Common Pitfalls With A Debt-For-Equity Swap In New Zealand (And How To Avoid Them)

Most problems with a debt-for-equity swap aren’t about the idea-they’re about execution, documentation, and alignment.

Not Properly Identifying The Debt You’re Converting

Shareholder loans aren’t always well documented (especially early-stage ones). If the debt amount is unclear, the conversion becomes messy.

Tip: make sure you can clearly show:

• the original principal advanced;
• any agreed interest rate (if applicable);
• repayments already made; and
• the final balance being converted.

Accidentally Breaching Pre-Emptive Rights Or Consent Requirements

Your constitution, shareholders agreement, and the Companies Act may require you to offer new shares to existing shareholders first (unless those rights are excluded/modified), or require unanimous/majority consent for certain issues.

If you ignore those rules, you could end up with:

• a shareholder dispute;
• a claim for unfair prejudice; or
• a forced unwind of the transaction (in extreme cases).

Valuation Disputes (The “It’s Not Worth That Much” Problem)

Valuation is often the emotional centre of a conversion-especially if the company has had a tough year but still has future potential.

Common ways to reduce risk include:

• agreeing a clear conversion price formula;
• using an independent valuation (when the stakes justify it); or
• converting in stages (e.g. part now, part on future milestones).

Director Duty Risks If The Company Is Struggling

If the company is close to insolvency, directors must be especially careful about reckless trading and ensuring decisions are made in the company’s best interests.

A debt-for-equity swap can help the company (by reducing liabilities), but the process should be properly recorded and justified. If you’re unsure, get advice before implementing the conversion.

Tax And Accounting Surprises

Even though this is primarily a legal restructure, it can have tax and accounting implications (for example, how the debt forgiveness is treated, and the implications for shareholder basis).

Sprintlaw can help with the legal documentation and process, but we don’t provide tax advice. You should speak with your accountant or a tax adviser (and where appropriate, check relevant IRD guidance) to make sure the treatment and timing work for your business and the lender.

What Documents Will You Usually Need To Convert A Shareholder Or Investor Loan Into Shares?

The exact documents depend on your company structure, who’s involved, and whether you’re issuing a new class of shares. But for most small businesses, the “core set” looks like this.

1) A Written Conversion Agreement Or Deed

This records the commercial deal in plain terms, including:

• who the parties are (company and lender);
• the debt being converted (amount and how it’s calculated);
• the number and class of shares to be issued;
• the conversion date and any conditions; and
• warranties/confirmations (e.g. the lender agrees the debt is satisfied by the share issue).

This is the document that stops future “but that’s not what we agreed” arguments.

2) Share Issue Paperwork (Subscriptions + Consents)

When you’re issuing shares, you usually need a subscription-style set of terms showing the consideration and the shares being issued. Depending on the structure, a Share Subscription Agreement can be the cleanest way to record those terms, especially if there are investor-style rights attached.

3) Director And/or Shareholder Resolutions

To properly authorise the share issue and record decision-making, you’ll typically need:

• a board resolution approving the issue and the terms; and
• if required, shareholder resolutions approving the issue (or waiving pre-emptive rights).

For many companies, putting a compliant Directors Resolution in place is part of making the process “audit-ready” if investors, accountants, or buyers look back later.

4) Updates To Your Company Records

After the conversion, make sure your company records are updated, including:

• the share register (new shareholding details);
• share certificates (if you issue them);
• cap table updates; and
• any Companies Office notifications required due to changes.

5) Governance Documents (If You’re Changing The Shareholder Mix)

If the conversion brings in a new investor as a shareholder (or changes control), it’s often the right time to revisit your governance framework. That might mean updating your Shareholders Agreement and checking whether your Company Constitution still fits the business you’re building now (not just the one you started with).

6) A Quick Structure Check (Especially For Growing Businesses)

If your business is scaling or bringing in more sophisticated investors, it can also be worth confirming whether your entity structure is still fit for purpose. Sometimes the conversion is a catalyst for a broader tidy-up, including a proper Company Set Up review to ensure your records and governance match what investors expect.

Key Takeaways

• A debt-for-equity swap in New Zealand typically converts a shareholder or investor loan into shares, reducing liabilities and strengthening the balance sheet.
• Before converting any debt, check your constitution and shareholder arrangements for restrictions, consent requirements, and pre-emptive rights (including any statutory pre-emptive rights that apply by default unless modified).
• Most swaps are implemented as an issue of shares for non-cash consideration, which needs proper approvals, resolutions, and company record updates under the Companies Act 1993-and directors should document that they have reasonable grounds to be satisfied about the value of the non-cash consideration.
• Valuation and dilution are usually the biggest commercial pressure points, so document the agreed conversion price and rationale clearly.
• If the lender is a director or existing shareholder, manage conflicts transparently and record decisions carefully to reduce dispute risk.
• Don’t treat it as “just an accounting entry” - the right legal documents (conversion agreement, subscription terms, resolutions, register updates) are what make the conversion clear and enforceable.

If you’d like help structuring or documenting a debt-for-equity swap, or converting a shareholder/investor loan into shares the right way, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.