Loan Conversion Agreement Template for Australia

A Loan Conversion Agreement transforms your existing debt into company equity, providing a structured legal framework for converting loans into shares or other ownership interests. This document is crucial when you want to change the relationship between lender and borrower from creditor-debtor to investor-company, often improving your company's financial position while giving lenders potential upside through equity participation.

When do you need this document?

You'll need a Loan Conversion Agreement when your startup is raising new funding rounds and existing lenders want to convert their loans into equity to participate in company growth. This is particularly common in bridge financing situations where short-term loans convert into shares during subsequent investment rounds. You'll also require this agreement during corporate restructuring when your company needs to strengthen its balance sheet by reducing debt levels and improving debt-to-equity ratios. The document becomes essential when lenders see greater long-term value in becoming shareholders rather than remaining creditors, especially in high-growth companies or distressed situations where equity upside may exceed debt recovery prospects.

Key legal considerations

Your agreement must clearly define the conversion mechanism, including whether conversion occurs at a predetermined price, market valuation, or discount to future funding rounds. You need to address the treatment of accrued interest, determining whether it converts alongside principal or requires separate settlement. Consider the impact on existing shareholders through dilution calculations and ensure compliance with any pre-existing shareholder agreements or constitutional provisions. Your document should specify conditions precedent for conversion, such as board approvals, shareholder resolutions, or regulatory clearances. Include provisions for partial conversions, default scenarios, and the treatment of security interests that may exist over the original loan. Tax implications require careful consideration, particularly potential capital gains consequences for both parties and any stamp duty obligations on the share issuance.

Legal requirements in Australia

Under the Corporations Act 2001 (Cth), your conversion must comply with share issuance requirements, including proper board resolutions and, where necessary, shareholder approvals for significant transactions. You must ensure the conversion doesn't breach the company's constitution or existing financing agreements. If your loan has consumer credit components, the National Consumer Credit Protection Act 2009 (Cth) may impose additional disclosure and conduct obligations. The Personal Property Securities Act 2009 (Cth) governs how existing security interests over the loan are treated post-conversion. Your agreement should address ASIC notification requirements for new share issuances and ensure compliance with any disclosure obligations under the Corporations Act. Consider whether the conversion constitutes a related party transaction requiring special approvals, and ensure proper documentation for tax purposes under the Income Tax Assessment Act 1997 (Cth) to support any capital gains or losses claimed by either party.