Loan Conversion Agreement Template for New Zealand

A Loan Conversion Agreement is a legal document that transforms existing debt obligations into equity ownership in your company. Under New Zealand law, this agreement must comply with the Companies Act 1993 and Financial Markets Conduct Act 2013 to ensure valid conversion of loans to shares. The document establishes the framework for converting outstanding loan amounts, including principal and accrued interest, into company shares at predetermined valuation rates.

When do you need this document?

You'll need a Loan Conversion Agreement when your company wants to reduce its debt burden by offering lenders equity participation instead of cash repayment. This document becomes essential during startup funding rounds where initial loans convert to shares, enabling early investors to participate in company ownership. Companies facing cash flow constraints often use these agreements to negotiate with creditors, converting debt obligations into equity stakes rather than defaulting on loan payments. The agreement is also crucial when restructuring company finances before major investment rounds or when preparing for potential sale or public listing.

Key legal considerations

The conversion mechanism must clearly specify the conversion ratio, share class, and valuation methodology to avoid future disputes. You need to ensure the conversion doesn't breach existing loan covenants or trigger default clauses in other agreements. The document should address pre-emptive rights of existing shareholders and comply with company constitutional requirements for share issuance. Consider including provisions for adjustment mechanisms if company valuation changes significantly before conversion occurs. Tax implications for both the company and converting lenders must be carefully evaluated, as debt forgiveness may trigger taxable events under New Zealand tax law.

Legal requirements in New Zealand

Under the Companies Act 1993, your company must have sufficient authorised share capital to issue new shares from the conversion. The board of directors must formally resolve to approve the conversion and share issuance, ensuring compliance with the company's constitution and shareholder agreements. If the conversion involves a financial product under the Financial Markets Conduct Act 2013, you may need to prepare disclosure documents or comply with licensing requirements. The conversion must not result in the company becoming insolvent or unable to pay its debts as they fall due. You'll need to update the company's share register and file appropriate notices with the Companies Office following conversion completion.