Debt capitalisation in Lithuania: legal possibilities and key risks

In corporate finance practice, it is common for companies to receive loans from shareholders or other creditors that, over time, become structurally inefficient. They increase liabilities, weaken equity ratios, and may complicate the attraction of new investments or bank financing.

One of the rational solutions in such cases is debt capitalisation – the conversion of loans into shares through a new share issue combined with the set-off of mutual claims.

Under Lithuanian law, this mechanism is permitted and widely used in practice. The company adopts a decision to increase its share capital, sets the share issue price, and the creditor’s claim for repayment of the loan is set off against their obligation to pay for the subscribed shares.

From a legal perspective, this is not a traditional cash contribution. It is a properly structured set-off of mutual claims, which must be supported by clear corporate decisions and consistent documentation.

Pagal Lietuvos teisę skolos kapitalizavimas yra galimas ir praktikoje plačiai taikomas mechanizmas. Bendrovė priima sprendimą didinti įstatinį kapitalą, nustato akcijų emisijos kainą, o kreditoriaus reikalavimas grąžinti paskolą užskaitomas su jo pareiga apmokėti pasirašytas akcijas.

Svarbu pažymėti, kad teisiniu požiūriu tai nėra klasikinis piniginis įnašas. Tai tinkamai įforminta priešpriešinių reikalavimų užskaita, kuri turi būti pagrįsta aiškiais korporatyviniais sprendimais ir nuoseklia dokumentacija.

A properly structured capitalisation offers significant strategic advantages.

First, it improves the company’s balance sheet by reducing liabilities and strengthening the equity position. This directly impacts financial ratios that are important for banks, investors, and private equity funds.

Second, it aligns interests structurally – the creditor becomes a shareholder and shares business risk with other participants. In practice, this often helps resolve long-standing imbalances between shareholders and financiers.

Finally, optimising the capital structure is often a prerequisite for investment rounds, M&A transactions, or refinancing, as a clean structure is a key factor in legal and financial due diligence.

The main risks typically arise not from the mechanism itself, but from how it is implemented.

In practice, a common issue is poorly drafted loan or investment agreements that do not clearly define conversion terms or leave ambiguity regarding share price, conversion ratio, or other key parameters. In such cases, what should be a technical step may turn into a shareholder dispute.

Another critical aspect is pre-emption rights. If the share capital increase is carried out without properly granting or waiving these rights in accordance with applicable law or the company’s articles of association, the decisions may be challenged in court. This is particularly sensitive when capitalisation affects control, voting balance, or significantly dilutes other shareholders.

The set-off of mutual claims must also meet all legal requirements. Claims must be valid, clearly defined, and reciprocal, with accurately determined amounts. Any inconsistencies in accounting or documentation may create obstacles for registration or lead to disputes later on.

It is also important to assess tax implications in advance, especially where interest is capitalised or shares are issued at a value different from nominal. Failure to properly evaluate tax aspects may result in additional liabilities or risks.

In addition, it should be considered whether the capital increase requires notarisation. Where the company’s articles are non-standard or provide for specific procedures, additional formal requirements may apply, affecting both timing and execution of the process.

Finally, the entire capitalisation process must be consistently reflected in corporate documentation – including shareholder resolutions, amendments to the articles of association, and (where applicable) shareholders’ agreements – and properly registered with the Register of Legal Entities. Even minor inconsistencies may become significant during future legal or financial due diligence or in subsequent transactions.

Debt capitalisation should not be treated as a purely technical or administrative step. It is a strategic decision that affects the company’s shareholder structure, control balance, financial indicators, and future transactions.

When properly structured, it can deliver significant financial and structural benefits. However, poorly drafted documentation or failure to assess legal and formal requirements may lead to long-term risks, including disputes, liability, or obstacles in executing future deals.