Refinancing vs Debt‑for‑Equity Swaps: UK Directors Financial Pressure
Your business comes under sustained financial pressure, the instinct of many directors is to keep trading, hope for a turnaround, and avoid difficult conversations with lenders, HMRC, or shareholders. In many cases, that instinct can increase risk for both the company and its directors. The earlier a director engages with the legal and commercial options available, the more of those options are likely to remain realistically on the table, and the lower the personal risk to the director tends to become.Two of the most effective legal tools for a company under pressure, but still fundamentally viable, are refinancing and a debt-for-equity swap.
This article explains how each option works, when one may be preferable to the other, what directors should be alert to, and how the Jonathan Lea Network helps owner-managed businesses navigate these decisions before they become forced. It is intended as general background for directors and boards considering their options. It is not legal or tax advice, and specific advice should always be taken on the facts of any particular case.
Business Under Financial Pressure? How Debt-for-Equity Swaps and Refinancing Can Help You Avoid Insolvency
Most directors only realise that their business is under serious financial pressure when one of a few specific trigger events occurs. A covenant breach letter arrives from the bank. A facility is approaching maturity with no obvious path to renewal. HMRC arrears begin to escalate, and a Time to Pay arrangement breaks down or is refused. A lender proactively proposes a restructuring of the existing debt. A major customer becomes slow to pay, and the cash flow consequences reach a tipping point. In many cases, by the time these events occur, the underlying pressure has been building for months.
At that point, directors typically have three broad legal routes available. They can renegotiate or replace the existing debt through refinancing. They can convert some or all of the debt into shares through a debt-for-equity swap. Or they can enter a formal insolvency process, whether a company voluntary arrangement, administration, or liquidation. The first two options are generally less disruptive, tend to preserve more value for existing stakeholders, and can allow the director to retain control of the business. The third option typically results in a loss of control, and often a loss of value that could have been preserved through earlier action.
It is important to be clear about the distinction between financial pressure and insolvency. Whether a company is actually insolvent, on a cash-flow basis under section 123(1) of the Insolvency Act 1986 or on a balance-sheet basis under section 123(2), is a legal and accounting question that depends on the specific facts and figures. The examples given in this article are common warning signs, not a diagnostic test. Directors should not assume these warning signs prove the company is solvent or insolvent. They should take specific legal and accounting advice first.
There is usually a window in which restructuring options remain realistically viable, and it is often shorter than directors assume. Legal advice taken inside that window can often be one of the most effective steps a director can take to protect the business, their personal position, and the long-term value of the company. Waiting until after a winding‑up petition is issued, or after a lender appoints investigating accountants, usually removes many of the useful options from the table.
What Is a Debt-for-Equity Swap and When Should a UK Company Consider One?
A debt‑for‑equity swap is a transaction where a creditor releases all or part of a company’s debt in exchange for newly issued shares in that company. The company’s balance sheet liabilities reduce, and cash flow can improve because payments on the converted debt stop. The creditor becomes a shareholder with an economic interest in the company’s recovery rather than just a contractual claim. Done properly, a debt‑for‑equity swap aligns the creditor with the long‑term success of the business rather than short‑term enforcement.
When a debt-for-equity swap typically makes commercial sense
Debt-for-equity swaps are most commonly considered in a small number of recurring scenarios. Each has its own legal nuances, but they share a common feature: the underlying business is viable, and the capital structure is the problem.
- Lender-led restructuring. This is the most common scenario in mid-market transactions. A bank, alternative lender, or distressed debt fund concludes that full repayment is unlikely and that taking a stake in the restructured business may offer a better recovery than enforcement or insolvency. The swap is typically proposed by the lender, sometimes as part of a broader refinancing package. Directors should understand that the negotiating position at this stage is usually weaker than it would have been six or twelve months earlier, which is one of the reasons early engagement matters.
- Director or founder loan conversion. Many owner-managed businesses have been partly funded by loans from directors or shareholders. Converting those loans into equity can clean up the balance sheet, reduce apparent leverage, and is often a useful step before a fundraising round or a sale. Because the creditor and shareholder are frequently the same person, these swaps tend to be less contentious, but they still require proper legal documentation to be effective and to withstand later challenge.
- Supplier or strategic creditor swaps. Occasionally, a key commercial counterparty, whether a major supplier, a landlord, or a strategic partner, will agree to take equity rather than pursue payment. This can preserve the trading relationship and avoid the damage that enforcement would cause to the operational side of the business. These transactions require careful thought about the counterparty’s future rights as a shareholder and the long-term governance implications.
- As part of a wider restructuring plan. In more complex cases, a swap may be implemented alongside a Part 26 scheme of arrangement or a Part 26A restructuring plan under the Companies Act 2006, which can allow the arrangement to bind dissenting creditors or shareholders where statutory conditions are met. These are powerful tools, but they involve court sanction and a significantly higher legal and procedural threshold.
The Legal Mechanics in Outline
At a technical level, a swap typically involves amending the company’s articles of association to create the appropriate class of shares, often preference shares with specific rights on dividend, liquidation, and redemption. The company must ensure that the directors have authority to allot the new shares under section 551 of the Companies Act 2006 or the articles, and that pre-emption rights under section 561 are either respected or properly disapplied under section 570 or section 571.
Beyond the share issue itself, the company must pass the required board and shareholder resolutions, issue the new shares in accordance with the Companies Act 2006, and formally document the release of the debt and any associated security or personal guarantees through deeds of release and variation. Post-completion, the company will need to make the relevant Companies House filings, including a return of allotment on form SH01, file any amended articles, and update its PSC register where the swap produces a change in persons with significant control.
Tax treatment is fact-specific. How the debt is valued, how the shares are capitalised, and whether the debt is released entirely or partially can all materially affect the tax outcome for both the company and the creditor, and the interaction with loss relief rules and the loan relationship regime requires careful attention. The Jonathan Lea Network does not provide tax advice, and directors should obtain separate specialist tax advice on the tax treatment of any proposed restructuring. We regularly work alongside clients’ existing accountants and tax advisers, and can introduce specialists where required.
A swap may be the right option where the underlying business is viable but over‑leveraged. It also helps where the creditor has a genuine long‑term interest in the company’s recovery. Usually, it is appropriate only where existing shareholders accept that dilution is preferable to the alternative. It is less likely to be appropriate where the business is not fundamentally viable, where the creditor’s interests are misaligned with existing shareholders, or where the swap is being used to delay an insolvency that cannot realistically be avoided. In the last of those cases, directors may face later scrutiny over whether continued trading was appropriate.
Refinancing Business Debt vs Converting It to Equity: Which Option Is Right for Your Company?
Refinancing and debt‑for‑equity swaps are often discussed together, but they serve different purposes and lead to different outcomes for existing stakeholders. Understanding the difference is essential before entering discussions with lenders or creditors.
Refinancing replaces or restructures existing debt with new lending. The new facility may have different terms, a different lender, or a longer maturity. It keeps the company’s capital structure intact. Debt remains debt, and existing shareholders remain shareholders. A debt‑for‑equity swap fundamentally changes the capital structure by converting debt into shares. It immediately reduces financial pressure on the company, but at the cost of shareholder dilution. In commercial terms, refinancing buys time and flexibility; a swap delivers more permanent balance sheet relief.
The factors that drive the right answer:
The right choice depends on several commercial and legal factors. In almost every real case, the decision requires a careful weighing of competing considerations rather than a single, obvious answer.
- The underlying viability of the business. Refinancing only works if the company can realistically service the new debt. Where cash flow cannot support a meaningful debt load on sustainable terms, a swap is often the more appropriate route. It removes the repayment obligation on the converted portion of the debt. Directors sometimes refinance when they should swap, which postpones the problem instead of solving it. This is one of the more common avoidable mistakes we see.
- The availability of willing new lending. Refinancing requires a lender prepared to take the risk, often on revised security and with tighter covenants. Where existing lenders are unwilling to extend and the market for new lending has closed to the company, a swap with existing creditors may be the only genuinely available option. The fact that refinancing would be preferable in principle does not mean it is achievable in practice.
- The commercial position of the existing creditor. Banks generally prefer repayment, and therefore refinancing, because their business model is built around interest income and capital recovery rather than equity upside. Distressed debt funds and specialist lenders are often more receptive to equity, because their underwriting contemplates the possibility of a restructured outcome. The creditor’s commercial position will drive which structure is actually negotiable, regardless of which the company would prefer.
- The dilution existing shareholders can tolerate. A swap will materially dilute existing equity, sometimes to the point where the original shareholders retain only a minority stake or are effectively squeezed out. Refinancing avoids this, but typically requires fresh security, tighter covenants, and sometimes additional or expanded personal guarantees from directors. The trade-off between dilution and personal exposure is one of the more difficult conversations directors have with their advisers, and it deserves proper attention rather than a reflexive preference for avoiding dilution.
- The tax consequences of each route. Both options can carry material tax implications, including break costs on fixed-rate debt, hedging liabilities, stamp duty land tax on refinanced property debt, questions around debt release and loss relief, and interactions with the loan relationship and corporate interest restriction rules. These consequences should be modelled in advance with a suitably qualified tax adviser, not discovered afterwards.
In practice, the answer in many mid-market restructurings is not a binary choice. A combination approach often produces the best commercial outcome. This may involve partial refinancing of the most sustainable portion of the debt and a swap on the remainder. The Jonathan Lea Network regularly advises on combined transactions of this kind, frequently alongside capital reductions, share buybacks, or wider group reorganisations that sit around the core restructuring.
Can I Be Held Personally Liable If My Company Restructures Its Debt? Director Risks, Wrongful Trading and Personal Guarantees Explained
This is one of the most important questions a director facing a restructuring should be asking. It is also the area where the cost of getting advice wrong tends to be highest, because the consequences are personal rather than corporate and they can follow a director for years after the company itself has moved on.
Wrongful trading under section 214 Insolvency Act 1986
Under section 214 of the Insolvency Act 1986, a director who continues trading when there is no reasonable prospect of avoiding insolvent liquidation or insolvent administration can be held personally liable to contribute to the company’s assets. A director is at risk where they also fail to take every step to minimise losses to creditors. A wrongful trading claim can only be brought if the company subsequently enters insolvent liquidation or insolvent administration; it is a claim made in the course of that process rather than a free-standing liability during trading.
Refinancing or restructuring discussions do not automatically protect a director from this risk. Where a restructuring is pursued in circumstances in which a reasonable director would have concluded that insolvent liquidation or insolvent administration could not realistically be avoided, the director’s position may be weaker rather than stronger. The practical protection here is proper documentation of the decision-making process, supported by contemporaneous legal and financial advice. A board that can show it considered the company’s position properly, took advice, and reached a reasoned decision to pursue restructuring is generally in a stronger position than a board that simply carried on trading and hoped for the best.
Directors’ duties in the zone of insolvency
As a company approaches insolvency, directors’ duties shift. The primary duty is no longer to promote the success of the company for shareholders alone. Directors must consider, and in some cases give appropriate weight to, the interests of creditors. The Supreme Court considered the scope of this duty in BTI 2014 LLC v Sequana SA [2022] UKSC 25, confirming that the duty to consider creditor interests is engaged when the company is insolvent, is bordering on insolvency, or when an insolvent liquidation or administration is probable. As the company’s position deteriorates, the weight given to creditor interests increases.
Any restructuring decision taken in this zone, including a debt‑for‑equity swap or a refinancing, must take creditor interests into account. That consideration should be documented in a way that can be evidenced if challenged later. This is a meaningful change in the legal framework within which directors operate. It is often overlooked by directors who assume that, until the company formally enters an insolvency process, ordinary shareholder‑focused duties continue to apply unchanged.
Board process and evidence
Good governance is not a formality in this context; it is a material part of the director’s protection. Boards considering a refinancing or debt‑for‑equity swap should hold properly minuted board meetings. They should obtain contemporaneous legal and financial advice. They should also keep records of the commercial rationale for the chosen course of action. Where relevant, they should document the consideration given to creditor interests This creates a contemporaneous evidential record that can be relied upon if the transaction is scrutinised in later proceedings, and it reinforces that decisions were taken on a reasoned basis.
Personal guarantees and their expansion risk
Many SME directors have provided personal guarantees for company borrowing, asset-based lending, landlord obligations, or trade credit. A refinancing is a critical moment to review and, where possible, renegotiate the scope of those guarantees. Lenders will often seek to extend or expand existing guarantees as a condition of new lending, and directors should ensure that their personal exposure is proportionate, clearly capped, and does not quietly pick up liabilities that were not previously guaranteed.
In a debt-for-equity swap, the release of personal guarantees should be expressly addressed in the documentation. If the underlying debt is released but the guarantee is not formally discharged, the director may remain exposed on a contingent basis, and disputes over the scope of the release can produce very damaging outcomes for directors if not handled correctly. The deed of release should be specific, should cover all associated security, and should address ancillary obligations such as indemnities and undertakings.
Preference and transaction at undervalue risk
If the restructuring later fails and the company enters insolvency, the liquidator or administrator has statutory powers to challenge earlier transactions. They can challenge deals that preferred one creditor over others. They can also challenge deals that transferred value at an undervalue in the period before insolvency. A refinancing that releases one creditor’s security while leaving others exposed, or a swap that advantages a connected creditor, can in some cases be challenged and unwound by the court, and directors may then face personal exposure depending on the facts.
The relevant look-back periods under the Insolvency Act 1986 matter here. Transactions at undervalue under section 238 can be challenged if they occurred within two years before the onset of insolvency. Preferences under section 239 can be challenged within six months, or within two years where the preference was to a connected party. Restructuring decisions taken today can therefore be scrutinised years later, and the quality of the legal and commercial rationale at the time of the transaction can be decisive.
Shareholder and minority investor challenges
Existing shareholders who suffer material dilution through a swap may challenge the transaction, particularly minority shareholders with pre-emption rights, veto rights, or protections under the articles or a shareholders’ agreement. In some cases, a dilutive share issue without proper approvals or valuation may give rise to claims for unfair prejudice under section 994 of the Companies Act 2006. Proper shareholder approvals, adherence to pre-emption rights or formal disapplication where permitted, and independent valuation advice where appropriate are important protections. These risks are manageable, but generally only with advice taken early and through documented decision-making. In our experience, the directors who get into serious difficulty tend to be those who made commercial decisions first and sought legal advice afterwards.
Time Limits and Warning Signs That Should Prompt Early Legal Advice
A number of specific events should prompt directors to take legal advice within days rather than weeks. These include the receipt of a covenant breach letter or reservation of rights notice from a lender, a statutory demand or winding-up petition, the failure of a Time to Pay arrangement with HMRC, the appointment of investigating accountants by a lender, and the receipt of a lender-initiated restructuring proposal. Each of these events can materially narrow the window in which restructuring options remain realistically available, and each carries its own procedural deadlines.
Winding-up petitions in particular move quickly. Once a petition has been advertised, the company’s bank accounts will typically be frozen, trading becomes extremely difficult, and the scope for a consensual restructuring narrows sharply. Acting before advertisement, and ideally before the petition is presented, can change the available options significantly. Similarly, once a lender has formally accelerated a facility following a covenant breach, the negotiating dynamic shifts and the legal framework for any restructuring becomes more constrained.
The practical point is that if a director is reading this article and recognising the situation, the right time to take advice is usually now, not after the next missed payment or the next difficult letter. For further background on director responsibilities and the early warning signs of corporate distress, directors may find the GOV.UK guidance on company insolvency a useful starting point, although it is not a substitute for specific legal advice.
How JLN Can Help You Restructure, Refinance or Negotiate with Lenders Before It’s Too Late
The Jonathan Lea Network advises directors, shareholders, lenders, and investors on the full spectrum of corporate restructuring, from early-stage financial pressure through to more complex distressed transactions. Our work in this area covers strategic assessment, negotiation support, transaction documentation, director duty advice, and coordinated delivery with specialist tax advisers.
We regularly advise on debt-for-equity swaps, including swaps implemented alongside capital reductions, share buybacks, and schemes of arrangement. We act on the refinancing of corporate loans, development finance, and asset-based facilities, with particular attention to security releases, personal guarantee renegotiation, and covenant packages. Where restructuring sits within a wider reorganisation, we coordinate across corporate restructuring and reorganisation workstreams, working with specialist tax advisers to address HMRC clearance and tax treatment.
Our approach is partner-led, commercially focused, and delivered in plain English. We work with SMEs and owner-managed businesses across the United Kingdom, and we are often instructed at the point where directors have received a covenant breach notice, a lender’s restructuring proposal, or an HMRC enforcement letter and need advice within days rather than weeks. We provide clear scoping, realistic timelines, and transparent fee arrangements, so that directors can make informed decisions without adding cost uncertainty to an already pressured situation.
Speak to JLN’s Corporate Team Before Your Next Conversation With Your Lender, HMRC, or Shareholders
Book a confidential, fixed-fee initial consultation with one of our corporate solicitors to review your refinancing or debt-for-equity options, director duties and personal exposure, and a realistic timeline, before decisions are taken out of your hands.
Received a covenant breach letter, restructuring proposal, or HMRC enforcement notice? Send it to our corporate team for a preliminary review.
We will respond to most enquiries with both an indicative scope of work and fee estimate, as well as the offer of a complimentary 20 minute discovery video call to discuss your issues and how we can help, before sending a more considered formal fee estimate via email.
In some limited cases, if you would just like initial advice and guidance on a call, we may instead offer a fixed fee appointment (commonly charged between £280 to £500 + VAT) whereby we will review the information you provide, hold a video call consultation and then follow up with an advisory email (as well as a fee estimate for any further work identified).
Please email wewillhelp@jonathanlea.
FAQs on Refinancing vs Debt‑for‑Equity Swaps for UK Directors
A properly structured and documented debt-for-equity swap or refinancing does not, on its own, stop you from continuing to act as a director of your current company or other companies. The bigger risks to your future ability to act as a director arise if the company later goes into insolvent liquidation or administration and a court finds that you engaged in misconduct, such as wrongful trading, misfeasance, or other serious breaches of duty, which can in some cases lead to a contribution order or director disqualification. Taking early, specialist advice, making decisions on the basis of proper information, and ensuring those decisions and the consideration of creditor interests are properly minuted all help to reduce the risk of allegations that might threaten your ability to act as a director in the future. If HMRC is your main or only significant creditor, the broad menu of options is similar, but HMRC’s approach and powers make the dynamics different from dealing with a commercial lender. HMRC has its own enforcement tools, including Time to Pay arrangements, enforcement action, and in some cases presenting winding-up petitions, and it also has a form of secondary preferential status for certain taxes, which can affect how other creditors are treated if things progress into insolvency. In practice, any proposed refinancing or compromise involving HMRC needs to be approached carefully and usually in coordination with your accountants or tax advisers, because their focus is often on realistic, evidence‑based repayment proposals supported by credible cash‑flow information. Once your company is in financial difficulty, and particularly if it is or may be insolvent, you cannot safely treat loans from you, family members, or connected companies as if they were somehow “outside” the normal creditor order. Preferentially repaying connected creditors, including director or family loans, in the run‑up to an insolvency can in some circumstances be challenged as a preference, and if the payment is set aside the court may also make further orders that leave you and the company worse off overall. If you are considering repaying a loan from you or a family member while under financial pressure, it is generally sensible to take advice first, document the company’s position carefully, and understand how the preference rules and creditor‑focused duties may apply to your specific facts. For an initial restructuring consultation, we will usually ask for a short overview of your business, your latest management accounts or most recent statutory accounts, a simple summary of your main creditors and banking facilities, and copies of any recent letters or emails from lenders, HMRC, landlords, or key suppliers. We may also ask for details of any personal guarantees, security documents (such as debentures or legal charges), and any cash‑flow forecasts you already have, because these help us gauge how urgent the situation is and which options are realistically available. You do not need everything to be perfect or complete before speaking to us; part of the first conversation is working out what is missing, how quickly it can be pulled together, and what can sensibly be done in the meantime. No. An initial conversation with us is confidential and does not, by itself, lead to any notification to your bank, other lenders, HMRC, Companies House, or the courts. Instructing us to advise you does not commit you to any particular process; the first step is to help you understand your position, your duties, and the range of options, so that you can decide if, when, and how to approach creditors. If we later agree, on your instructions, that it is in your interests for us to speak directly to a lender or to HMRC on your behalf, we will do that in a planned and documented way, but only once you are comfortable with the proposed strategy and its likely implications.
Important Information
The law and practice referred to in this article relate to England and Wales and are correct as at the date of publication. Readers should take specific legal and tax advice before taking any action in reliance on the matters discussed.
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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.
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