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I have a question about a $2M convertible debenture in New

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York State. The maturity date...
I have a question about a $2M convertible debenture in New York State. The maturity date was December 31, 2000. The public company liable to pay the debenture went out of business, and no claim was filed by the debenture holder. I believe that New York State has a six-year statute of limitations on such debt, so it appears that the debt itself is not collectible through the courts.

However, I now want to resurrect the public company shell through a reverse merger (since it has many shareholders).


Question: Even though the statute of limitations has expired on collecting the debt itself, can the holder of the debenture subsequently exercise his right to convert that debt into shares? (My understanding is that the debt still exists, even though it cannot be collected through the courts after the statue to limitations has expired.) However, I am NOT aware of any statute of limitations on the CONVERSION RIGHT. Hence my concern. (A theoretical legal argument can be made that the purpose of the statute of limitations on debt is to achieve some finality, but I don't want to rely on the type of argument one might make in a higher court.) 


Of course, I could ask the holder of the debenture to sign a release, but if I do so, they then may want to be paid for that, either in dollars or shares, or both, so I'd rather not ask unless I have no other choice.
Submitted: 6 years ago.Category: Business Law
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10/5/2011
Business Lawyer: FLCORPLAWYER, Attorney replied 6 years ago
FLCORPLAWYER
FLCORPLAWYER, Attorney
Category: Business Law
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FLCORPLAWYER :

The debt still exists. It is well settled law that the statute of limitations is "an affirmative defense that must be plead and proved". It relates to litigation and does not extinguish the underlying debt, but makes it uncollectable in court. In my opinion the debenture is still convertible into shares, and must be dealt with. In any event, it is going to remain on the books and must be dealt with on your K's and Q's. Try to make a deal, making it clear to the holder of the debenture that if you do not buy this shell, he will get zero.

Customer:

You seem to be saying that not only will the conv. debenture remain on the books, but so will all the other "plain vanilla" debts. The latter does not make as much sense to me, but if true, do I need to get all the other debt holders to sign off as well in order to use the shell?

FLCORPLAWYER :

No the debenture is different from the other debts. If the other debts are old enough, your CPA should agreed with you that they are uncollectable. But try and get a CPA to sign off on writing down the debenture and you will see that he will not. You may wish to think about an "in and out" prepackaged bankruptcy to clean up the shell before you merge into it.

FLCORPLAWYER
FLCORPLAWYER, Attorney
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Experience: 23 Years business & securities law, NY and FL bars. SEC all states.
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