Ocker, I've just watched exactly that scenario in a NZ company...

Ocker, I've just watched exactly that scenario in a NZ company that went under.

Lots of worthless unsecured debt converted to equity to make the balance sheet look stronger and allow it to struggle along for a few more months of capital raising from "sophisticated investors", before finally eating dust. Just a last ditch gamble for debt-holders who stood to get nothing back anyway (and at least were left with a more liquid/tradeable asset in the few intervening months).