Introduction To Internal Reconstruction of Companies
Introduction To Internal Reconstruction of Companies
Introduction To Internal Reconstruction of Companies
company is purchased by another to become a single company. In this unit we shall discuss another type of administrative and financial arrangement by which the capital structure of the company in question may be legally reconstructed. This is generally called Internal Reconstruction of company. The term Reconstruction implies the process followed for reorganisation of a company with respect to its capital structure including the reduction of claims of both the shareholders and the creditors of the company. Reconstruction of a company is required when it faces acute financial problems due to over capitalisation or accumulation of operating losses. In this unit we will discuss the meaning of internal reconstruction and external reconstruction of companies, the situation for internal reconstruction of companies, internal reconstruction by alteration of share capital and reduction of share capital and accounting treatment on internal reconstruction of companies. MEANING OF EXTERNAL RECONSTRUCTION AND INTERNAL RECONSTRUCTION
A company can be reconstructed in any of the two ways. These are: (i) External Reconstruction and (ii) Internal Reconstruction. (i) External Reconstruction : The term External Reconstruction means the winding up of an existing company and registering itself into a new one after a rearrangement of its financial position. Thus, there are two aspects of External Reconstruction, one, winding up of an existing company and the other, rearrangement of the companys financial position. Such arrangement shall be approved by its shareholders and creditors and shall be sanctioned by the National Company Law Tribunal (NCLT). Such a step usually involves the writting off of a debit balance on Profit and Loss Account, elimination of all fictitious assets if any from the Balance Sheet, and the consequent readjustment of share capital. (ii) Internal Reconstruction: Internal reconstruction means a recourse undertaken to make necessary changes in the capital structure of a company without liquidating the existing company. In internal reconstruction neither the existing company is liquidated, nor is a new company incorporated. It is a scheme in which efforts are made to bail out the company from losses and put it in profitable position. Internal reconstruction of a company is done through the reorganisation of its share capital. It is a scheme of reorganisation in which all interested parties in the capital structure volunteer to sacrifice. They are the companys shareholders, debenture holders, creditors etc. Under internal reconstruction, the accumulated trading losses and fictitious assets are written off against the sacrifice made by these interest holders in the form of reduction of paid up value of their interest.
(i) When the capital structure of a company is complex and it is required to make it simple. (ii) When there are huge accumulated losses and it is required to write off these losses to depict a better position of the company. (iii) When a part of the capital is not represented by available tangible assets. (iv) When change is required in the face value of shares of the company so that they can become attractive for future investors
(b) The company may decide to change the shares of smaller denomination into larger denomination. This process is called consolidation of shares. On account of consolidation, the total amount of capital of the company will not change but the number of shares will decrease. The following journal entry is required to be passed: Share Capital A/c (Old Denomination) Dr. To Share Capital A/c (New Denomination) (Being the consolidation of..... Shares of Rs...... each into .......... Shares of Rs......... each as per General Meeting Resolution No....... Dtd..........)