meaning of reconstruction
Company reconstruction refers to changes in the internal and external structure of the company. It is such a method of formation of a new company in which all the old assets are taken over by the new company in such a way that the interests of the old shareholders do not change much. A company that has lost most of its capital or is no longer expected to succeed, may be reconstituted by the members or by a court of law instead of being liquidated. In this process, the members of the old company and the creditors, after consultation and agreement among themselves, build the structure of the new company on the ruins of the failed company. It is not necessary that the new company should do business under the new name, if the old name is still in the market, then the new company can do business under the old name.
Thus, when the company’s capital structure becomes over-capitalized or the company suffers a loss or the property is overvalued, then an attempt is made to rebuild it to remove all these defects.
Reconstruction includes the following tasks
(1) Reduction in share capital.
(2) Change in share capital.
(3) Dissolution of the existing company and establishment of a new company to buy its business.
Kinds of Reconstruction Reconstruction can be done in the following two ways could
1. Meaning of Internal Reconstruction
If the prescribed plan of financial sequence maintains the existence of the existing company, then this arrangement is called internal reconstruction. In other words, internal reconstruction refers to the revamping of the financial structure of the company. It may happen that the company has suffered heavy losses in the previous years, the value of the company’s assets has fallen drastically or the company has more capital than required. At the same time, the owners and lenders of the company want to save it from statutory winding up, then in such a situation only one solution remains and that is the remedy for internal reconstruction of the company. With concerted efforts, the company was able to renounce its dilapidated condition and get a new life. Thus, in a nutshell, internal reconstruction refers to a surgical-like process of reviving the company with vigor and vigor without winding up.
Causes of Internal Reconstruction Following are the main reasons for internal reconstruction
1. There is a need to write off the accumulated losses of the company in the past years.
2. To make the complex capital structure of the company simple and in line with the modern ideology be needed
3. In case of decline in the company’s activity and turnover.
4. If there is a need for change in the capital gearing of the company
5. Requirement to change the face value of the company’s shares
Objectives Reconstruction The main objectives of reconstruction are:
(1) Eliminating the defects of over-capitalisation.
(2) Reducing the liabilities of interest and dividend.
(3) To improve the internal financial system.
(4) Getting rid of unprofitable assets.
(5) To improve the capital structure.
2. Meaning of External Reconstruction
When an existing company is facing financial difficulties or is incurring losses continuously for many years or is feeling the lack of working capital or is unable to improve the internal financial system by internal reconstruction, it closes itself and If a new company is formed to take it, it is called external reconstruction. The purchasing company is mostly a newly established company which is specially formed for this purpose only. In this there is no interference of any other existing company, rather a new company is established according to the name of the old company and the shareholders of the old company are often the shareholders of the newly established company.
Objectives of Extemal Reconstruction The main objectives of external reconstruction are as follows:
(1) To protect the company from future losses.
(2) To increase the objectives of the company.
(3) To increase the working capital of the company.
(4) To move the registered office of the company from one state to another.
(5) Conversion of a foreign company into an Indian company.
Subject Matter of Internal Reconstruction –
The following points are studied under Internal Reconstruction—
I. Alteration in Share Capital of Company
Change in the share capital of the company means increase in the capital of the company, integration or division of shares, conversion of shares into inventory or conversion of stock into share capital or sub-division of shares. The provisions relating to change in the share capital of the company can be explained as follows:
1. Increase in Share Capital The share capital of the company can be increased in the following way – (a) By increasing the authorized capital – When the entire authorized capital of the company has been issued and fully paid up,
However, if the company considers the need to increase the authorized capital so that new shares can be issued, the company may do so provided the Articles of Association of the company permits to do so.
The authorized capital is shown in excess in the balance sheet.
(b) Increasing the issued capital – If the company wants to increase the issued capital within the limit of authorized capital, then in such case the Board of Directors will have to pass a resolution to this effect in its meeting. For the accounting process relating to issue of share capital, the rules regarding issue of shares will be applicable.