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Notes On Internal Reconstruction

The document discusses internal reconstruction, which is the reorganization of a company's financial affairs without liquidation by revaluing assets, writing off losses, and potentially reducing share capital. This is needed to accurately reflect the company's financial position, address overvalued assets, reduce external liabilities, and ensure the share capital is realistic. Internal reconstruction allows correcting issues to prevent future disaster through remedial measures like diagnosis and reorganization. It is regulated by section 100 of the Companies Act and allows for tax advantages compared to external reconstruction which involves liquidating the existing company.

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Ali Nadaf
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232 views

Notes On Internal Reconstruction

The document discusses internal reconstruction, which is the reorganization of a company's financial affairs without liquidation by revaluing assets, writing off losses, and potentially reducing share capital. This is needed to accurately reflect the company's financial position, address overvalued assets, reduce external liabilities, and ensure the share capital is realistic. Internal reconstruction allows correcting issues to prevent future disaster through remedial measures like diagnosis and reorganization. It is regulated by section 100 of the Companies Act and allows for tax advantages compared to external reconstruction which involves liquidating the existing company.

Uploaded by

Ali Nadaf
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Internal Reconstruction

1. Meaning of Reconstruction :
”Reconstruction of a company means re-organization of financial activities or
affairs of the company when its financial condition or position in not good or
satisfactory. This is accumulated loss and over valuation of assets etc.

Types of Reconstruction
1. External Re-construction
2. Internal Re-construction

1. Internal Re-construction :
It means re-arrangement or re-organization of the financial
activities or financial affairs of the company by re-valuation of its
assets, ascertaining the correct amount of liabilities or writing off the
accumulated losses by reducing the share capital of the company, with
or without changing the rights of share holders but without liquidation
of the company.

2. External Reconstruction:
It means winding up of existing company and transferring the
assets and liabilities at their natural value to new company.

Need of Internal Reconstruction :


1. True and Fair View of Financial Position: A company may
be incurring losses for several years. In cases the financial
position cannot reflect a true and fair view. Hence it
necessitates reorganization in order to disclose the actual
financial position of an enterprise
2. Value of Assets: On a careful analysis it may reveal that
such continues loss-making companies consist either
overvalued tangible assets or insignificant intangible assets.
To get rid of these unreal values of assets they should be
updated to their real values by way of reconstruction
3. External Liabilities : External liabilities include loan, payment
of preference dividends, debenture, etc These cannot be
reduced to a great extent to maximize profitability through
reorganization
4. Share capital : The capital figures (i.e the value of the net
assets) is not reliable as it tends to show a higher figure
than the real figure due to various factors such as
overvalued tangible assets, idle and valueless intangible
assets and fictitious assets and outstanding liabilities not
discharged on maturity date. Because of this the share
capital of such loss-incurring companies will not reflect the
real and fair value of the net assets of the company . To set
right this sort of over capitalization reconstruction is of
vital importance.
5. Remedial Measures: If proper reorganization does not take
place it will lead to total disaster. To escape from such a
scenario, reconstruction is necessary. To a certain extent.
Reconstruction is remedy to avoid unforeseen disaster to
companies. Proper diagnosis and reorganization may alleviate
such evils

Difference between Internal Reconstruction and External Reconstruction


Basis of Difference Internal Reconstruction External Reconstruction
1. Liquidation of It does not require liquidation of It involve liquidation of the
company the company company
2. Formation of It does not involve formation of It requires formation of a
company a new company new company which takes
over the business of
liquidating company.
3. Accounting It involves revaluation of assets It is recorded as per AS-14
Treatment and liquidation of an existing
company
4. Legal It requires fewer legal It requires more legal
Formalities formalities. There is no need to formalities
settle the claims of creditors
and debenture holders
5. Tax Benefit It ensure tax advantage to the A company is not allowed to
company carry forward its losses for
income tax purpose
6. Regulation It is done as per provisions of It is regulated by section 494
sections 100 of the companies of the companies act 1956
act
7. Reduction These is certain of capital and There is no reduction of
sometimes the outside liabilities capital in fact there is fresh
like debenture holders may share capital of the company
have to reduce their claim

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