Scribd
Upload
0 views

Ans 6

External reconstruction involves liquidating an existing company and forming a new entity to take over its business, assets, and liabilities. The process aims to revive financially distressed companies, improve operational efficiency, and protect stakeholder interests. Key steps include board approval, formation of a new company, asset valuation, and regulatory sanction before transferring business operations.

Uploaded by

SHRI BALAJI CORNER
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
0 views

Ans 6

External reconstruction involves liquidating an existing company and forming a new entity to take over its business, assets, and liabilities. The process aims to revive financially distressed companies, improve operational efficiency, and protect stakeholder interests. Key steps include board approval, formation of a new company, asset valuation, and regulatory sanction before transferring business operations.

Uploaded by

SHRI BALAJI CORNER
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Ans 6.

External Reconstruction: Definition, Procedure, and Objectives


External reconstruction is a process in which an existing company is liquidated and a new company is formed to
take over its business, assets, and liabilities. Unlike internal reconstruction (which involves reorganization
without liquidating the company), external reconstruction results in the closure of the old company and the
creation of a new legal entity.
Key Features of External Reconstruction
The existing company is wound up.
A ne company is formed to take over the business of the old company.

The new company issues fresh share capital, generally without any reduction in face value.

The assets and liabilities of the old company are transferred to the new company.

Creditors and shareholders of the old company may become creditors or shareholders of the new company.
Objectives of External Reconstruction

Revival of Financially Distressed Companies


To rescue a company facing financial losses, insolvency, or declining performance by restructuring it under a
new legal entity.
Fresh Start with Clean Balance Sheet
To eliminate accumulated losses and bad debts, and begin with a new balance sheet that reflects the true
financial position.

Improving Operational Efficiency


External reconstruction often accompanies management restructuring or business process improvements.
Protecting Stakeholder Interests
By forming a new company, creditors and shareholders may have better chances of recovering their
investments or dues.
Regulatory or Legal Requirements
Sometimes, laws or regulatory conditions require companies to reorganize themselves externally to comply with
industry norms.
Tax Planning and Optimization
Reconstruction can offer tax advantages by adjusting carried forward losses or capitalizing on new exemptions.
Procedure for External Reconstruction
The external reconstruction process involves several systematic steps:
Board Approval
The Board of Directors of the old company approves the proposal for reconstruction and liquidation.
Formation of New Company
A new company is incorporated under the relevant Companies Act (e.g., Companies Act, 2013 in India).
Preparation of Scheme of Reconstruction
A reconstruction scheme is prepared detailing how assets and liabilities will be transferred, share exchange
ratio, and the treatment of creditors and shareholders.
Valuation of Assets and Liabilities
Proper valuation is conducted to determine the fair market value of assets and liabilities.
Approval by Stakeholders
The scheme is placed before shareholders and creditors of the old company for approval.
Sanction by Tribunal/Court

The scheme must be approved by the appropriate regulatory authority or tribunal (e.g., National Company
Law Tribunal in India).
Winding Up of Old Company
Once approved, the old company is liquidated as per the law.
Transfer of Business
Assets and liabilities are transferred to the new company as per the reconstruction scheme.
Issue of Shares by New Company
The new company issues fresh share capital to the old company’s shareholders or creditors as per the agreed
terms.
Example Scenario

If Company X Ltd. is suffering losses and has accumulated debts, it may choose to liquidate. A new company, Y
Ltd., is formed to acquire the business, excluding non-performing assets. Y Ltd. will issue fresh shares to the
shareholders of X Ltd., possibly on a reduced ratio (e.g., 2 shares of Y Ltd. for every 5 shares of X Ltd.), but the
nominal capital remains intact in the new entity.

You might also like