CONCEPT:
When a company is suffering loss for several past years and suffering from financial difficulties, it may go for reconstruction. In other words, when a company's balance sheet shows huge accumulated losses, heavy fictitious and intangible assets or is in financial difficulties or is to over capitalized, and then the process of reconstruction is restored.
Reconstruction may be internal and external.
1. External reconstruction
When a company is suffering losses for the past several years and facing financial crisis, the company can sell its business to another newly formed company. Actually, the new company is formed to take over the assets and liabilities of the old company. This process is called external reconstruction. In other words, external reconstruction refers to the sale of the business of existing company to another company formed for the purposed. In external reconstruction, one company is liquidated and another new company is formed. The liquidated company is called "Vendor Company" and the new company is called "Purchasing Company". Shareholders of vendor company become the shareholders of purchasing company.
2. Internal Reconstruction
Internal reconstruction refers to the internal re-organization of the financial structure of a company. It is also termed as re-organization which permits the existing company to be continued. Generally, share capital is reduced to write off the past accumulated losses of the company. The accounting procedure of internal reconstruction is distinct from that of amalgamation, absorption and external reconstruction.
When a company is suffering loss for several past years and suffering from financial difficulties, it may go for reconstruction. In other words, when a company's balance sheet shows huge accumulated losses, heavy fictitious and intangible assets or is in financial difficulties or is to over capitalized, and then the process of reconstruction is restored.
Reconstruction may be internal and external.
1. External reconstruction
When a company is suffering losses for the past several years and facing financial crisis, the company can sell its business to another newly formed company. Actually, the new company is formed to take over the assets and liabilities of the old company. This process is called external reconstruction. In other words, external reconstruction refers to the sale of the business of existing company to another company formed for the purposed. In external reconstruction, one company is liquidated and another new company is formed. The liquidated company is called "Vendor Company" and the new company is called "Purchasing Company". Shareholders of vendor company become the shareholders of purchasing company.
2. Internal Reconstruction
Internal reconstruction refers to the internal re-organization of the financial structure of a company. It is also termed as re-organization which permits the existing company to be continued. Generally, share capital is reduced to write off the past accumulated losses of the company. The accounting procedure of internal reconstruction is distinct from that of amalgamation, absorption and external reconstruction.
Internal Reconstruction Vs External Reconstruction
Comparison Chart
| BASIS FOR COMPARISON | INTERNAL RECONSTRUCTION | EXTERNAL RECONSTRUCTION |
|---|---|---|
| Meaning | Internal reconstruction refers to the method of corporate restructuring wherein existing company is not liquidated to form a new one. | External reconstruction is one in which the company undergoing reconstruction is liquidated to take over the business of existing company. |
| New company | No new company is formed. | New company is formed. |
| Use of specific terms in Balance Sheet | Balance Sheet of the company contains "And Reduced". | No specific terms are used in the Balance sheet. |
| Capital reduction | Capital is reduced and the external liability holders waive their claims. | No reduction in the capital |
| Approval of court | Approval of court is must. | No approval of court is required. |
| Transfer of Assets and Liabilities | No such transfer takes place. | Assets and liabilities of existing company are transferred to the new company. |
No comments:
Post a Comment