Internal Reconstruction
Meaning of Internal Reconstruction:
When a company has been making losses for a number of years, the financial position does not present a true and fair view of the state of the affairs of the company. In such a company the assets are overvalued, the assets side of the balance sheet consists of fictitious assets, useless intangible assets and debit balance in the profit and loss account. Such a situation does not depict a true picture of financial statements and shows a higher net worth than what the real net worth ought to be. In short the company is over capitalized. Such a situation brings the need for reconstruction. Reconstruction is a process by which affairs of a company are reorganized by revaluation of assets, reassessment of liabilities and by writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights attached to different classes of shares.
The object of reconstruction is usually to reorganize capital or to compound with creditors or to effect economies. Such a process is called internal reconstruction which is carried out without liquidating the company and forming a new one. However, there may be external reconstruction. Wherever an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company, there is external reconstruction. Such external reconstruction is essentially covered under the category ‘amalgamation in the nature of merger’ in AS-14.
It also refers to the reconstruct the business without its liquidation. It does not require the binding of the existing company. It necessarily involves the reduction of share capital. There is no transfer of assets and liabilities, because there is not a formation of new company.
It is of 3 types Through alteration of capital
Through
When a company has been making losses for a number of years, the financial position does not present a true and fair view of the state of the affairs of the company. In such a company the assets are overvalued, the assets side of the balance sheet consists of fictitious assets, useless intangible assets and debit balance in the profit and loss account. Such a situation does not depict a true picture of financial statements and shows a higher net worth than what the real net worth ought to be. In short the company is over capitalized. Such a situation brings the need for reconstruction. Reconstruction is a process by which affairs of a company are reorganized by revaluation of assets, reassessment of liabilities and by writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights attached to different classes of shares.
The object of reconstruction is usually to reorganize capital or to compound with creditors or to effect economies. Such a process is called internal reconstruction which is carried out without liquidating the company and forming a new one. However, there may be external reconstruction. Wherever an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company, there is external reconstruction. Such external reconstruction is essentially covered under the category ‘amalgamation in the nature of merger’ in AS-14.
It also refers to the reconstruct the business without its liquidation. It does not require the binding of the existing company. It necessarily involves the reduction of share capital. There is no transfer of assets and liabilities, because there is not a formation of new company.
It is of 3 types Through alteration of capital
Through
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