INTERNAL
RECONSTRUCTION
6. 2 ADVANCED
ACCOUNTING
Types of Reconstruction
Internal
External
Reconstruction
reconstruction
(Sections of the Companies
Act 2013) (AS14 Accounting for
Amalgamations)
Methods of Internal
Reconstruction
Alteratio Variation of Reductio
Compromis Surrend
n of Shareholder n of
e/ er of
Share s’ rights Share
Arrangeme Shares
Capital Capital
nt
Sub-division Conversion of
and share into stock
Consolidation or vice- versa
of Shares
1. MEANING OF RECONSTRUCTION
When a company has been making losses for several 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 generally overvalued, as
the balance sheet consists of fictitious assets, unrepresented intangible
assets and debit balance in the profit and loss account (showing the carry
forward of losses). Such a situation always leads the company to show a
higher net worth and not depicting a true picture of financial statements.
In short, the company is over capitalized. Such a situation brings the need
for reconstruction/reorganization of the affairs.
INTERNAL RECONSTRUCTION OF 6.3
COMPANIES
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 so that company can be bailed out from present situation
without winding up the existing company.
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 of ‘amalgamation in the nature
of merger’ in AS 14.
Difference Between Internal and External Reconstruction
Basis Internal External
Reconstruction Reconstruction
Liquidation The existing company is The existing company is
and not liquidated rather the liquidated to form a new
formation of capital and debt company in which the
structure is changed to existing shareholders
new bring the company back
company to normalcy become shareholders of
new company as well
Reduction of There is certain There is no reduction of
capital and reduction of capital and capital. In fact, there is a
varying sometimes the outside fresh share capital of the
rights company. The
liabilities like debenture
shareholders need not
holders may have to vary their rights in
reduce their claim in this company
scheme.
Legal Internal reconstruction is External reconstruction is
position done as per provisions of regulated by section 232
section 61 and 66 of of the Companies Act,
the 2013.
Companies Act, 2013.
Legal It requires court’s It can be affected without
formalities confirmation and other the court’s interference
legal procedures before and less time-consuming
it can be implemented process.
6. 4 ADVANCED
ACCOUNTING
2. METHODS OF INTERNAL RECONSTRUCTION
For properly deploying the process of internal reconstruction following
methods are generally employed or used simultaneously:
2.1 Alteration of Share Capital
According to the Section 61 of the Companies Act 2013, a limited
company can alter its share capital, if so authorized by its Articles, by
passing an ordinary resolution in the general meeting. The provisions of
the relevant sections of Companies Act will be applicable, but in this
chapter, we are going to focus on the accounting treatment of the various
conditions pertaining to internal reconstruction.
The following types of Alteration can be done under Section 61-
(a) Increase of authorized share capital;
(b) Consolidation and sub-division into shares of larger or smaller denominations;
(c) Conversion of all or any of the shares into stock or vice versa;
(d) Cancellation of shares which have not been taken or agreed to be
taken by any person.
Sub-division and Consolidation of Shares
The existing share capital can be sub-divided or consolidated into the
shares into those of a smaller or higher denomination than that fixed by
the Memorandum of Association, so long as the proportion between the
paid up and unpaid amount, if any, on the shares continues to be the same
as it was in the case of the original shares.
Conversion of Fully Paid Shares into Stock and Stock into Shares
According to section 61 of Companies Act, 2013, a company can convert
its fully paid shares into stock and reconversion of stock into shares. If
authorized by its Articles, a company may, in a general meeting by
passing an ordinary resolution, can convert its fully paid shares into stock
and reconversion of stock into shares. Stock is the consolidation of the
share capital into one unit divisible into aliquot parts. Stock is a bundle of
fully paid shares put together for convenience so that it may be divided
into any amount and transferred into any fractions and sub- divisions
without regard to the original face value of the shares. While it is
impossible for share capital to be one share, any amount of stock may be
transferred. In practice, however, companies restrict the transfer of stock
to multiples say, ` 100.
INTERNAL RECONSTRUCTION OF 6.5
COMPANIES
A company can convert its fully paid shares into stock. Upon the
company converting its shares into stock, the book-keeping entries
merely record the transfer from share capital account to stock account. A
separate Stock Register is started in which details of members’ holdings
are entered and the annual return is modified accordingly.
2.2 Reduction of Share Capital
Section 66 of the Companies Act, 2013 lays down the procedure in respect
of reduction of share capital. Subject to confirmation by the Tribunal on
an application
by the company, a company may, by a special resolution, reduce the
share capital in the following manner-
(a) Extinguishing or reducing the liability of the shareholders in respect
of unpaid amount on the shares held by them; or
(b) Paying off any paid-up share capital which is in excess of its requirements;
(c) Cancelling any paid-up share capital which is lost or is unrepresented
by available assets.
Generally, reduction in share capital is followed when a company has been
suffering losses continuously for a long time, is not truly represented by its
assets. In such a case, any scheme for capital reduction should write-off
that portion of capital which is already lost
