Reconstruction of Company

Reconstruction of a company refers to dissolving an existing corporation and transferring its assets and liabilities to a new corporation. Shareholders in the former firm automatically become shareholders in the new corporation. The structure of the business and the stockholders of the new firm are essentially identical to the previous company.

What is the Meaning of Reconstruction?

Reconstruction of a company is the process of reorganising a company’s legal, operational, ownership, and other structures. A new set of obligations are created by revaluing the new company’s assets and reassessing liabilities. The transfer of business refers to transferring a company’s operations to a new entity. This will result in the old business being wound up and its shareholders agreeing to accept shares in the new firm that have an equal value to their existing shares. Reconstruction is necessary when a company loses money for an extended period. Reconstruction is also done when the company’s statement of account does not accurately represent the actual and fair condition of the firm, as a bigger net worth is shown instead of the actual net value of the organisation.

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Goals and Objectives of Reconstruction 

The following are the most important goals for reconstructing a company.

1. To overcome the problems of overcapitalisation, massive cumulative losses, and the overvaluation of assets.
2. To simplify the structure of a company when it becomes too complicated. 
3. To change the face value of the company’s shares when necessary.
4. To generate a surplus by writing off cumulative losses and writing down overvalued assets.
5. To obtain more money via the issuance of new shares.
6. To produce funds for working capital requirements, asset replacement, the addition of balancing equipment, the modernisation of plant and machinery, and other purposes.

Different types of Reconstruction of Company 

Two approaches are used to restructure a corporation. 

• External Reconstruction of a Company 

When a firm has been losing money for many years and is in the midst of a financial crisis, it may be able to sell its assets to a newly created company. In reality, the new corporation is founded to acquire the assets and liabilities of the previous corporation. External reconstruction is the term used to describe this procedure. 

In other words, external reconstruction refers to the selling of an existing firm’s business to a new company that has been founded specifically for this reason. In the case of external reconstruction, one firm is dissolved, and a new company is founded in the place of the former. The dissolved firm is called the vendor company, while the newly formed company is called the purchasing company. Those who own shares in the vendor firm also own shares in the purchasing corporation.

• Internal Reconstruction of a Company 

Internal reconstruction is the internal reorganisation of a company’s financial structure. The present firm is allowed to continue operations. In most cases, the company’s share capital is lowered to write off its prior accumulated losses.

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Differences between the Internal and External Reconstruction of a Company

These are some essential differences between a company’s internal and external reconstruction.

1. Internal reconstruction is ‘restructuring without dissolution’ since it does not involve starting a new business from scratch. However, an external reconstruction is a kind of corporate restructuring. The current corporation is dissolved to give birth to a new company that will continue the business of the previous one.
2. No new company is formed as a consequence of internal rebuilding. An alternative is to create a new company to take over activities of the existing one through the external reconstruction process.
3. Debenture holders and creditors, for example, are given a discount on their claims in return for lowering the company’s capital as part of internal reconstruction. However, the company’s capital is not reduced by external rebuilding.
4. A court-ordered internal reconstruction is necessary because a drop in capital might affect shareholder rights, necessitating a court order. Exterior reconstruction, on the other hand, does not need such approval.
5. The phrase ‘And Reduced’ appears on the balance sheet of a company that has undergone internal restructuring. The balance sheet, on the other hand, does not use any particular language for external reconstruction.
6. Internal reconstruction does not create a new business hence no assets or liabilities are transferred. In contrast to internal reconstruction, external reconstruction entails transferring the assets and liabilities of the old one to the new business.

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Conclusion

Corporate restructuring is when a firm changes its organisational structure and business operations. As a result, only the rights of shareholders and creditors are altered due to a specific decrease in capital. In contrast, the rights and claims of debenture holders are excluded from the internal reconstruction of the company’s operations. As defined by the Companies Act, 2013, the process of ‘amalgamation in the type of merging’ governs the external reconstruction of the company. External reconstruction of a company involves forming a new company to take over the operations of a liquidated firm. The newly established company receives a fresh share capital without any diminution in the share capital.