Internal Reconstruction vs External Reconstruction
Internal Reconstruction:
- Definition: Internal reconstruction refers to the process of reorganizing the financial structure of a company without changing its legal status.
- Purpose: The primary objective of internal reconstruction is to rectify past errors, adjust the capital structure, and improve the financial health of the company.
- Method: It involves adjusting the balance sheet by writing off fictitious assets, revaluing assets and liabilities, creating various reserves, and altering the capital structure.
- Legal Formalities: Internal reconstruction does not require any court approval or involvement of external parties as it is done within the company's existing legal framework.
- Impact: Internal reconstruction does not change the legal identity of the company, and it does not involve any transfer of assets or liabilities to another entity.
External Reconstruction:
- Definition: External reconstruction involves the creation of a new legal entity to take over the assets and liabilities of the existing company.
- Purpose: The main aim of external reconstruction is to address severe financial issues, such as insolvency, by transferring the viable parts of the business to a new entity.
- Method: It typically involves the formation of a new company, transfer of assets and liabilities to the new entity, and the liquidation of the old company.
- Legal Formalities: External reconstruction requires court approval, shareholder consent, and compliance with regulatory requirements as it involves the creation of a new legal entity.
- Impact: External reconstruction results in the dissolution of the old company and the transfer of its operations to a new entity, which may lead to changes in ownership, management, and operational structure.