External and Internal Reconstructions - Amalgamation of Companies, Advanced Corporate Accounting | Advanced Corporate Accounting - B Com PDF Download

What is the Meaning of Reconstruction?

• The process of reconstructing a company involves reorganizing its legal, operational, and ownership structures. 
• This entails revaluing assets and reassessing liabilities in order to create a new set of obligations. 
• Furthermore, transferring a business also includes winding up the old business and having its shareholders agree to accept shares in the new firm that are equal in value to their current shares. 
• This type of restructuring is often necessary when a company has been suffering losses over an extended period of time, or when its financial statements do not accurately reflect the true condition of the company and misrepresent the actual net worth. 

Different types of Reconstruction of Company

1. External Reconstruction of a Company 

• When a firm has been suffering financial losses for an extended period of time, resulting in a financial crisis, one option is to transfer its assets and liabilities to a newly created company. This process is known as external reconstruction.
• External reconstruction involves the selling of an existing firm’s business to a newly created company. 
• In this process, the existing firm is dissolved and a new company is formed in its place. 
• The dissolved firm is known as the vendor company and the newly created one is called the purchasing company. 
• Those who own shares in the vendor firm would also own shares in the purchasing corporation. 

2. Internal Reconstruction of a Company 

• A company's internal reconstruction is a reorganization of its financial structure which enables it to go on operating as normal. 
• This process often involves reducing the company's share capital to erase any previous losses it has incurred. 

Difference between Internal and External Reconstruction of a Company