Question

Objective of internal and external reconstruction

Answer 1

Answer:

internal reconstruction can be defined as the reorganization of the company, without liquidating the existing company and forming a new one. In internal reconstruction, the capital of the company is reduced, and external liabilities such as debenture holders and creditors waive their claims by giving a discount.

The objective of external reconstruction is to reorganize the financial structure of the company. On the other hand, the objective of amalgamation is to cut competition and reap the economies of large scale.

Explanation:

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Answer 2

Objective of Internal reconstruction:

In order to address the issues of excessive capitalization, significant cumulative losses, and asset overvaluation, When a company's financial structure needs to be simplified because it is complex, when a modification in the face value of company shares is necessary.

Objective of External reconstruction:

Restructuring the company's financial structure is the goal of external reconstruction.

Definition of reconstruction:

• Reconstruction is the process of reorganizing the business in terms of its ownership, management, legal, and other structures by reevaluating its assets and obligations.
• It describes the transfer of a business from a firm or from a number of corporations to a new company.
• As a result, the old business will be liquidated, and shareholders will consent to accept shares of the new company with a value equivalent.
• Reconstruction is necessary when a company has been losing money for a long time and the statement of accounts does not accurately reflect the true and fair status of the company since the statement of accounts shows a higher net worth than the actual one.

There are two types of reconstruction namely:

1. Internal reconstruction:

• When a business has been losing money for a while and is in financial trouble, it can sell its operations to another recently founded corporation.
• Actually, the old company's assets and obligations are transferred to the new one when it is founded.
• External reconstruction is the name given to this technique.

2. External reconstruction:

• Internal reconstruction is the term used to describe the internal reorganization of a company's financial structure.
• It is also known as reorganization, and it enables the continuation of the current business.
• Typically, share capital is decreased to write off the company's prior accumulated losses.

Importance of reconstruction:

• Corporation restructuring refers to the process through which a company modifies its internal organizational structure and operational procedures.
• The rights/claims of the holders of debentures are therefore excluded from the internal reconstruction process, leaving only the rights of shareholders and creditors to be modified with a certain reduction in capital.
• According to the Companies Act of 2013, the procedure of "amalgamation in the type of merging" governs the process of external reconstruction.
• A new company is created during the external reconstruction process to take over the insolvent company, and the newly created company receives new shares without having its share capital reduced.

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