Reconstruction is the process wherein the existing company transfers its operations, assets and liabilities to a new company. In other words, it is the transfer of one or more companies into a new company. It implies that the old company shall go into liquidation, and the existing shareholders will subsequently acquire shares of equivalent value in the new company. The process of reconstruction is generally required when the company is incurring losses, and its statement of account does not show any profits. Henceforth, financially unstable companies often opt for reconstruction arrangements to move out of the financial difficulties to reconstitute their financial structure. The 2 ways through which the companies can be reconstructed are Internal and External Reconstruction. The present article will discuss in detail the meaning of internal and external reconstruction and draw a detailed differentiation between them.<\/p>\n\n\n\n
The differentiation between internal and external reconstruction can effectively be made if the meaning and features of the internal reconstruction are adequately elaborated.<\/p>\n\n\n\n
In Internal Reconstruction, the internal financial structure of the company is reorganised without dissolving the company. Under this system, the internal shape of the company is altered by the alteration or reduction of its share capital. The existing company uses this type of reconstruction to change its financial structure without dissolving its operations. Moreover, it is especially preferable for companies with a large number of accumulated losses and overvalued assets. Therefore, in general words, internal reconstruction is a type of corporate restructuring<\/a><\/strong> wherein the company arranges the organisation by making deliberate changes in the assets and liabilities to improve its financial position without winding up the company or transferring it to a new company.<\/p>\n\n\n\n Henceforth, it can be said that the end objective of the internal reconstruction is to provide surplus through reducing the liabilities such as alteration in the share capital, variation of the rights and settlement of creditors. This surplus received through the arrangement can then be used to write off the accumulated losses and overvalued assets. This type of reconstruction will improve the final position of the company and protects the company from going into liquidation.<\/p>\n\n\n\n \n Need expert guidance on \n internal reconstruction and external reconstruction strategies<\/strong>? \n Consult EnterSlice<\/strong> professionals for assistance with \n corporate restructuring, financial reorganization, and compliance planning<\/strong> \n to help your business restructure efficiently.\n <\/p>\n\n From the plain reading of the internal reconstruction, it can be concluded that the internal reconstruction involves alteration or reduction of share capital; therefore, to draw the differentiation between internal and external reconstruction, it is necessary to understand the meaning and features of external reconstruction.<\/p>\n\n\n\n In External Reconstruction, the company goes into liquidation, and its affairs are transferred to a new company. In other words, it is a process wherein the affairs of the existing company are wound up and transferred to a new company through a scheme of arrangement. The existing company having a large number of accumulated losses and is on the verge of going bankrupt adopts this type of reconstruction by transferring its assets and liabilities to a new company. It is also imperative to mention that external reconstruction is not the same as amalgamation, as, under external reconstruction, the existing company goes into liquidation, and in amalgamation, there is a combination of one or more companies into a single entity.<\/p>\n\n\n\n Under this type of reconstruction, the existing company (transferor) continues to be part of the new company (transferee) and holds a substantial interest in it, as the shareholders transferred to the new company are almost the same.<\/p>\n\n\n\n The fundamental difference between internal and external reconstruction is the formation of a company<\/a><\/strong>. There is no new company formation of the company under internal reconstruction as compared to external reconstruction, which requires the formation of a new company and winding up of the existing company. Further, the number of differences that can be made between internal and external reconstruction are discussed below:<\/p>\n\n\n\n The motive serve by internal and external reconstruction is to improve the financial position of the company by reducing the burden. It is required by the company they should undergo a financial reconstruction if they are facing financial problems. Hence, both types of reconstruction aim to protect the company from going bankrupt<\/strong>[1]<\/strong><\/a><\/sup> by rationalising the financial structure. In addition, the Companies Act 2013 governs both the internal and external reconstruction, and therefore there is a statutory obligation on the part of the company to safeguard the rights of the shareholders, creditors and debenture holders.<\/p>\n\n\n\n\n Difference between Internal and External Reconstruction\n <\/h3>\n\n
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Objectives of the Internal Reconstruction<\/h3>\n\n\n\n
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Methods of Internal Reconstruction<\/h3>\n\n\n\n
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External Reconstruction<\/h2>\n\n\n\n
Features of External Reconstruction<\/h3>\n\n\n\n
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Difference between Internal and External Reconstruction<\/h2>\n\n\n\n
Basis<\/a><\/strong><\/td> Internal Reconstruction<\/strong><\/td> External Reconstruction<\/strong><\/td><\/tr> Meaning<\/strong><\/td> The internal reconstruction is a type of reconstruction wherein the internal financial structure of the company is reorganised without putting the company into liquidation.<\/td> The external reconstruction is a type of reconstruction wherein the company goes into liquidation, and all the assets and liabilities are transferred to the new company.<\/td><\/tr> Reduction of Share Capital<\/strong><\/td> There is a reduction and rearrangement of share capital<\/td> There is no reduction or rearrangement of share capital.<\/td><\/tr> Formation of a Company<\/strong><\/td> There is no new formation of a new company<\/td> There is formation of a new company<\/td><\/tr> Existence of a transferor company<\/strong><\/td> Since there is no transfer, hence the company continues to exist<\/td> The existing or transferor company ceases to exist<\/td><\/tr> Approval of Court<\/strong><\/td> The tribunal’s approval is required as a reduction in the share capital may affect the shareholder<\/a>’s rights.<\/td> The approval of the tribunal is also required.<\/td><\/tr> Transfer of assets and Liabilities<\/strong><\/td> There is no transfer of assets and liabilities.<\/td> There is the transfer of assets and liabilities of the transferor(existing) company to the transferee (new) company.<\/td><\/tr> Ease of Process<\/strong><\/td> It is not a simple process, as reconstruction is possible only through authorisation under the Article of Association and special resolution.<\/td> It is a simple process as compared to internal reconstruction<\/td><\/tr> Set off of losses<\/strong><\/td> The existing company can set off their accumulated losses against its future profits.<\/td> The existing company cannot set off its accumulated losses with the profits of the new company.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Conclusion<\/strong><\/h2>\n\n\n\n