Internal Reconstruction and Methods of Internal Reconstruction
Internal Reconstruction
Internal Reconstruction refers to the process by which a company reorganizes its capital structure, assets, and liabilities within itself without winding up or liquidating the company. It aims to improve financial stability, reduce accumulated losses, or alter the share capital structure without affecting the company’s legal identity.
Why Internal Reconstruction?
To write off losses and reduce accumulated losses.
To adjust or reduce the share capital.
To make the balance sheet stronger.
To remove the burden of unprofitable or redundant assets.
To avoid liquidation and revive the company.
To rearrange the capital structure for better financial health.
Key Points
No change in the company’s legal status.
Usually involves adjusting the share capital, revaluation of assets/liabilities.
Shareholders’ and creditors’ approval is necessary.
Often used as an alternative to liquidation.
Methods of Internal Reconstruction
1. Reduction of Share Capital
Reducing the face value of shares or the number of shares.
Write off the accumulated losses against the capital.
Can be done with approval of shareholders and the National Company Law Tribunal (NCLT).
2. Conversion of Shares
Convert preference shares into equity shares or vice versa.
Convert unsecured loans or debentures into shares.
Helps reduce interest burden and strengthen equity capital.
3. Revaluation of Assets and Liabilities
Adjust the book value of assets and liabilities to reflect their true value.
Write down overvalued assets or write off bad debts.
Increase undervalued assets if necessary.
Helps present a realistic financial position.
4. Cancellation of Shares
Cancel shares that have not been paid for or are forfeited.
May cancel partly paid shares and issue new shares accordingly.
5. Adjustment of Capital Against Assets
Adjust the capital by writing off assets or by transferring reserves and surplus.
6. Rearrangement of Shareholders' Rights
Alter rights attached to different classes of shares.
For example, changing voting rights, dividend rights, or conversion rights.
Process of Internal Reconstruction
Board Approval: Board of Directors proposes a scheme.
Draft Scheme: Prepare the scheme detailing capital restructuring, asset revaluation, etc.
Shareholder Approval: Pass special resolution in the general meeting.
Creditor Approval: Obtain consent from creditors if liabilities are affected.
NCLT Approval: File the scheme with NCLT for sanction.
Implementation: Once approved, the company implements the reconstruction plan.
Benefits of Internal Reconstruction
Avoids liquidation.
Improves company’s financial health.
Protects the company’s reputation.
Restores shareholders’ confidence.
Helps attract fresh capital.
Summary
Internal Reconstruction is a financial and structural reshuffle done within a company to rectify financial difficulties without ending the company’s existence. It involves methods like reducing share capital, revaluation of assets, share conversion, and cancellation of shares, all aimed at reviving the company and making it financially sound.
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