Distinction between internal and external reconstructionS

• Reconstruction is the process of reorganizing a company’s legal, operational, ownership, and other structures, including revaluing assets and reassessing obligations. There are two ways of rebuilding: internal reconstruction and exterior reconstruction. The former is a technique of reconstruction that does not include winding up the company and starting a new one, while the latter is one in which the present company is dissolved and a new company is formed to take over the previous firm’s activity.
• Internal reconstruction is a method of corporate restructuring where an arrangement is made by the company of the organization wherein changes in the assets and liabilities are made to improve the financial position without liquidating the company or transferring the ownership to an external party, whereas external reconstruction is the one where an existing company is liquidated and taken over by another newly formed company and the transfer of assets and liabilities takes
• Internal methods:
• Authorization by Articles of organization: The company’s articles of organization must permit it to pursue capital reduction. The articles of association include all of the facts about the company’s internal activities, as well as a section describing how capital will be reduced.
• Passage of Special Resolution: Before engaging in capital reduction, the corporation must first pass a special resolution. The special resolution may only be approved if the majority of stakeholders agree to the internal renovation. This extraordinary decision must be signed by the tribunal and lodged with the registrar designated under the Companies Act of 2013.
• Tribunal approval: Before proceeding with the capital reduction procedure, the corporation must get the necessary approval from the court or tribunal. The tribunal provides approval only if it is convinced that the firm is operating fairly and has the favorable agreement of all stakeholders.
• Payment of borrowings: Under Section 66 of the Companies Act of 2013, a corporation must refund all sums deposited as well as interest due before proceeding with capital reduction.
• Creditor permission: The corporation undergoing capital reduction must get the written permission of its creditors. The court orders the firm to protect the interests of the dissident creditors. The court grants the corporation authorization after determining that a capital decrease would not impair the creditors’ interests.
• Public Notice: In accordance with the tribunal’s directives, the firm must issue a public notice declaring that it is resorting to capital reduction. Furthermore, the organization must provide legitimate explanations for the same.
• Internal Reconstruction Methods: Alteration of Share Capital: Sections 61-64 of the Companies Act, 2013 govern share capital changes. It might take the form of issuing new shares, converting fully paid shares into stock, cancelling unissued capital, consolidating existing shares, or subdividing existing shares.
• The Memorandum of Association includes a company’s capital provision. A business with restricted shares may change its capital clause if authorized by its Articles of Association.
• If the firm passes a resolution to this effect at its general meeting.
• A firm may change its share capital in any of the following methods.
• A) The corporation may raise funds by issuing additional shares.
• B) It may consolidate all or part of its share capital into bigger shares.
• C) It may convert shares to stock or vice versa.
• D) It may split all or part of its share capital into smaller shares.
• E) It may cancel any shares that have not been taken up and lower its capital appropriately.
• According to Section 48 of the Companies Act 2013, if a company’s share capital is divided into different classes, the rights of each class can be changed with written consent from holders of at least three-fourths of the issued shares or a special resolution passed at a separate meeting of the holders.
• Section 66 of the Companies Act 2013 allows a company limited by shares or guarantee to reduce its share capital through a special resolution, including extinguishing or reducing liability on unpaid-up shares.
• (i) Cancel any paid-up share capital that has been lost or is not represented by accessible assets.
• (ii) Pay off any paid-up share capital that exceeds the needs of the firm.
• Compromise/Arrangement: A plan of compromise and arrangement is an agreement between a firm, its members, and external obligations during financial difficulties. As a result, such an agreement requires sacrifices on the part of shareholders, creditors, and debt holders, or all of them.
• Surrender of Shares: This approach divides shares into smaller denominations and requires shareholders to surrender them to the corporation. These shares are subsequently distributed to debenture holders and creditors, reducing their respective obligations. The unutilized surrendered shares are then canceled and transferred to the Reconstruction account.
• External Reconstruction
• External Reconstruction is the process of winding up a firm’s financial affairs and forming a new company to take over the current company’s assets and obligations after a financial reorganization. It needs the permission of shareholders, creditors, and the National Company Law Tribunal (NCLT).
• In external reconstruction, the undertaking is maintained by the firm but is effectively transferred to a business that is not external but rather another entity with almost identical owners, to be carried on by the transferee company. External rebuilding has the same accounting treatment as amalgamation in terms of purchasing nature.
• External reconstruction entails numerous activities, which often include:
• The current corporation is being liquidated.
• The issuance of new company shares to existing firm owners.
• The new firm may make financial arrangements to satisfy the former company’s obligations. For example, debt holders or creditors may be discharged by issuing equity or preference shares.
• Formation of a new company to acquire the previous firm’s operations (including its assets and liabilities) for agreed-upon prices.
• The new business may acquire assets at lower valuations that more truly reflect their underlying worth.