CHAPTER

Accounting of Internal
Reconstruction 2
Learning Objectives
N e e d for reconstruction and Company Law provsions, Distinction between internal nd

external constructions

M e t h o d s inchiding alteration of share capital, variation of share-holder rights, sub divisicon

consolidation, surrender and reissuelcancellation, reduction of share capital, with relevan

legal provisions and accounting treatments for same

2.1 INTRODUCTION

A company can be reconstructed in any of the two ways. These

are:

i) 'External' Reconstruction and

(ii) 'Internal' Reconstruction.

(i) External Reconstruction:

The term 'External Reconstruction' means the winding up of an

existing company and registering itself into a new one after

rearrangement of its financial position. Thus, there are two aspect
of 'External Reconstruction, one, winding up of an existin;
financia
company and the other, rearrangement of the company's
approved by its shareholden
position. Such arrangement shall be
and creditors and shall be sanctioned by the National Compan
Law Tribunal (NCLT). Such a step usually involves the writing o
of a debit balance on Profit and Loss Account, elimination ot Ji

fictitious assets if any from the Balance Sheet, and the consequen
readjustment of share-capital.
Accounting of Internal Reconstruction 25

(in Internal Reconstruction:

Internal reconstruIction means a recourse undertaken to make
necessary ehanges in the capital structure of a company without
liquidating the existing company. In internal reconstruction
neither the existing company is liquidated, nor is a new company
incorporated. It is a scheme in which efforts are made to bail out
the company from losses and put it in profitable position. Internal
reconstruction of a company is done through the reorganization of
its share capital. It is a scheme of reorganization in which all
in the capital structure volunteer to sacrifice.
interested parties
They are the company's shareholders, debenture holders,
internal reconstruction, the accumulated
creditors etc. Underfictitious
trading losses and interestassets written off against the
are

sacrifice made by these

paid up value of their interest.
holders in the form of reduction of

2.2 MEANING
Reconstruction is a process by which affairs of a company are
reorganized by revaluation of assets, reassessment of liabilities
and by writing off the losses already suffered by reducing the
paid up value of shares and/ or varying the rights attached to
different classes of shares. Such a process is called internal
reconstruction which is carried out without liquidating the
company and forming a new one.
Internal reconstruction refers to the internal re-organization of
the financial structure of a It is also termed as
company. re-
organization which permits the existing company to be continued.
Generally, share capital is reduced to write off the past
accumulated losses of the company. The accounting procedure of
internal reconstruction is distinct from that of amalgamation,
absorption and external reconstruction.
Internal Reconstruction focuses on relieving the company from
debts and losses
by negotiating witlh the creditors and reducing
e Outstanding amount towards them, so as to reach a favorable
position.
 Vipul's Corporate Restructuring
6
RECONSTRUCTION
2.3 NEED FOR INTERNAL to followinB
IS necesary
due the
Reconstruction
Internal
1s

Fair: When the company

reasons:
not True and show
statements
Final statement do not
(1) loSses, the financial
making heavy state of affairs
of the company.
view of the
and fair company
balance sheet of a
true
asset side of the accumulated
Assets: The fictitious assets,
(2) assets, assets
have intangible etc. The real
may expenditure
losses adequate
revenue
deferred
losses, Due to value.
a high valued at a
are
shown at
stock may be
not be provided, and doubtful
depreciation may be made for bad
rate. No provision may
higher
unsecured
debts. and
have secured
The Company
may overdue Interest
Liabilities: become
(3) be repaid.
It may overdue.
loans which may
arrears.
Creditors may be long
in be in arrears
on loan may be shares may
d i v i d e n d on
preference
Preference

long period. fall in the

over a
is lost due to drastic
of a company
the real value
(4) Capital: Capital is not represented by the by
assets. It
value of
of assets. of
The main purpose
Total Loss:
Estimating
the
accumulated losses from the
(5) the
reconstruction is to eliminate values and,
assets to their true
books and to bring down the the loss on
accumulated losses including
therefore, the total estimated. This is
done by
assets should be
revaluation of the fictitious
and loss account,
debit in the profit
adding up the debentures, preliminar
discount on shares or whidh
assets like
asset like goodwill
etc. and intangible
expenses
a loss in the case of a company
running at
represents only
loss.
(6) Writing After determining the total amount
off the Losses:
or
the is to spread the burden
be writtern off, next step
losses among debenture holders, creditors and varo
classes of shareholders. The main burden of the l
 Accountir of Internal Reconstruction
7
should be borne primarily by the equity shareholders because
ultimately they ate responsible for all residuary losses.
A fair equitable distribution of loss is the essence of successful
heme. The equity shareholders have to bear the maximum
anmount of loss but they cannot be reduced to nil because they will

not agree to such a scheme.

2.4 CAPITAL REDUCTION

Introduction:

Capital reduction refers to the cancellation of that part of paid

up which is lost in operations or which is not
capital represented
by existing assets. It is generally resorted to write off the past
accumulated losses of the company. It is unlawful except when
sanctionedd by the court because conservation of capital is one of
the main principles of the
company law. The issued share capital
of company represents the security on which the creditors rely.
a

Companies usually do not call the full value of shares at one time.
The uncalled capital act as a future security for the
company's
creditors. Therefore, any reduction of capital reduces the
of reditor. security
A company is permitted to reduce its share capital by section
100 through following ways:
G) By reducing the uncalled liability of the members.
(ii) By writing off the part of paid up capital which is lost in
the operations or which is not
represented by available
assets.
ii) By returning that part of capital which is in the excess of
the need of the company.
Purpose of Capital Reduction:
When new capital has to be introduced to revive a
company,
Success of a new issue would however, almost certainly be
opardised by the existence of accumulated losses. Therefore, it is
rudent and usual to write off hese accumulated losses by
troducing a reconstruction scheme into etfect.
28
Vipul's" Corporate Restructuring MS)
The
purpose of
Capital
Reduction the is
payment ot
normal dividends
out of the resumption of
without the necessity of expected future pro
balanceof the Profit and using these prolits to
write off the
Loss Accoun. ae
Procedure of Capital Reduction:
In
order to affect Share
formalities must be Capital Reduction, the following
completed in accordance with the Companies
Act, 1956 (Sections 100 to 104). These are
(A) Conditions and manner
briefly discussed below:
of reduction:
According Section 100 of the
to
Companies Act, a company
limited by shares can reduce its Share Capital subject to the
following
(a) There must be an express provision in the Article of the
company. permitting such action.
b) Special resolution will be
Capital.
required for reduction of Share

The Share
Capital can be reduced in one or more of the
following ways:
(i) Extinguish or reduce the
liability on any or its shares in
respect of Share
Capital not paid-up.
(ii) Cancel any paid-up Share
Capital which is lost or is
unrepresented by available assets.
(iii) Pay off any paid-up Share Capital which is an excess of the
wants of the company.
The necessary alternation is also
required to be made in the
Memorandum of the company.
(B) Petition to the Court for confirming the reduction:
As per Section 101 of the Companies Act, a
company can app
by petition to the Court for an order confirming the reduction.
Every creditor of the company, whose debt or claim is no
discharged or has not been determined, is entitled tó object to th
reduction.
 of Internal Reconstruction
Accounting
29

l s s u e of order confirming the reduction from the Court:

(C

AS
per Section 102 of the Companies Act, if the Court is
isfied that such creditor has been satisfied either by obtaining
satisfi

his consent or his debt or claim has been discharged or has been
determined or securea, may make an order conforming the
reduction on such terms and conditions as it thinks fit.

In such a case the court may direct the company to use the
words "and reduced for a specified period of time and such
words would be deemed to be part of the name of the company.
(D) Certificate of conclusive evidence compliance from the
Register:
As per Section 103 of the Companies Act, the Registrar:
(a) On production to him of an order of the court confirming the
reduction of the Share Capital of the company, and
(b) On the delivery to him of a certified copy of the order of a
minute aPproved by the court showing with respect to the
Share Capital of the company as altered by the order.
i) the amount of the Share
Capital,
(i) the number of shares into which is to be divided,
(ii) the amount of each share, and
iv) The amount, if any, at date of
registration deemed to be
paid up on each share; shall register the order and
minute.
(c) On of the order and minute and
registration not before, the
resolution for reducing Share Capital as confirmed by the
order shall take effect.
(d) Notice of shall be
registration published in such manner as
the Court may direct.
e) The certificate issued by the registrar shall be conclusive
evidence that all the requirements of the Act with respect to
Teduction of Share Capital have been duly complied with and
the Share Capital of the company stands reduced as stated in
the minute.
2.5 METHODS OF INTERNAL RECONSTRUCTION
the
Following are the methods generally employed to afece
internal reconstruction process:
ernsl econstruellon Method

arln ned
Surrendar o
Anerano edueton of
Compromise
hghis

Conversion of
Su dvis
rision andd
tion ol Shares inlo sioCx

Shares

Increase in the Share Capital: Increase in the Share Capital

(a) new
Shares are issued to the
members or
means new existing
increases the
members who subscribe for the shares. This
the company as more funds are infused into
share capital of be
the business. With additional
funds coming in, they can

of the losses and correcting the

used for wiping must be within
overvaluations of the assets. However, this
In the absence of
the authorised capital limits of the company.
authorised limits, the necessary legal compliance is required

be made to raise the authorised capital limits

of the
to

company. It is not easy for a company having huge losses and

over valuations in the Balance Sheet to raise additional capital
or raise the limits of authorised capital.
(b) Consolidation of Shares: Consolidation of shares
means

into shares of
converting shares of smaller denomination
larger denominations. For example, 100 shares of Rs. 10 each
are converted into one share of Rs. 100 each. Although the
amount involved remains the same, the number of shares
involved reduces.
(c) Sub-division of Shares: Sub-division of shares means
covering shares of larger denomination into shares of smale
denomination. This is exactly the opposite of consolidation
For example, one share of Rs. 100 each is sub-dividend into

shares of smaller denomination of 10 shares of Rs. 10 eact

Although the amount involved remains the same, the numbe
 Internal Keconstruction
ting of
Accounting 31

chares involved increases. This facilitates the surrender of

ares by the shareholders and enables reduction of capital.
share

(d Conversion of
of shares into Stock: Conversion of shares into
means that the shares are converted into bigger amount
stock
of holdings which are called stock. Stock represents collective
amount of shares. The stock can be in fractions. Conversion of
shares into stock requires necessary approval from the
Controller of capital issues.

Surrender of Shares: Shareholders are asked to surrender

(e)
some of the shares so as reduce the share capital. This
facilitates reduction process. The shares,
which are
surrendered, are issued to clear the outstanding liabilities of
debenture holders, creditors etc. The shares, which are
surrendered but not issued to any party, are cancelled and the
amount so realised is used to write off losses,
assets, excessive value of assets etc.
intangible
(Cancellation of Shares: Cancellation of shares effectively
means reduction of capital. When shares are surrendered and
not re-issued to any party in discharge of any obligation; such
shares remaining unused are cancelled. The amount of capital
so reduced is used for writing off losses,
excessive value of assets etc.
intangible assets,

2.6 DISTINCTION BETWEEN INTERNAL AND

EXTERNAL RECONSTRUCTIONS
=

Basis
Internal Reconstruction External
Reconstruction
Meaning Internal reconstruction External reconstruction is
refers to the method of one in which the company
corporate restructuring| undergoing reconstruction is|
wherein existing company is liquidated to take over the|
not
liquidated to form a
new| business of existing company.
one.
New company No new company Is New
company is tormed.
tormed.
Se of specific Balance Sheet of the No specific terms are used
terms in contains "And in the
company Balance sheet.
5alance Sheet Reduced
 32
vipul's Corporate estructuring
Restrud (BMD
Capital Capital is reduced and the NNo
Teduction in the
reduction external liability holders capital.
waive their claims.

APproval of APProval of court is must. No

approval of court
COurt
required.
Transfer of No such transfer Assets and liabilities
Assets and
takes of
Liabilities
place. exishing company
to
are

transterred the
new
company
Liquidation The existing company is The existing company is
not liquidated. liquidated.
Nature Internal Reconstruction is External Reconstruction
a slow and tedious process. can be carried out easiuy
Set off of losses Internal Reconstruction, | External Reconstruction,
the company is able to set off the past losses of the old|
s past losses against future company can't be set off
profits. against the future profits of

thenew company.
Legal position Internal Reconstruction is External Reconstruction is
done as per provisions of regulated by section 394 of the
of the Companies
section 100
Act, 1956
Companies Act 1956
Reduction of Ihere is certain There is no reduction
reduction
capital of capital and sometimes the capital. In fact there is a fresh
outside liabilities like| share capital of the company.
debenture holders may
their claim.
have
to reduce

2.7 DISTINCTION BETWEEN CONSOLIDATION OF

SHARES AND SUBDIVISION OF SHARES
=
Basis
Consolidation of Shares Subdivision of Shares
Meaning Consolidation of shares Sub-division of shares
means converting shares of means covering shares o
smaller denomination into larger denomination into
shares of of Smaller
larger shares
denominations. denomination.
Face Value 100 shares of Rs. 10 each One share of Rs. 100 eact
are converted into one share is sub-dividend into shares
of Rs. 100 each. smaller denomination of
shares of Rs. 10 each._
 gof Internal Reconstruction
Accounting 3

Amount involved remains Amount involved remains

the sane, he number of | thhe sarne, the number "
( C a p i t a l

Amouni a n d

Number o
shares involved reduces shares involved increases
s h a e

P'tovision ol Section
Sedton 61(1)| Provision of Section 61()|
(6) of Companies Act 2013. (d) of Companies Act 201

2.8 ACCOUNTING ENTRIESS

Particulers LDebit Credit

0 For changing the face value of shares with reductlon In the

F Rs. Rs.

amount of share Capltal

Share Capitail Ac (Okd tace value)
To Share Capilal Ac (New face value) Nc
To Capital Reduction Ac (With Diference)
aFor reduction in Share Capltal without change In the face value of

sheres
Share Capdail Ac Dr.
To Capital Reduction Nc (Wih
amount of reduction)
the
(S) For reduction in the amount of Debenture holders Le. sacrifice
made by them:

Debenture amount reduced / sacrificed)

holders c (with the
Outstanding Interest on Debentures Ac)
Dr.
Dr.
To Capital Reduction Ac
(4) For reduction In the amount of Creditora Le. sacrifice made by
hem:
Creditors A/c (Wth the amount reduced l sacrficed)
To Capial Reducion A/c
( F o r appreciatilon In the value of assets
Assets Ac (with the amount of appreciation) Dr.

(5)
To Capital Reduction Ac
For writing oft Fictitious Assets, Deblt balance of profit and Loss
ACcOunt, excessive value of Assets etc.:

Capital Reduction Ac
To Proft and Loss Nc
To Goodwil AC
To Preliminary Expenses c
To Underwriting Commission c **

on Issue ol Shares / Debenlures

Ac
1o Discounl
TO Assets Ac (Excess amount reduced)
To Capital Reserve Alc (balancing tigure l any)

For Consolidation of Shares:

Face Value ile. Rs. 10) r.
Share Capital AVc (Existing
Alc (Revised Face Value Rs. 100)
T o Share Capital
For Sub-division ol Shares:
Face Value ie. Rs. 100)
onares Capilal Ac (Existing Value Rs. 10)
Share Capital Wc (Revised Face
(9) For
o
Surrender of Shares D
cC
Surender of Shares Share Capital
To Shares Surendered AC
 Vipul'sM Corporate Restructuring (BMS)

into Preference Sheres:

Shares Converted
(9 b)Surrendered
Shares SuTendered NC
To Prelerence Share Capital AVc

(9c)SuTendered
Shares relssued to Creditors/ Debenture holders:
Shares SurmTendered wC
To Share Capila
are cancelled:
(9d)Shares Surendered Dr. A*

Shares Surendered Ac
To Capital Reduction A/c

(10) For payment of Recorded Liability: Dr.

Lability Ac
Bank
Liablity:
(11)For payment of Unrecorded
Capilal Heducbon Ac
XXX
ToBank A
Assets:
(12) For Selling off Recorded Or.
Bank Ac
To Assets AC
of Unrecorded Assets:
(13) For Seling Dr.
k AC
ToCapital Reducion ANc
(14) For payment of Contingent Liablity:
Capital Reduction Alc
To Ban Nc
or payment of Reconstruction Expenses:
Dr.
Captal Heducion Ac
AA

To ba Share
of New Shares for cash:
(16) For issue Dr. AA

Bank Ac
To Share Capital A/c
Debentures for Old Debentures:
(17) For exchange of New Dr. XXX
Debentures (old) Ac
ToCaptal Reduction Alc (Balance f any
To Debentures (New) Nc
for Taxation Nc, Capital Reserve c , and Share
(18) Provislon
Premlum Ac utilised for Capital Reduction:

Provision lor Taxation c

*

D. *

Capial Reserve Nc
Share Premum NC .

o Caplal Heducbon c
(19) For Assets given to Loan Creditors: Dr. AA

Loan To
Credtors Ac
Assets Nc
(20)For changing the rate of dividend of Preference Shares:
Preference Share Capital Nc (Old Ralte) Dr.
Share Rate)
(21)
To Prelerence Capilal Ac (New
For arrears of Preference Share Dividend cancelied:
NoEntry
(22) For walver of prelerence dlvldend arrears by an lssue of shares
debentures
Capital Reduclion/ Reconstruction Ac
ToShare Capital A/c
To Debentures Alc
AccOunting or internal Reconstructi

For lssue of sharesdebenture against accrued

provided in the Balance Sheet:
interest airesdy
ACCrued Interest Ac
Dr.
To Share Capital AWc
AAA
To Debentures c
To Capital Reduction /
Reconstruction Nc XXX
24) Fortransfer of tavourable balance of Reserve Accounts:
Indidual eserve Ac
Dr. XXX
To Capital Reduction/ Reconstnucton Alc
ns) For capitalisation of surplus on Captal Reduction Account:
Capital Reduction / Reconstruction Alc
Dr
To Capital Reserve Ac

PRACTICAL PROBLEMS
llustration 1:
The folowing is the Balance sheel of Devi LId. as on 31" March 2016.

Balance Sheet
Liabilities S. Asset Rs.
2.000, Equity Share of Rs. 100 each 2,00,000 Goodwill
1,500, 10% Preference Share of Rs. Plant and Machinery
50,000
52,500
00 each 1,50,000 | Leasehold Property 0.000
Sundry Creditor
42.500 SiocK 9,175
Capital Heserve 36,000 Deblors 30.200
Bank Overdrat 51,000 Prolt and Loss Ac 1,10,375
Formation Exp. 250
4,79,500 4,79,500
(1)
TheThefollowing scheme of reconsiruction was sanclioned:
equity share be reduced by Rs. 87.50 per share.

2(3 The prelerence share be reduced by Rs. 50 each.

To wrile off Profit and Loss Ac and inlangible assels including formation expenses.
(4) Plant and Machinery to be maintenance at Rs. 75,000.
You are required to:
(0 Passjoumal entries.
(1) Prepare capital reduction Alc.
(i) Balance sheel afer reconstruction.
Solution:
In the books of Devi Ltd.
Journal Entries
Date Particulars LDebit Credit
Rs.
( Equity Share Capital Ac D. 2,00,000
(2000x 100) (Ol6)
1.75,000
To CapitalReducton Ac
To Equity Share Capital Ac 25,000
(2000x 12.50) (New)
(Being equity share capital reduced by Rs. 87.50 per share)
(100-87.50 =12.50)_
 S,00,000 Fixed Assets ASSets
Reserves
LoOng Tem B0rrowings 40,000
9,00.000
Trade Payables 3,00,000
60,000
9,00,000
9,00,000

QUESTIONS
(0)Multiple Choice Questions:
(a)When the company's existing financial structure
dissolving the existing company and
is
without formingrecognised without
is referred to as.
a new
company
() Internal Reconstruction (ii) Amalgamation (ii)
Reconstruction (iv) Absorption External
(b) Internal Reconstruction involves alteration of share
capital through
(i) Consolidation of Shares (ii) Sub-division of Shares (ii) Surrender
of Shares (iv) All of the above

(c) Converting Shares of smaller denomination into share of

denomination is termed as
larger
(i) Consolidation of Shares (ii) Sub-division of Shares
(in) Conversation of Shares (iv) Surrender of Shares
 Vipul's'M Corporate Restructuring (BMS)
116

necessary approval trom the

(0) Conversion of Shares into Stock requlres

Controller of Capital issues

Hegister of the Companies (M)
(
(0) Shareholders (lv) Debenture holders

In case of sub-divislon of share capital the tolal number of shares

(e)

() Increases () Decreases (11) Does nol change

( ) f he shares of smaller denomination are converted Into the shares of

without changing he tolal

&amount of
share
higher denomination
capital, then it is a case of
Sub-division ol share capital
() Consolidation of share capital (11)
(11) Decrease in unissued share capital
into the capital stock, then
(9) When company converts its
a equity shares
the account to be credited is .
() Equity share capital account (ii) Equity capital stock account (ii) No
entry is required
(h) A Ltd. with a share capital of 10,000 equity shares of Rs. 10 each fully
paid decides to repay Rs. 5 per share thus making each share of

Rs. 5 fully paid. It is a case of .

() Reducing share capital by returning the excess capital (U1) Reducing
the liability on account of uncalled capital (11) Reducing ihe paid-up
capital
() For writing off the accumulated Josses under the scheme of capital,
we debit
() Share capital account (1) Accumulated osses account (ii) Capital
reduction account
) If there is any balance in the capital reduction account after writing of
all the accumulated losses, then the same is transferred to .
() Share capital account (i) Capital reserve account (ii) Genera
reseve account
(k) A company has issued capital of 10,000 equity shares of Rs. 10 each
fully paid. It decides to convert its capital into 20,000 equity shares a
Rs. 5 each. It is a case of -
() Consolidation of share capital (il) Sub-division of share capta
(i) Decrease in unissued share capital
( the creditors are wiling to reduce their claims against the compay
then the amouni of reduction in their claim will be transferred

) Share capilal account (0) Creditors account (il) Capital reducie

account
 Reconstruction
R eco
or
nternal
117
ewating

on revaluation of the assels al the lime of

loss internal
Any will be charged from
(m) r e c o n s t r u c t i o n

ayaluation account (0) Share capital account (1I) Capital

reduction account

of the following cases, procedure of reduction ot capital is not

in)
In which
called for.
NRedemption of prelerence shares (i) Forteitures of shares
Surrender of shares or git of shares (lv) All of the above

a scheme of reorganization amount of shares surrendered by

shareholders is transferred to
n Capital reduction account_(1i) Shares surrendered account
reserve account (Iv) Heserve capital account
(il) Capital
shareholders is credited to
o)Amount sacrificed by
0 Capital reduction account (i) Shares surrendered
account
(ii) Capital reserve account (iv) Reserve capital account
() To cary outcapital reduction, permission is required from
law Board (ii) Central
() The Competent Court (ii) Company
government (iv) SEB
() In case of sub-division of share capital the total number of shares

i) increases (i) decreases (ii) does not change

of
(s) If the shares of smaller denomination are converted into the shares
changing the total amount of share
higher denomination without
capital, it is a case of
then
() consolidation of share capital () sub-division of share capital
(1) decrease in unissued share capital
(9 When a company converts its equity shares into the capital stock, then
the account to be credited is
share capital account (ii) equity capital stock account (iit) no
9 equity
entry is required
A
Ltd. with a share capital of 10,000 equity shares of Rs.each
10each ful
share of
thus making
oHs. 5 decides to repay Rs. 5 per share
fully paid. It is a case o
reducing share capital by retumning the excess capital () reducin9
the paid-up
c iity on account of uncalled capital ( ) reducing
capital
[Ans.:
Sharesnernal Reconstruction; (b) All of the above; (c)
Consolidation of
Consolidation of
Share ca oniroller of Capital Issues; (e) Increases; (1)
by re apita; (g) Equity capital stock account: (h) Reducing share capar
reduction accOunt; U Capital
eserve ar GXcesS capital; () Capital
capital; () Capital reduction
CCOun: (K) Sub-division of share
a p i t a l reduction account; (n) All of the above; (o) Shares
118 Vipul's" Corporate Restructuring
ng (BM
SuTerxdered account, (P) Capital redUction aCcount (9) The Come
consolidation of share capilal (0) equityn
Cut, () icreases, (8)
stock Aounts. (u) reducing share capital by roturning the excass Ca

State whether the following

atatements are True or False:
capitai
(2)
(a) Reduction of capital is unlawful excepl when sarnclioned by the te.
Aunt
act,
(b) According to sec. 94 of he companies a limited
increase, sub-divide or consolidale all or part ot its existing sh
company
authonzed by its articles ol assoclalion. share
(c) Redemption of preference shares In accordance with the provisioe.
section 80 is reduction of preference share capital.
(d) A company must pass a special rosolullon lor reduction of capital

() The word "And reduced" cannot be added to the name of the comg
t no direclion has been given by Ihe court. ompany
(0 Alteration of share capital can be affecled by passing an ordinar
nar
resolution.
(g) Cancellation of unissued capital is also a case of capital reduction.
(h) Only unsuccesstul companies undertake capital reduction.
( No journal entry is required for cancellation of unissued share capita
0) Consent of creditors is not required if capital reduction invokves te
writing off of pald up capital lost or not represenled by availabe
assets.

(k) A company is free to reduce or extinguish the uncalled liability of

members.
() Consent of creditors is required if capital reduction involves diminuticn
of lability regarding uncalled capital or return of paid up
capilal
(m) Approval of court is must for the company to undergo inte
reconstruction. (May 19)
(n) Sub-division of shares means converting shares of smae
denomination into shares of larger denomination. (May 19)

Ans.: (o) True: (b) True; (c) False; (d) Tue; (e) True: () True: (9) Tre
(h) True: () True: () True: (k) Faise; () True: (m) True: (n) False]
(3) Match thefollowing:
Group Group 'B
(e) Capital Reduction Not transterable to cap
reduction

(b) Consolidation of shares () Section 100

(c) Subdivision of shares Provislons of Company Lam
()
(d) Reduction in paid up value of (lv) Unchanged capital
share
 Rpr
or
f Internal Reconstruction
internal

wating

GOodwill A/c in a loss making 119

company
(v)Section 391 to 393
and 394A
nInternal reconstruction
(vI) Ficlilious asset
External reconstruction
(9 (vl) Transfer
difference to
Capital stOck
reserve capital
() (vili) Can be
purchased or sold even
in traction
Statutory reserve
(1x) Share of As. 1 each
)Surrender of shares
into share of Rs.
10 each
converted
(x) Unchanged Capital
Surrender of Shares (May 19)
() Share of Rs. 100 each
converted into share of Rs.
each 10
Ans. i); (b ix); (C
(a -

Xi); (d -

vi); (e -

vi): (f- v): (g -ü"); (h

(i-i:0-iv): (k- xi)] -

ii);
4Whyinternal reconstruction 1s needed?
Explain Capital Reduction in detail.
What is Internal Reconstruction? Explain methods of internal
reconstruction.
7Distinguish between Internal and External Reconstruction.
Distinguish between consolidation of shares and subdivision of shares.
Write short notes on:
a) Intemal Reconstruction.
6) Capital Reduction.
()Methods of internal reconstruction.
0) Consolidation of shares.
eSubdivision of shares.