Internal Reconstruction

Group 1
 What is Reconstruction?
• Reconstruction is a process of the company’s reorganization, concerning legal,
operational, ownership and other structures, by revaluing assets and reassessing
the liabilities. It refers to the transfer of company or several companies’
business to a new company. This, therefore, means that the old company will
get put into liquidation, and shareholders will therefore agree to take shares of
equivalent value in the new company. Reconstruction is required when the
company is incurring losses for many years, and the statement of account does
not reflect the true and fair position of the business, as a higher net worth is
depicted, than that of the real one.
 What is Internal Reconstruction?
• Internal Reconstruction is also known as Capital Reduction. Section 66 of the
companies Act governs the internal reconstruction. A company resorts to internal
reconstruction or capital reduction only in exceptional circumstances. Internal
reconstruction result in the reduction of the capital of the company.
• Internal reconstruction is basically concerned with the complete overhauling of
financial position of a firm. The main purpose is to improve the profitability of
the existing company.
• Such reconstruction of existing capital structure of the company to overcome
financial difficulties. It is also termed as- 
1) Capital Reduction.
2) Capital Reconstruction.
• For internal reconstruction capital reduction is prepared and after getting
approval of it from court as well as from creditors, it would be implemented.
 Reasons for Reconstruction
• Reconstruction is considered when the business makes consistent losses, and there is a need to
review the balance sheet if assets/capital is overstated. For instance, accumulated losses/Debits of
the profit and loss account can lead to an overstatement of fictitious assets that have no role in
revenue and profit generation.
• Further, the process of reconstruction is carried to reflect the true picture of the business
performance/status and enhance the use of financial statements for the stakeholders. For instance, if
the business has been making consistent losses in recent years, it may indicate that assets of the
company are over-valued, fictitious assets have been accumulated, and useless intangibles have
been excessively capitalized. So, there is a need to reconstruct the balance sheet items and control
capitalization. The concept is mainly applied on the equity side of the financial statement to reflect
a true sense of ownership and controls by sub-division of shares and other techniques.
 Major Reasons
• 1) Company has huge accumulated losses
• 2) Company's assets are overvalued.
• 3) Future of the company must be promising.
 Importance of Internal Reconstruction
• It’s important to note that reconstruction is different from company liquidation and does
not result in the formation of a new company but its overhauling of the balances. 
Overall, internal reconstruction helps to,
1. Reduce inflated share capital/alteration of the shares structure.
2. Show true and fair view of assets by valuation.
3. Reduce overdue outside liabilities.
 Conditions necessary for Internal
Reconstruction
1. AUTHORISATION BY ARTICLES OF ASSOCIATION:
The company must be authorized by its articles of association to resort for capital
reduction. Articles of association contains all the details regarding the internal affairs of
the company and mention the clause containing manner of reduction of capital.
2. PASSING OF SPECIAL RESOLUTION
The company must pass the special resolution before resorting to capital reduction. The
special resolution can be passed only if the majority of the stakeholders are assenting to
the internal reconstruction. This special resolution must be get signed by the tribunal and
deposited to the registrar appointed under the Companies Act, 2013.
3. PERMISSION OF TRIBUNAL
The company must get the due permission of the court or tribunal before starting the
process of the capital reduction. The tribunal grants permission only it feels satisfied with
the point that the company is going fair and there is positive consent of every stakeholder.
4. PAYMENT OF BORROWINGS
As per Section 66 of the Companies Act, 2013, the company has to repay all the amounts
it gets deposited and also the interest due thereon before going for capital reduction.
5. CONSENT OF CREDITORS
The written consent of the creditors is required for the company which is going for capital
reduction. The court requires the company to secure the interest of the dissenting creditors.
The company gets the permission of the court after the court thinks fit that reduction of
capital will not harm the interest of the creditors.
6. PUBLIC NOTICE
The company has to make a public notice as per the directions of the tribunal stating that
the company is resorting to capital reduction. Also the company has to state the valid
reasons for the same.  
 Journal entries involved in internal
reconstruction
Sr. No. Particulars Dr Cr
1. For reduction of Equity Share Capital
(Old) Equity Share Capital Account Dr.
To (new) Equity Share Capital Account
To Capital Reduction Account
2. For reduction of Preference Share Capital
(Old) Preference Share Capital Account Dr.
To (new) Preference Share Capital Account
To Capital Reduction Account
Sr. No. Particulars Dr Cr
3. For reduction of the amount due to debenture holders
Debenture holders Account Dr.
To Capital Reduction Account
4. For reduction of the amount due to Creditors
Creditors Account Dr.
To Capital Reduction Account
Sr. No. Particulars Dr Cr
5. For appreciation in the value of Assets
Assets Account Dr.
To Capital Reduction Account

6 For the payment of Reconstruction expenses

Reconstruction Expenses Account Dr.
To Bank Account
Sr. No. Particulars Dr Cr
7. For utilization of capital reduction account in writing off
accumulated losses and various fictitious assets
Capital Reduction Account Dr.
To Profit and Loss account (loss)
To Preliminary Expenses
To Discount of issue of shares or debentures account
To underwriting commission account
Sr. No. Particulars Dr Cr
To Advertising Suspense’s account
To Reconstruction Expenses account
To Good will account
To Patents or Trade Marks account
To Fixed assets account (over valued assets)
To Other assets account
To Capital Reserves account (if some balance is still )