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Unit 6: External Reconstruction of Companies

starting again a new or a fresh. That is technically, a new company will be floated or formed to notes
take over the existing company. Internal reconstruction refers to making internal arrangements
for overcoming financial difficulties.

Notes Reconstruction of the financial structures of the company is expressed to alter the
rights and interest of the shareholders, debenture-holders and creditors or outsider’s
liability.

We have already discussed the Internal Reconstruction of Companies in previous unit. Now,
we will elaborate the External reconstruction accounting treatment in more detail. In the case
of external reconstruction, an existing company goes into liquidation and a new company is
formed in order to buy its business. Thus, shareholders of the old existing company become the
shareholders of the newly formed company.
From the point of view of an accountant, external reconstruction is similar to amalgamation
in the nature of purchase; the books of the transferee company are closed and in the books
of the transferee company, the purchase of the business is recorded. But otherwise external
reconstruction and amalgamation differs as follows:

(i) In external reconstruction, only one company is involved whereas in amalgamation, there
are at least two existing companies which amalgamate.
(ii) In external reconstruction, a new company is certainly formed whereas in amalgamation
a new company may be formed or in the alternative one of the existing companies may
take over the other amalgamating company or companies and no new company may be
formed.
(iii) The objective of the external reconstruction is to reorganise the financial structure of the
company, on the other hand, the objective of the amalgamation is to cut competition and
reap the economies of larger scale.

6.1.1 legal position as regards external reconstruction

Sec. 494 of the Companies Act permits the liquidator of a company to transfer the whole or
any part of the company’s business or property to another company and receive from the
transferee company for distribution among the share holders of the company under liquidation.
The liquidator must obtain the sanction of the company by a special resolution. Any sale of
arrangement in pursuance of this section is binding on the members of the transferor company.
But a shareholder who has not voted for the special resolution may, within seven days of the
resolution, serve a notice on the liquidator expressing his dissent and requiring the liquidator
either,
(a) To abstain from carrying the resolution into effect, or
(b) To purchase his interest at a price to be determined by agreement or by arbitration.

Did u know? In external reconstruction, only one company is involved whereas in
amalgamation.

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