Page 115 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes 6.1.2 Differences between amalgamation and external reconstruction

The points of differences are:
1. Amalgamation of companies involves liquidation of two or more companies, while external
reconstruction involves liquidation of only one company,
2. Amalgamation of companies results in combination of companies, but external
reconstruction does not result in any such combination.
6.1.3 Differences between absorption and external reconstruction

The points of differences are:
1. Absorption of companies does not involve formation of a new company; however, external
reconstruction involves formation of a new company,

2. Absorption of companies results in liquidation of one or more companies while external
reconstruction results in liquidation of only one company.
3. Absorption of companies involves combination of companies, whereas external
reconstruction does not involve any combination.

6.1.4 features of the amalgamation, absorption and external reconstruction

The features of amalgamation, absorption and external reconstruction are shown in the following
table:

table 6.1: features of amalgamation, absorption and external reconstruction

Basis of Difference amalgamation absorption external
reconstruction
Liquidation Two or more companies go One or more companies One and only one
into liquidation. go into liquidation. company goes into
liquidation.
Formation of New A new company is formed Only the existing company A new company is
Company to take over the business of acquires the business of formed to acquire
the wound up company. the wound up company. the business of the
liquidated company.
Shareholders The shareholders of the new There will be the The shareholders of the
company are those who shareholders of the new company are those
were in the old company. purchasing company who were in the old
only. company.
Level of Companies The level of the The economic status of the The economic condition
amalgamating companies is purchasing company is, of the old company is
generally same. enhanced in comparison found to be unsound,
to that of the liquidating and a new company is
company. formed to rectify the
situation.

self assessment

State whether the following statements are true or false:
1. External reconstruction of a company means the reduction of its share capital.
2. Absorption of companies results in liquidation of one or more companies.

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