Page 85 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes company’ is used to reorganize the financial structure. During the reconstruction of a company,
several changes take place such as change in shareholders’ rights and interests, debenture-
holders’ rights, creditors’ rights etc.
Reconstruction of companies may be of two types: External Reconstruction and Internal
Reconstruction.
1. External Reconstruction: When the capital structure of a company is reorganized through
the liquidation of the existing company and formation of the new company, it is called
external reconstruction. Thus, in the case of external reconstruction, one existing company
will go into liquidation and a new company will be formed in order to purchase the
business of the existing company.

Example: When Ankit Limited goes into liquidation and a new company Ankit Mohan
Limited is formed to purchase the business of Ankit Limited, it is a case of external liquidation. In
this way, the shareholders and persons interested and business will be same in the newly formed
company as were in the old company.
2. Internal Reconstruction: Internal reconstruction means the reorganization of the capital
structure of a company without forming a new company and without liquidating the
existing company. Internal reconstruction of a company is done to alter the share capital
or to reduce the share capital without going into liquidation. It means the reorganized
form of the company will run the business of the existing company. The claims of the
shareholders, creditors and outsiders are adjusted towards the amount of writing off the
losses and fictitious assets. This is further discussed in the following pages. Thus, in the
internal reconstruction, the following two are included:
(a) Alteration of share capital
(b) Reduction of share capital

self assessment

State whether the following statements are true or false:
1. All types of companies undertake capital reduction.
2. Internal reconstruction means the reduction of capital.
3. There is no need for a company to take the permission of court to cancel any paid up capital
which is lost or not represented by the available assets.
4. Share premium account cannot be transferred to capital reduction account.
5. To return the excess paid up capital, the permission of the court is required.
6. Cancellation of nominal capital is also called capital reduction.

7. If reduction of capital is not sanctioned by the court, it is unlawful.
alteration of share capital

According to Section 94 of the Companies Act, a limited company having a share capital may,
if so authorized by its Articles of Association, alter the capital clause of its Memorandum of
Association by the ordinary resolution in the general meeting. These alterations do not require
the approval of the Company Law Board. Alteration in the capital clause may be in any of the
following ways:

(a) Increase in its share capital by the issue of fresh shares of such amount as it thinks
expedient.

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