Internal Reconstruction: Definition, Objectives, Methods

What Is Internal Reconstruction?

Internal Reconstruction means reduction of capital inorder to cancel any paid of share capital which is lost or un-presented by the available asset. It is neither liquidation of the company nor formation of a new company to take over any existing business.

In other words internal reconstruction refers to continuation of existing company in its legal form but reduction or alteration of share capital with the permission sanctioned by court.

Objective Of Internal Reconstruction

For the sake of clarification some of the most important objectives of Internal Reconstruction are pointed below:

  • To reduce the share capital of the company and bring its real worth.
  • To present the true and fair view of the company’s financial position.
  • To create Confidence among the shareholders by providing them fair return on their investment.
  • To eliminate the fictitious asset of the company.
  • To facilitate shake of the past losses.

Methods Of Internal Reconstruction

Generally there are 2 methods that are broadly used for internal reconstruction. They are:

1.Alteration In Share Capital

2.Reduction In Share Capital

Alteration In Share Capital

According to sec-61 of the companies act 2013 alteration of share capital involved those cases which didn’t require any approval from the court. But such alteration must be em-powered by the articles of the company. These are;

Increase in share capital:

The increase in share capital of a company helps in internal reconstruction. It can be increased only by issuing new shares when the company thinks above expanding.

Consultation of share:

The alternation of share capital of a company also can be done through consultation of share. It means conversion of an existing share of a smaller denomination into a share of a higher denomination.

Sub-division of share:

The subdivision of shares also helps in internal reconstruction of a company. Under This method the amount of share capital is changed by dividing shares of higher denomination into shares of smaller denomination.

Cancellation of unissued shares:

Under This method alternation of share capital is made by cancelling the unissued capital or which is not subscribed. Generally it is done with the permission of the court.

Conversion of share into stock:

Another important method of alternation of share capital is conversion of share into stock. It also has provision to convert fully paid shares into stock and reconvert stocks into fully paid shares.

Reduction In Share Capital

The process of decreasing companies shareholders equity through share cancellation and share repurchase is called reduction of share capital, which is considered as another important method of internal reconstruction.

Generally the companies reduce their capital for the purpose of share of value and for developing efficient capital structure.

Reasons Of Reduction Of Share Capital

  • To reduce the basis for taxation.
  • To facilitate reduction of share
  • To return the surplus capital to the shareholders.
  • To need any capital expenses.
  • To increase or create distributable reserves.

Steps In Reduction Of Share Capital

According to sec-66 of the Companies Act 2013 the following steps are followed in the process of reduction of share capital such as:

Step-1: Special Resolution

The first step of the capital reduction process is passing of special resolution, which should be filled with the registrar within 30 days.

Step-2: Sanction From Tribunal

The second step after passing of special resolution is to secure sanction from tribunal for reduction of share capital.

Step-3: Tribunal Confirming Reduction:

The 3rd step of capital reduction is to obtain a confirmation letter from the court regarding reduction of share capital.

Step-4: Certificate In Registration:

The next step after the confirmation order is to fill its copy with the registrar of the company for getting a certificate of registration within 3 months of court order, which is obtained within 1 month of file date.

Step-5: Liabilities Of Member Penalties

The last steps involved in the reduction of share capital is settlement of liabilities and penalties of its members. It also ensures the extent of liabilities do not exceed the difference between the amount paid on share and the reduced amount.

Other Methods Of Internal Reconstruction Normally there are some other methods used for internal Reconstruction they are:

  • Variations Of Shareholders Rights.
  • Surrender Of Share.
  • Comprehensive & arrangement.

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