Reconstruction

BY CHERANJIT DAS

* Internal

When a company has been making losses for a number of years, it becomes difficult for it to maintain a high amount of capital, debts as well as creditors. In that case the company may decide to reduce its capital and debts by way of reconstruction. This process of reducing capital and debt is known as internal reconstruction.

*Definition

1.

The existing company is not liquidated. No new company is formed. Only the rights of the shareholders and creditors is changed. There is a reduction of capital and sometimes outside liabilities like debenture holders may have to reduce their claims. Internal Reconstruction is done as per the provisions of sections 100 of the Companies Act, 1956.

2.

3.

4.

*Important points

1.

Alteration of Share Capital ( Sec. 94,95 And 97) Variation of Share holders rights ( sec. 106) Reduction of Share Capital (Sec. 100 to 105) Compromise/Arrangements ( Sec. 391 to 393 and 394A) Surrender of Shares

2.

3.

4.

5.

NB : Dont memorize the sections, its unnecessary.

*Methods of Internal

reconstruction

If authorised by its articles, a company may, in a general meeting, decide to sub-divide or consolidate its shares. By doing this the proportion between paid up capital and unpaid amount, if any, should be the same as was in the case of original capital.

*1. Alteration of Share

Capital

Eq. Share Capital (Rs. 100) A/c .Dr. To Eq. Share Capital (Rs.10) A/C (Being sub-division of ____ Eq. Shares @ Rs. 100 each fully paid to ____ Eq. Shares @ Rs. 10 each fully paid, as per B.R. No.___ Dated____)

*sub-division of shares

Stock is consolidation of share capital into one divisible into aliquot parts. Only fully paid shares can be converted to stock [Sec. 94(C)]

paid shares into stock and stock to shares

*Conversion of fully

Conversion of Shares to Stock : Eq. Share Capital A/C.Dr. To Eq. Stock A/C (Being conversion of ______ Eq. shares of Rs.__ each fully paid into Rs.____ Eq. Stock, as per B.R. No.___ Dated____)

*Entries

Conversion of Stock to Shares : Eq. Stock A/C Dr. To Eq. Share Capital A/C ( Being re-conversion of Rs._____ Eq. Stock to _____ Eq. Shares of Rs. ___ each fully paid, as per B.R. No.____ Dated_____)

*Entries

When a company has issued different classes of shares with different rights or privileges attached to such shares e.g. right as to dividend, voting rights etc. any of such right may be changed in any manner. Example : the company may change rate of dividend No entry is required here

Shareholders rights

*2. Variation of

Sec. 100 lays down provisions for reduction of share capital. There are two types of reduction a. Reduction in paid up value only b. Reduction in both nominal value and paid up value

*3. Reduction of Share

Capital

Share Capital A/CDr. To Capital Reduction A/C ( Being ___ Eq. Shares of Rs. 100 each fully paid reduced to ___ Eq. Shares of Rs. 100 each Rs. 10 paid)

*a. Reduction in paid

up value only

Eq. Share Capital (Rs.100) A/CDr. To Eq. Share Capital (Rs.10) A/C To Capital Reduction A/C ( Being ___ Eq. Shares of Rs.100 each reduced to ___ Eq. Shares of Rs.10 each)

*b. Reduction in both

nominal value and paid up value

A scheme of compromise or arrangement in an agreement between the company and its members and outside liabilities when the company faces financial problems. Such an agreement involves sacrifices by shareholders or creditors and debenture holders or by all.

*4. Compromise OR

Arrangements

1.

Eq. Shareholders give up reserves and accumulated profits :

Reserves A/C.Dr. Profit & Loss A/CDr. To Reconstruction A/C OR Capital Reduction A/C (Being reserves transfer to Capital Reduction A/C, as per scheme of reconstruction)

*Entries

2. Settlement of outside liabilities : Outside Liabilities A/C..Dr. O/S Interest A/C.Dr. To Reconstruction A/C OR Capital Reduction A/C ( Being claim of outside liabilities reduce to or by ______)

*Entries

Shareholders surrender their shares. These shares are allotted to debenture holders or creditors to reduce their claim. The unutilized shares then cancelld

*5. Surrender of
Shares

1.

Surrender of shares : To Share Surrendered A/C

Eq. Share Capital A/C.Dr. ( Being ___ Eq. Shares of Rs.___ each surrendered by the shareholders)

*Entries

2. Issue of shares to outside liabilities : Creditors/Debenture Holders A/CDr. To Capital Reduction A/C (Being creditors claim reduced to or by ___) Share Surrendered A/C..Dr. To Eq. Share Capital A/C (Being issue of ___ Eq. Shares of Rs.___ Each out of share surrendered, as per scheme of reconstruction)

*Entries

3. Cancellation of unutilized portion of share surrender: Share Surrendered A/CDr. To Capital Reduction A/C (Being Cancellation of unutilized portion of share surrendered)

*THE END