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Internal Reconstruction

Internal Reconstruction

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Published by neeru792000
Its a part of reconstruction sheme..
Its a part of reconstruction sheme..

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Categories:Topics, Art & Design
Published by: neeru792000 on Sep 28, 2010
Copyright:Attribution Non-commercial

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11/27/2014

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1.
 
INTRODUCTION
 What is Reconstruction?
Re-construction is a process of re- organization of acompany. It takes place when the financial position of the company is notgood due to overvaluation of assets, accumulated losses etc. It is re-organization with a view to run the company efficiently in the future. Itinvolves writing off accumulated losses, fictitious assets and overvaluationof assets out of the sacrifice of the shareholders viz. shareholders,debenture holders and creditors so as to give a realistic view of financialposition of the company.
Need for Internal Reconstruction:
Internal Reconstruction is necessary due to the following reasons:
1.
 
F
inal statements not True &
F
air:
 When the company is making heavy losses, the financialstatement do not show true and fair view of the state of affairs of thecompany.
 
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2
.
 
 A 
ssets:
 The asset side of the balance sheet of a company may have intangible assets, fictitious assets, accumulated losses, deferredrevenue expenditure etc. The real assets are shown at a high value.Due to losses adequate depreciation may not be provided, stock may be valued at a higher rate. No provision may be made for bad anddoubtful debts.
3
.
 
L
iabilities:
 The Company may have secured and unsecured loans which may be repaid. It may become overdue Interest on loan may be in arrears. Creditors may be long overdue. Preference dividend onpreference shares may be in arrears over a long period.
4
.
 
C
apital:
Capital of a company is lost due to drastic fall in the value of assets. It is not represented by the by the real value of assets.
5
.
 
Reconstruction:
Due to continuous losses, basic structure of the company gets damaged. The pillars on which the super structure is basedbecome weak and the company may collapse at any time. Hence thecompany has to be placed on strong foundation in order to ensurestability in future.
 
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2
.
 
 TYPES OF RECONSTRUCTION
C
ompany Reconstruction:
 
 A term used to describe the drastic formal changes in acompany·s capital structure as a result of certain circumstances. There aretwo types of reconstruction. 
(1) External Reconstruction:
  When a company has no power to operate his ownbusiness due to heavy loss and it sells his all business to a new company. It will be external reconstruction.
(
2
) Internal Reconstruction:
 Internal Reconstruction means to do every action forbringing the company out of losses. If a company is suffering heavy losses,company can use the provision 94 of Indian Company law 1956 and reduceits capital.

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