When Does a Company needs Internal Reconstruction?
When a company has been making losses for a number of years, the financial position does not present a true and fair view of the state of the affairs of the company. In such a company the assets are overvalued, the assets side of the balance sheet consists of fictitious assets, useless intangible assets and debit balance in the profit and loss account
In short the company is over capitalized. Such a situation brings the need for reconstruction.
Basically, The liability is more than assets but,
How is this possible for the balance sheet does tally.
The reason for this is, The asset side will consist of P/L Debit balance, not being a Asset but an expense recorded on the assets.
Basically in order to save the company from Liquidation & Amalgamation, Internal Reconstruction is one of the last Options.
So basically all the creditors weather short term/Long term, Have to reduce/ Give up their claim, but this happens as per order of the Court.
Doubt?? Why will a creditor give away his claim ???
Ans:- if there is a creditor of company with a claim of Rs. 100, as per the Internal Reconstruction Scheme 50% of the claim needs to be waived off, The creditor may readily agree for it, otherwise, the company is on the verge of liquidation, so Rather then having No money of 100, its better to sacrifice 50.
Reconstruction is a process by which affairs of a company are reorganized by revaluation of assets, reassessment of liabilities and by writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights attached to different classes of shares.
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