MEANING AND DIFFERENCE BETWEEN INTERNAL AND EXTERNAL RECONSTRUCTION

1. Internal Reconstruction:

   • Internal reconstruction refers to the reorganization of a company’s financial structure and operations without winding up its affairs or undergoing liquidation.
   • It involves changes within the company, typically aimed at improving its financial position, simplifying its capital structure, or rectifying financial difficulties.
   • Internal reconstruction is usually carried out through various methods such as capital reduction, revaluation of assets and liabilities, writing off accumulated losses, and the creation of new classes of shares.
   • This process does not involve the dissolution of the company or the creation of a new legal entity.
2. External Reconstruction:
   • External reconstruction involves the restructuring of a company through external means, often resulting in the creation of a new legal entity or the acquisition of the existing company by another entity.
   • It typically occurs when a company is facing severe financial distress or when there is a strategic need for a change in ownership or structure.
   • External reconstruction methods include mergers, acquisitions, amalgamations, and takeovers, where the existing company may cease to exist as an independent entity.
   • External reconstruction often involves legal and regulatory procedures and may require approval from shareholders, creditors, and regulatory authorities.

Here’s a table summarizing the key differences between internal and external reconstruction:

Key Differences:

1. Nature:
   • Internal reconstruction involves changes within the existing company, while external reconstruction involves restructuring through external means.
2. Legal Entity:
   • In internal reconstruction, the company remains the same legal entity, whereas external reconstruction may involve the creation of a new legal entity.
3. Objective:
   • Internal reconstruction aims to improve the financial position of the company, simplify its capital structure, or rectify financial difficulties. External reconstruction addresses financial distress or strategic repositioning needs.
4. Methods:
   • Internal reconstruction methods include capital reduction, revaluation, writing off accumulated losses, and creation of new share classes. External reconstruction methods include mergers, acquisitions, amalgamations, and takeovers.
5. Approval:
   • While shareholder approval may be required for certain changes in internal reconstruction, external reconstruction often requires regulatory approvals and shareholder approval, especially for significant changes.
6. Outcome:
   • Internal reconstruction allows the company to continue operating with a modified structure, whereas external reconstruction may result in the existing company ceasing to exist independently.