Assignment No. 1: Reconstruction
Assignment No. 1: Reconstruction
Assignment No. 1: Reconstruction
1
Topic
Reconstruction
Submitted By
Abdur Rub
SP07-BB-0005
Advance Accounting
Sir Manzoor Talat
This article summarizes what is company reconstruction, its objectives and the different type of
company reconstruction.
• A term used to describe the drastic formal changes in a company’s capital structure as a result of
certain circumstances.
Type of Reconstruction:-
Internal Reconstruction:-
• Undertaken by companies that have surplus capital or companies whose capital has been eroded
by trading losses
• In this type of internal reconstruction, companies who wish to reduce their capital need to comply
with certain requirements of their local Companies Act. This normally involves the following:
• The capital reduction scheme must be confirmed by the court
• The articles of association of the company must provide for such reduction of capital and
• A special resolution must be passed by the company
Three(3) situations where the Companies Act ( in this case Malaysia) permits such capital reduction:-
1. To reduce or write off uncalled capital on any of its shares;
2. To cancel paid up capital not represented by assets; or
3. To refund any surplus capital i.e. Capital in excess of the needs of the company ( a company
which has par value of $1 applies to reduce to 50 cent per share so as to refund 50 cent per
share to the shareholders.
External Reconstruction:-
It is the process in which one existing company reconstructs itself with new name and identity.
Besides, the factors to be considered in devising the capital reduction scheme are also narrated.
Illustration:
The above illustrates that XYZ Ltd has unwisely eroded its paid up share capital from $600,000 to $50,000.
So what next should XYZ Ltd do? XYZ Ltd can either:
• continue to be in business and face further erosion of capital vide it continuing trading losses
• wind up its business
• re-organize
By embarking on an internal reconstruction, XYZ Ltd should have the following intention:
• ability to start afresh to regain profitability
• adjust any unrepresented assets
• writing off the accumulated losses by reducing its paid up capital
• subsequently to issue additional shares to raise funds for its new plans.
In any Capital Reduction Scheme, it is imperative that the capital “lost” should be absorbed equitably by
the various parties hence the careful need to design the proper scheme. Needless to say, the ordinary
shareholders who are the risk taker need to bear the largest amount of reduction of capital. Next, it can be
the preference shareholder, debenture-holders and creditors to share in the absorption of the losses.
The following are some of the factors to consider when determining the amount of capital that is lost and
how this loss should be allocated:
Internal Reconstruction: