External Reconstruction

External Reconstruction

Reconstruction is a process of the company’s reorganization, concerning legal, operational, ownership, and other structures, by revaluing assets and reassessing the liabilities. External reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities to a newly formed company which is generally owned and named alike.

In the case, external reconstruction the losses of an old company can’t be set off against the profit of the new company. It refers to the sale of the business of an existing company to another company formed for the purpose. In external reconstruction, one company is liquidated and another new company is formed. This reconstruction takes place when an existing company goes into liquidation for the express purpose of selling its assets and liabilities to a newly formed company which is generally owned and named alike.

It refers to the sale of the business of an existing company to another company formed for the purpose. When a company is suffering losses for the past several years and facing a financial crisis, the company can sell its business to another newly formed company.

The term ‘External Reconstruction’ means the winding up of an existing company and registering itself into a new one after a rearrangement of its financial position. When a company is suffering losses for the past several years and facing a financial crisis, the company can sell its business to another newly formed company. Thus, there are two aspects of ‘External Reconstruction’, one, winding up of an existing company and the other, rearrangement of the company’s financial position. Actually, the new company is formed to take over the assets and liabilities of the old company. This process is called external reconstruction. In other words, external reconstruction refers to the sale of the business of an existing company to another company formed for the purposed.

Such arrangement shall be approved by its shareholders and creditors and shall be sanctioned by the National Company Law Tribunal (NCLT). In external reconstruction, one company is liquidated and another new company is formed. Such a step usually involves the writing off of a debit balance on Profit and Loss Account, elimination of all fictitious assets if any from the Balance Sheet, and the consequent readjustment of share capital. The liquidated company is called “Vendor Company” and the new company is called “Purchasing Company”. Shareholders of vendor company become the shareholders of the purchasing company.

Types of External Reconstruction are:

  • Mergers / Amalgamation
  • Acquisition / Takeover
  • De-merger
  • Reverse Merger
  • Application to BIFR (Board of Industrial & Financial Reconstruction)