Forms of Internal Reconstruction of a Company (Scope of Internal Reconstruction)

Internal reconstruction of a company can be carried out in the following different ways. These are as under:

1. Alteration of Share Capital; and

2. Reduction in Share Capital

Alteration of Share Capital: Memorandum of Association contains capital clause of a company. Under Section 94 of the Companies Act 1956, a company, limited by shares, can alter this capital clause, if is permitted by (i) the Articles of Association of the company; and (ii) if a resolution to this effect is passed by the company in the general meeting. A company can alter share capital in any of the following ways:

A) The company may increase its capital by issuing new shares.

B) It may consolidate the whole or any part of its share capital into shares of larger amount.

C) It may convert shares into stock or vice versa.

D) It may sub-divide the whole or any part of its share capital into shares of smaller amount.

E) It may cancel those shares which have not been taken up and reduce its capital accordingly.

To alter capital by any of the above modes require a resolution at a general meeting, but does not require confirmation by the National Company Law Tribunal. The company is required to give a notice to the Registrar within thirty days of alteration.

The accounting treatment of the above five types of capital alteration is discussed below.

A) If the company has issued all of its authorised capital, then, for the purpose of raising fund by the issue of fresh shares, it will have to increase its authorised capital first. For increasing the authorised capital, the Capital clause of Memorandum of Association of the company is required to be altered and permission of S.E.B.I. is also required to be obtained.  No accounting entry is necessary for increasing authorised share capital. The company will have to observe the formalities prescribed under the Companies Act, 1956.

B) The company may decide to change the shares of smaller denomination into larger denomination. This process is called consolidation of shares. On account of consolidation, the total amount of capital of the company will not change but the number of shares will decrease.

C) A company, in order to alter its share capital, may convert all or any of its fully paid up shares into Stock or Stock into fully paid up shares. In case, shares are converted into Stock, the members get a part of Stock Capital in place of shares. By converting Shares into Stock, any amount of Stock Capital can be transferred to any other person.

D) When the shares of a company are sub-divided in shares of small value, it is known as sub-division of shares. In sub-division of shares, the face value of a share is converted into smaller denomination from larger denomination. The total capital of the company remains unaffected by sub-division but the total number of shares increase.

E) Cancellation of capital may take the following form:

1. Cancellation of unissued capital; and

2. Cancellation of uncalled capital.

1. Cancellation of Unissued Capital:

Cancellation of unissued capital means cancellation of unissued shares by a company. It means that the part of the authorised capital which has not yet been issued to the public may be cancelled by the company.

(ii) Cancellation of uncalled capital: Cancellation of uncalled capital means cancellation of that part of the face value of the share which has not yet been called by the company.

Reduction of Capital: Sometimes there may be a genuine necessity for the reduction of capital. This power is, given by Section 100 of the Companies Act, subject to the compliance of conditions. According to this, a company may,

(1) Extinguish or reduce the liability on any of its shares in respect of share capital not paid up

(2) cancel any paid-up share capital which is lost or is unrepresented by any available assets;

(3) pay off any paid-up share capital which is in excess of what is required by the company. Conditions for effecting a reduction

Following conditions are required to be fulfilled by a company to reduce its share capital –

(a) The Articles of Association of the company must permit it to reduce its capital;

(b) The company in general meeting shall pass a special resolution to reduce its capital; and

(c) The approval of National Company Law Tribunal (previously Court) shall be obtained for the scheme of reduction in share capital.