Internal reconstruction is a process where a company reorganizes internally through a scheme where all parties sacrifice in a certain order to continue operating legally. Objectives of internal reconstruction include altering share capital like increasing or consolidating shares, varying shareholder rights such as dividend rates, reducing share capital with court approval, implementing compromise or arrangements between the company and members/creditors, and allowing shareholders to surrender shares. The process aims to help companies facing financial problems by restructuring ownership and debt obligations.

1. Internal Reconstruction
By
Dr. Sunil M Rashinkar
Assistant Professor
School of Management
Presidency University, Bengaluru

2. Meaning:
• This is generally resorted to by a company which is being reorganized
internally.
• A scheme of reorganization is prepared in which all parties sacrifice.
The sacrifice are made in this order – equity shareholders, preference
shareholders, unsecured creditors and partially secured creditors.
• Under this scheme the existing company continues in its legal entity
form and can take advantage of carry forward and set off of the past
losses.

3. Objectives of IR:

4. Alteration of Share Capital:
• According to section 61 of the companies act, 2013 a limited
company can, if authorized by its articles of association, later the
capital clause of its memorandum of association in any of the
following ways:
• Increase its authorized share capital by such amount as it thinks expedient.
• Consolidate all or part of its existing shares of smaller amounts into shares of
larger amounts.
• Sub divide its shares of higher denomination into shares of smaller
denomination subject to the condition that in case of partly paid up shares,
the proportion between the paid up and the unpaid amount on the shares
continues to be the same after sub division as before.

5. Variation of Shareholders’ Right:
• When a company has issued different type of shares with different
rights or privileges attached to such shares ex., as to dividend or
voting rights etc. any such rights may be changed in any manners.
• For ex. A company may change rate of dividend on preference shares
or convert cumulative preference shares into non-cumulative
preference shares without changing the amount of share capital.

6. Reduction of Share Capital:
• Reduction of capital is unlawful except when sanctioned by the court
because conservation of capital is one of the non principles of the company
law.
• The issued share capital of a company represents the security on which the
creditors rely.
• By extinguishing or reducing the liability on any of its shares in respect of share
capital not paid up.
• By paying off any paid up capital which is in excess of the needs of the company.
• Where any paid up share capital is being reduced without reducing the liability on
the shares.
• Where any paid up share capital is being reduced reducing the liability on the shares.
• By any other method approved by the court.

7. Compromise or Arrangement:
• A scheme of compromise or arrangement is an
agreement between a company and its members and
outside liabilities when the company faces financial
problems.
• Such an arrangement involves sacrifices to be made
by shareholders or creditors or debenture holders or
by all.

8. Surrender of Shares:
• Shareholders may surrender their shares in some
situations.
• These shares may then be allotted to creditors or
debenture holders so that their liabilities are reduced.
• The unutilized surrendered share are then cancelled.