Reconstruction is a very common word and almost all household do the reconstruction of the house once during their lifetime, in case of companies also they undertake reconstruction which is also known as corporate restructuring where company reorganizes its assets, liabilities and ownership pattern due to constant losses over the past few years or when company’s financial position does not reflect the true value of the business. Reconstruction can be of two types one is internal reconstruction while the other is an external reconstruction, in order to understand more about both the terms one should look at some of the differences between internal and external reconstruction –
Internal VS External Reconstruction
Meaning
Internal reconstruction refers to that reconstruction where the existing company is not liquidated or sold rather existing assets and liabilities are restructured while external reconstruction refers to that reconstruction in which the current company is liquidated and a new company is formed. In simple words just like in the case of our homes when we do interiors the structure of our home remains the same the only thing changes is the interiors of the house which is similar to internal reconstruction while if one decides to dismantle the house to make a new house than it is similar to external reconstruction done by the companies.
New Company
In the case of internal reconstruction, no new company is formed rather only the financial structure of the company is rearranged whereas as far as external reconstruction is concerned the old company is liquidated and the new company is formed.
Time for Reconstruction
In case we decide to do interiors of our house we all know that it takes so much time because we already are living in that house and it takes time to rearrange all things so that the interiors of the house is carried out smoothly but as far as the dismantling of the house is concerned it can be done quickly in few hours. In the case of a company’s similar thing happens where internal reconstruction is a time-consuming process but when it comes to forming a new company for doing external reconstruction it takes very little time and can be done quickly and easily.
Past Looses
As far as internal reconstruction is concerned companies are allowed to set off their losses against any future profits because the company has not changed while in case of external reconstruction companies do not get this benefit as the new company has been formed and hence there is no scope of setting off the past losses against future profits.
Treatment of Assets and Liabilities
In the case of internal reconstruction, the assets and liabilities do not go anywhere from the company rather the capital is reduced apart from creditors waiving some of their claims while in case of external reconstruction all the assets, as well as liabilities of the company, are transferred from the old company which is being liquidated to the new company.
As one can see from that both internal and external reconstruction are completely different from each other and that is the reason why any company thinking of doing reconstruction should carefully read the above points and then only select any one method of reconstruction.