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A scheme of compromise and arrangement is an agreement between a company and its members or creditors when facing financial difficulties, involving sacrifices by shareholders. Internal reconstruction methods include alteration of share capital, variation of shareholder rights, and reduction of share capital, with specific accounting points outlined for managing the Capital Reduction Account. The process may involve surrendering shares to reduce liabilities, with only fully paid shares eligible for surrender.

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16 views1 page

open_book_21

A scheme of compromise and arrangement is an agreement between a company and its members or creditors when facing financial difficulties, involving sacrifices by shareholders. Internal reconstruction methods include alteration of share capital, variation of shareholder rights, and reduction of share capital, with specific accounting points outlined for managing the Capital Reduction Account. The process may involve surrendering shares to reduce liabilities, with only fully paid shares eligible for surrender.

Uploaded by

strugglerhritik1
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTERNAL RECONSTRUCTION (MIND MAP) A scheme of compromise and arrangement is an agreement between a company

and its members and outside liabilities when the company faces financial problems.
Such an arrangement therefore also involves sacrifices by shareholders, or creditors
Affairs of a company are reorganized by revaluation of assets, reassessment of and debenture holders or by all.
liabilities and by writing off the losses already suffered by reducing the paid up
Capital Reduction Account is a temporary account opened in order to carry out
value of shares and/or varying the rights attached to different classes of shares.
the internal reconstruction. This account is a nominal account which takes on
Methods of Internal Reconstruction: credit side all income and profits and on debit side all expenses and losses. At the
end, Capital Reduction Account either tallies or it shows credit balance which is
Alteration of Share Capital: company may, in a general meeting by passing an transferred to “Capital Reserve A/c”.
ordinary resolution, decide to sub-divide or consolidate the shares into those of a
smaller or higher denomination. A notice specifying alteration made must be given
Special Points w.r.t. Accounting:
to the Registrar within 30 days of alteration.
Example - sub-division of 10,000 shares of Rs. 100 each with Rs. 75 paid up thereon  An appreciation in the value of an asset or reduction in the amount of a liability
into 1,00,000 shares of Rs. 10 each with Rs. 7.50 paid up. should be debited to the account concerned and credited to Capital Reduction
Account (or Reconstruction Account).
Variation of Shareholder Rights: It happens with the consent in writing of the  Write off all fictitious assets (including Goodwill and Patents) and eliminate all
holders of not less than three-fourths of the issued shares of that class or by means over-valuation of assets through debit to Capital Reduction Account (or
of a special resolution of the class. For example, the company may change rate of Reconstruction Account).
(a) dividend on preference shares or (b) convert cumulative preference shares into  If any balance is left in the Capital Reduction (or Reconstruction) Account it
non-cumulative preference shares. should be transferred to the Capital Reserve Account.
Reduction of Share Capital: Section 66 of the Companies Act, 2013 lays down the  While preparing Balance Sheet of reconstructed company, after name of the
procedure in respect of reduction of share capital – Confirmation by Tribunal and company, the words “and Reduced” should be added only if Court so orders.
Special Resolution. This reduction is a sacrifice by the shareholders and the amount  In case of fixed assets, the amount written off under the scheme of
of reduction or sacrifice is credited to a new account called Capital Reduction reconstruction must be shown for five years in Balance Sheet.
Account (or Reconstruction Account). Surrender of Shares:
 Extinguishing or reducing the liability of the shareholders in respect of unpaid Shares are divided into shares of smaller denominations and then shareholders are
amount on the shares held by them made to surrender their shares to the company. These shares are then allotted to
 Paying off any paid-up share capital which is in excess of its requirements debenture holders and creditors so that their liabilities are reduced. The unutilized
 Cancelling any paid-up share capital which is lost or is unrepresented by surrendered shares are then cancelled by transferred to Reconstruction Account.
available assets
Only fully paid shares can be surrendered. The shares surrendered could be either
Compromise / Arrangements: equity or preference shares.

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