#1 Internal Reconstruction - Concept - Corporate Accounting -By Saheb Academy

Internal reconstruction involves reorganizing a company's existing structure without external intervention. It focuses on making changes within the company to improve its financial health or operational efficiency. Unlike construction, which creates something new from scratch, reconstruction modifies and rearranges what already exists.

ABC Limited, established in 2014, faced consecutive financial losses from its inception through 2017. Despite hopes for improvement by 2016, the company remained unprofitable. In dire circumstances and seeking solutions, they consulted a professional firm to identify underlying issues. The consultancy began their analysis by reviewing ABC Limited’s balance sheet and financial statements to diagnose the persistent problems.

The consultancy team analyzed ABC Limited's balance sheet and found severe issues. The company, suffering continuous losses since 2014, had overvalued assets like machinery and furniture that were not properly depreciated. Despite being loss-making for years, the company falsely reported goodwill of ₹50,000—a clear case of window-dressing to present a favorable financial position. Additionally, fictitious assets such as trademarks inflated their asset side while liabilities included an unjustified general reserve created without profits. High-cost borrowings at 16% interest from banks and debentures at 18% further worsened the company's dire financial state.

Reviving a Failing Company through Internal Reconstruction A consultancy firm advised ABC Limited, which was facing severe financial losses, to consider internal reconstruction as an alternative to liquidation. This process involves reorganizing the company's structure and affairs by revaluing assets to their correct value, eliminating fictitious assets like goodwill or patents, wiping out accumulated losses such as profit-and-loss debit balances or discounts on shares. Additionally, it requires altering or reducing share capital by negotiating with shareholders for sacrifices in equity and reserves.

Negotiation Strategies for Reducing Liabilities To reduce liabilities during internal reconstruction, companies must negotiate with third parties including banks, debenture holders, creditors and others. These negotiations aim at lowering interest rates or accepting reduced payments due to the company’s dire condition nearing bankruptcy. By successfully implementing these measures—revaluation of assets/liabilities elimination of non-essential items—and fostering cooperation among stakeholders; businesses can transition from loss-making entities into profitable ventures benefiting all involved over time.