Which of the following are true in case of Internal Reconstruction?

(A) The existing company is liquidated

(B) No new company is formed

(C) There is certain reduction of capital and sometimes liabilities are also reduced

(D) The new company issues fresh capital

(E) It is done as per section 66 of the Companies Act, 2013

Choose the correct answer from the options given below:

Correct option is C

Internal reconstruction refers to a process undertaken by a company to reorganize its capital structure without liquidating the existing company or forming a new company. It is typically done to deal with financial difficulties or reallocate resources effectively.
1. No New Company is Formed (B):
· Explanation: Internal reconstruction involves modifying the financial structure of the existing company itself rather than liquidating it or creating a new entity.
· True Statement.
2. Reduction of Capital and Liabilities (C):
· Explanation: Capital restructuring often includes reducing share capital (e.g., canceling unpaid share capital) and renegotiating liabilities to improve financial stability.
· True Statement.
3. Done as per Section 66 of the Companies Act, 2013 (E):
· Explanation: Section 66 governs the reduction of share capital in India, specifying the procedure and legal compliance required for internal reconstruction.
· True Statement.
4. Incorrect Statements:
· The Existing Company is Liquidated (A): Internal reconstruction does not involve liquidation; the company continues its operations.
· The New Company Issues Fresh Capital (D): No new company is formed, so this does not apply to internal reconstruction.
Information Booster
Internal reconstruction is commonly used to clean up a company’s balance sheet, eliminate accumulated losses, or write off fictitious assets. Unlike external reconstruction, it does not involve dissolving the company or creating a new entity.