Capital Reconstruction

6150 Words Oct 27th, 2012 25 Pages
Capital Reconstruction

Introduction:-

The act of placing a company into voluntary liquidation and then selling its assets to another company with the same name and same stockholders, but with a larger capital base.
It is the complete overhaul of the capital of a distressed company to save it from liquidation. The object of it is to enable the company to continue as a going concern by the removal of the burden of immediate debt, the attraction of additional capital and the creation of a viable financial structure.

Definition:-

The reconstruction of capital, which is also known as capital reconstruction, is defined as the plans made by a company for the restructuring of its capital base. Capital reconstruction involves major alterations
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debt holders).

Reconstruction Schemes

This addresses the 2nd and 3rd points above. This involves the company * Writing off overdue debt interest and restructuring debt to have lower interest and extended maturity * Writing off cumulative preference shares dividend owed * Writing off amounts owed to suppliers * Issuing new shares (crediting equity reserves) to the previous debt holders, preference shares holders, suppliers for accepting to restructure the debts.
Essentially debt holders convert to being equity holders, possibly retaining a lower debt amount. This allows them to recover their funds through the company’s recovery, as opposed to not recovering their funds when the company collapses.

Liquidation via a New Company

This involves: * Selling assets to another company * Using the proceeds to pay down remaining debts, and liquidating the business.

* Profit recognized is based on proceeds less carrying costs of remaining net assets. * The buyer of the assets will still recognize Goodwill based on the fair value of the assets bought.

Any of a range of financing transactions aimed at significantly altering the shape of a firm's liabilities (cf. recapitalization; reconstructing). There are three basic ways in which this can happen: increases/decreases
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