Internal vs External Reconstruction Differences
Internal reconstruction is a method of corporate restructuring where an arrangement is made by the company of the organization where in changes in the assets and liabilities are made to improve the financial position without liquidating the company or transferring the ownership to external party, whereas external reconstruction is the one where an existing company is liquidated and taken over by another newly formed company and the transfer of assets and liabilities takes place, and the same is considered similar to amalgamation.
Every 20 years Buddhist temples are reconstructed. The idea of reconstruction is to create something new that would serve the world better. The approach is similar when it comes down to internal and external reconstruction.
When businesses get started, they’re not perfect. The founders learn as they grow. As a result, it becomes important to sometimes reconstruct the existence of the businesses. Some completely change the idea of business and create a new one. Some prefer to stick to the old and reconstruct the internal processes.
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No matter what sort of reconstruction it is, it’s important to renovate, recreate, and reassume the business processes and visions as businesses grow.
Internal vs External Reconstruction Infographics
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Key Differences Between Internal and External Reconstruction
- Internal reconstruction needs a lot of time and statutory requirements to occur because in internal reconstruction the company has to take the permission of every stakeholder and also of the court. On the other hand, external reconstruction can be done immediately without any need for permission from the court.
- Both of these reconstructions ensure the change in financial structureFinancial StructureThe financial structure refers to the sources of capital and the proportion of financing that comes from short term liabilities, short term debt, long term debt, and equity to fund the company's long term and short term working capital requirements.read more. But since internal reconstruction doesn’t liquidate, things become difficult.
- In the case of internal reconstruction, the losses of the company can be set off against the future profit of the company. In the case, external reconstruction the losses of an old company can’t be set off against the profit of the new company.
- Internal reconstruction is done when there is a chance for the existing company to bounce back. External reconstruction is done to start the whole thing afresh.
- The accounting required for both internal reconstruction and external reconstruction are complex.
Comparative Table
| Basis for Comparison | Internal reconstruction | External reconstruction |
| 1. Inherent meaning | IR is a restructuring method that doesn’t create a new company via liquidation. | ER is a restructuring method that creates a new company via liquidation. |
| 2. Application | It is done to ensure an inner re-arrangement of financial structure. | It is done to form a new company. |
| 3. Approval of court | Required. | Not required. |
| 4. Existence | No new existence is formed. | A new company is formed. |
| 5. Liquidation | Liquidation isn’t done. | Liquidation is done. |
| 6. Process | Very slow, tedious, and takes a long time. | Quick and swift, doesn’t take much time. |
| 7. Losses against profits | It can set off past losses against future profits. | Since a new company is established losses of the old company can’t be set off against the profits of the new company. |
Conclusion
Internal and external reconstruction are both valid for the companies that want to reconsider their approach and future strategy. And both of these depend on the decision and the permission of the stakeholders involved in the whole process.
However, both of these processes are much complex than they are perceived. But if you want to start afresh and your stakeholders are with you, you can be better off by taking the path of external reconstruction since no permission is required from a court in the case of external reconstruction.
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