In this article we will discuss about re-organisation of capital through surrender of shares, explained with the help of a suitable illustration.
Under this method, shares are sub-divided into shares of smaller denominations and shareholders are made to surrender a part of them to facilitate capital re-organisation. Such surrendered shares are usually utilised to reduce or extinguish debenture and trade liabilities. The amount of shares surrendered not re-issued, and the claim foregone by debenture-holders and creditors are transferred to capital re-organisation account, which will be utilised to write off losses, fictitious account etc.
The Balance Sheet of M/s. Raman Ltd. as at 31st December, 2006 as follows:
The fixed assets are heavily overvalued. A scheme of re-organisation was prepared and passed.
The salient points of the scheme are the following:
(1) Each share shall be subdivided into ten fully paid equity shares of Rs 10 each.
(2) After such subdivision, each shareholder shall surrender to the Company 90% of his holding, for the purpose of re-issue to debenture holders and creditors so far as required, and otherwise for cancellation.
(3) Of those surrendered 50,000 equity shares of Rs 10 each shall be converted into 8% preference share of Rs 10 each fully paid for debenture holders.
(4) The debenture holders’ total claim shall be reduced to Rs 5, 00,000. This will be satisfied by the issue of 50,000 preference shares of Rs 10 each, fully paid.
(5) The claim of sundry creditors shall be reduced by 80% and the balance shall be satisfied by allotting them equity shares of Rs 10 each, fully paid from the shares surrendered.
(6) Shares surrendered and not re-issued shall be cancelled.
Assuming that the scheme is fully approved by all parties interested and by the court, draft necessary Journal Entries and Balance Sheet of the Company after the scheme has been carried into effect.