This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
In England the term "reconstruction" is used to describe the process that we ordinarily call "reorganization." The English word is better chosen as it embodies the idea which underlies the whole process; that of tearing down the old financial structure and using the materials in a new and stronger structure.
Financial reorganization, in its proper sense, is not merely a series of compromises and forced sacrifices imposed upon security holders. It is a rearrangement of the company's liabilities so as to make them conform more closely to the assets and earnings. If it is worked out on ideal lines the reorganization may be described as a new financial plan which replaces the old plan that has proved faulty. The readjustment of the company's finances should enable it to proceed thereafter under more favorable conditions and to achieve better results.
In each reorganization there are one or two specific purposes that stand out with especial prominence. The specific purposes that are most commonly found are the following:
To raise more capital. To reduce fixed charges. To simplify the financial structure. To give increased facilities for raising capital in future. To eliminate unprofitable branches of the business. To pay or "refund" pressing obligations. To take care of an accumulation of unpaid preferred dividends.
The final plan of reorganization must be approved by a sufficient number of security holders and must also have the approval of the court. The relative influence of the security holders, on one side, and of the judge and receiver, on the other side, varies greatly in determining the plan of reorganization; and it is probable that in complicated reorganizations, especially those of railroads, it is more often necessary for the courts to intervene and take an active part in formulating a plan than it is in the simpler cases of reorganization, particularly of industrial corporations.