ISSN: 1391 - 0531
Sunday, July 08, 2007
Vol. 42 - No 06
Financial Times  

Hotels seen delisting over solvency issue

By Duruthu Edirimuni

Some hotels are contemplating to delist from the Colombo Stock Exchange (CSE), as they cannot meet the solvency test stipulated by the new Companies’ Act and many want the government to give some relief in order to avoid being driven to bankruptcy.

The solvency test introduced in the new law deals with the solvency of a company, where it requires the Board of a company to satisfy the solvency test and to obtain a certificate of solvency from the auditors before any dividend distribution is made.

A company shall be deemed to have satisfied the solvency test, if it is able to pay its debts as they become due in the normal course of business; and the value of the company's assets is greater than the value of its liabilities and the company's stated capital. However, this system may create problems for the hotel industry as they may be liable to undergo winding up proceedings as most of the hotels are now running with more liabilities than their assets, according to industry analysts.

Nimal Perera, Managing Director, Fortress Hotel and Director Finance, Amaya Hotels and Resorts told The Sunday Times FT that there is a delisting risk with such a law and the hotels may also close in the medium term. “Eighty percent of the hotels in the country will not qualify for a solvency test. People will ‘run away’ from business and there is a huge delisting risk that CSE will face by the hotel companies,” he said.

Many proponents of the rule say that this system would ensure the stability of a company and that the Contd. on page12

creditors are also protected to a greater extent. However, Perera along with other hoteliers reiterated that such a regulation is good only for developed nations and not for a developing country like Sri Lanka. “We cannot service the loans, because the government is not helping us, which will automatically send these hotels to the Credit Information Bureau (CRIB) (or as bad debtors),” he said.

Perera said that Amaya will not invest in the future in hotels. “We are looking to sell the land we have at Wadduwa,” he said. Industry analysts said that the worsening security situation and negative travel advisories provided by many countries has affected occupancy rates of beach hotels to below 40 percent.

Professor T. Furkhan, Chairman Confifi Hotels said presently the company is studying the Act. “We have to address the issue. Because this is a good governance requirement and we are also looking at improving the liquidity, but for the last 24 years, we have been going through a bad drill,” he said. Confifi, which has Eden hotel, Riverina Hotel and Club Palm Garden listed in the CSE is looking at speaking to the government for redress, after studying both the dividend payment and solvency test issues in totality.

A corporate lawyer said that with the new law directors of hotels will have to decide whether the company should be liquidated or not. “The directors are personally held liable and they will have to take responsibility,” he said.

Anura Lokuhetty, CEO, Ceylon Hotels Corporation (CHC) and CEO, Galle Face Hotel Management Company said that in such a backdrop, the solvency test will apply the ‘brakes’ in the hotels sector. “The change to the Act was required and now it will encourage the investors because it cuts long procedures and waste of time. However, Sri Lanka’s economy had had a very bumpy ride over the last few years and business was compelled to take risks. This level of risk has gone beyond control, but on the other hand if all the hotels did not take these risks, and refurbish or build hotels, the hotels’ sector would have been on a bad wicket,” he said.

He noted that the solvency test is welcomed in developed countries, but for Sri Lanka it is not the right time. CHC, a listed company has 21 properties around the country.



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Copyright 2007 Wijeya Newspapers Ltd.Colombo. Sri Lanka.