Financial Times

Laws to govern not only golden and silver companies but also bronze companies

By Ruwani Dharmawardana

Most of the developed and developing countries in the world including Sri Lanka concentrate mainly on reinforcing the private sector as a key instrument of economic growth.

However, due to recent accounting scandals at the Golden Key Credit Card Company and subsequent adverse effects on its sister companies within Ceylinco Consolidated, Industrial Reformation Laws and Industrial Insolvency or Bankruptcy Laws to rehabilitate private sector companies have attained increasing importance and attention in Sri Lanka. Laws to rehabilitate companies should be in place as part of the process of reinforcing the private sector.

Basically a company could require rehabilitation for two reasons:Due to the management’s failure to control the situation or due to factors beyond the control of the management. Other reasons could be the unreported commercial activities and resultant tax evasions. Whatever the reason no ‘sick’company should be allowed to close down since more jobs would be lost and the general public would lose their trust in the private sector. In recent times the Sakvithi and the Golden key scandal are good examples of melt-downs in the financial sector. Rehabilitation laws can provide a breathing spell to the debtor who could commence negotiations with its creditors while proposing a reorganisation plan.

In Sri Lanka, the legal framework for corporation insolvency is provided under the Company Law, which deals with winding up of companies. Part XII of the Companies Act 2007, deals with the “winding up” procedure. Part IX of the Companies Act contains provisions in respect of powers to “compromise with creditors.” In addition, the government has in recent times come out with a spate of legislations to arm the lending institutions with enough powers to eventually realize their dues. The introductions of the Debt Recovery (Special Provisions) Act No. 02 of 1990, the Recovery of Loans by Banks (Special Provisions) Act No. 04 of 1990, (as amended by the Act, No.24 of 1995) are examples of recent developments.

However, in Sri Lanka there isn’t a single comprehensive and integrated policy on corporate bankruptcy comparable with Chapter 11 or Chapter 7 bankruptcy code in the USA (which is one of the best rehabilitation laws in the world) and comparable with Insolvency Ordinance of 2005, Nepal (which is one of the best Insolvency Ordinances from Asia).

In the US bankruptcy is governed by the federal law found in the Title 11 of the United States Code. There are four kinds of bankruptcy proceedings. The most regular form of bankruptcy is a liquidation proceeding, available to individuals, married couples, partnerships and corporations. However, there are several alternatives as well. Debtors who prefer to remain in business including corporations, partnerships, and sole proprietorships and avoid liquidation could consider filing a petition under chapter 11 of the Bankruptcy Code. Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a more comprehensive reorganization.

Therefore generally chapter 11 is used by commercial enterprises that desire to continue operating their businesses and repay creditors concurrently through a court-approved plan of reorganization. The examination of Rehabilitation Laws found outside of Sri Lanka clarifies the basic concerns in approaches to sick companies. Comprehensive and integrated policy on corporate bankruptcy can prevent the financial market being soiled by accounting scandals.

(The writer is the author of the book titled “Principles and Practice of Company Law in Sri Lanka, 2008)


 
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