Transparency International Sri Lanka (TISL) is calling on the government to reformulate certain provisions in the Companies Act No. 7 of 2007 and has this recommendation in a position paper released this week following an analysis on the failure of a large number of companies to re-register under the Act.
In a press release, TISL said it believes there is ample reason to suggest a hidden agenda behind the questionable inclusion of Section 487 of the Act which aims to remove defunct companies from the register. TISL added that Section 487 was founded on the premise that there were adequate safeguards for stakeholders but TISL is arguing that there is potential for misuse of this transitional provision by errant directors and shareholders. The lacuna in the law may be used in order to escape liability to stakeholders by simple non re-registration of the companies, the press release stated.
According to TISL's position paper, since the Act was passed in October 2006, the Registrar has received 24,623 applications for re-registration and has processed 22,300. Re-registration was completed and certificates issued for 14,900 companies. Out of these, the large majority was private companies (13,409), the balance being public companies (950), public quoted companies (208) and others (333). Thus out of the 66,496 registered companies under the Acts enacted prior to the 2007 Act, only 37% have sought to re-register in terms of the provisions of Section 487. Furthermore, only 208 quoted companies have sought re-registration while the Colombo Stock Exchange (CSE) has 235 companies in its list of quoted companies.
TISL states that these statistics prove that 63% of all companies entitled to re-register under Section 487 have failed to do so. This may be due to lack of awareness, dormant and non-operational companies seeking a simple method of winding up or willful actions of directors and officers in avoiding re-registration.
TISL's analysis of Section 487 is based on 30 interviews conducted in June 2009 with leaders of business, lawyers, bankers, journalists, members of regulatory authorities, professionals, chambers and good governance civil society leaders as well as desk research. According to interviewees, the major loophole in Section 487 was its provision for the process of striking companies off the registry. When an entity is stuck off the Companies Register, it automatically extinguishes the legal status of the company. Consequently, TISL stated that Section 487 appears, prima facie, to be in conflict with the underlying principles of the Act which is to ensure the survival and continuity of a corporate entity as opposed to securing its demise.
TISL stated that many of the stakeholders likely to be impacted have no recourse through the Companies Act to prevent errant business persons and directors of companies from misusing the section to defraud. Nor are they able to take remedial measures if they have been unjustly defrauded. However, a minority of those interviewed felt that this section was created with sufficient safeguards in place to prevent misuse.
Interviews also revealed that Section 487 leaves significant opportunities for errant directors and controlling shareholders to avoid and evade liabilities and penal sanctions; due to the fact that when a company is struck off the register it ceases to be a legal entity and therefore action cannot be brought against it thereafter. The paper stated that it appears fraudulent entities can deliberately non-register in order to escape financial liabilities, legal obligations, potential investigation and consequential penal sanction.
TISL stated that it believes urgent action is needed to prevent misuse of Section 487. The state, Registrar of Companies, regulatory bodies as well as the private sector and civil society should work together to reformulate the law and ensure proper law enforcement. |
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