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Lankaputhra Bank chairman appointment unlawful: SC throws out his rights petition
View(s):In a judgment carrying wide-ranging implications for governance of state-owned enterprises (SOEs), the Supreme Court on Thursday dismissed a fundamental rights petition filed by K. Goonewardena, who challenged the Central Bank’s decision that effectively ended his tenure as Chairman and Director of Lankaputhra Development Bank Ltd. (LDBL).
The judgment highlighted not only a procedural flaw in the appointment but also drew attention to lapses in regulatory conduct, offering an important reminder of the standards expected of both regulators and state-owned financial institutions.
The Court dismissed the petition on the basis of an unlawful appointment, emphasising that regulators, like those they regulate, are obligated to act with diligence, procedural fairness, and respect for the limits of their statutory authority.
“The purported appointment of the petitioner as a director of the LDBL is seriously flawed in the eyes of the law and is therefore unlawful,” the judgment reads.
The Court also reaffirmed the importance of the “fit and proper” test as a safeguard for ensuring that individuals entrusted with the governance of financial institutions meet high standards of competence and integrity, qualities essential to maintaining confidence in the financial system.
Mr. Goonewardena, appointed to LDBL in February 2015, maintained that he had sought to reform the bank at a time when it was grappling with a legacy of mismanagement, politically influenced lending, and poor governance. He claimed to have uncovered irregular loans amounting to Rs. 1.7 billion, initiated audits, and reported suspected malpractice to law enforcement agencies.
However, in March 2016, the Director of Bank Supervision (DBS) of the Central Bank of Sri Lanka refused to certify him as a “fit and proper” person under Section 42(2) of the Banking Act, citing alleged breaches of confidentiality and violations of corporate governance requirements. This decision, later upheld by the Monetary Board, led to Mr. Goonewardena’s removal from office.
Represented by President’s Counsel Harsha Fernando, the petitioner argued before the Supreme Court that after the appointment had taken effect, the DBS lacked the authority to remove him from office, as such powers rested exclusively with the Monetary Board. Counsel also pointed out that the DBS had failed to comply with its statutory duty to determine “fit and proper” status within 30 days, as required under the Banking Act.
The petitioner’s counsel further contended that the alleged breaches of confidentiality and statements made during a press conference concerned information already in the public domain and were made to protect the bank’s reputation in response to public criticisms.
In the judgment, Justice Yasantha Kodagoda, PC, with Chief Justice Murdhu Fernando and Justice Gooneratne agreeing, acknowledged the DBS’s failure to act within the required statutory timeframe. The Court held that the terminology contained in the decision of DBS is “flagrantly ultra vires” the powers conferred on the 7th Respondent by the Banking Act and therefore carries no force in the eyes of the law. The Court also observed that regulatory decision-making must be conducted with fairness, transparency, and strict adherence to statutory duties, noting that delays undermine the integrity of the regulatory process.
The Court identified a more fundamental flaw: Petitioner’s appointment itself had not been lawfully made. The appointment in 2015 was effected by the Minister of Finance when, under LDBL’s Articles of Association and the Companies Act, the power to appoint directors and nominate the chairman resided solely with the Secretary to the Treasury, the sole shareholder of the bank.
This procedural defect, the Court held, rendered the appointment void from its very inception. Accordingly, he is prevented from invoking the protections or remedies afforded to directors of licensed banks under the Banking Act. The Court said that the required threshold of competence and integrity to be appointed as a Director of a Bank was very high, and the Public Trust doctrine, which would be applicable to the decision-making process of the Secretary to the Treasury, would also necessitate him to act not according to his or the Minister’s personal choice, but to make nominations/appointments in the best interests of the Nation and the public at large.
Harsha Fernando PC, with Chamith Senanayaka, Yohan Cooray, and Ruven Weerasinghe, appeared for the petitioner, and Deputy Solicitor General Rajive Gunatilaka appeared for the Monteray Board and the DBS.
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