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Shareholder files derivative action against NDB, Ernst & Young
View(s):By Namini Wijedasa
A shareholder of National Development Bank (NDB) this week filed a derivative action in the Commercial High Court of the Western Province against the leadership of the bank and its external auditors, Ernst & Young, following the internal fraud that resulted in a loss of approximately Rs 13.2 billion.
M Thiyagarajah alleges that the bank’s board of directors and auditors were grossly negligent in failing to respond to early warning signs or detect highly irregular financial escalations. Consequently, the petitioner is requesting that the court remove the current board, appoint independent forensic investigators, and compel the respondents to repay the lost funds.
A derivative action is a lawsuit filed by a shareholder or member on behalf of a corporation or LLC, rather than for themselves, to address wrongs committed against the company. It allows shareholders to sue directors, officers, or third parties who have harmed the company, usually when the board of directors has failed or refused to take action.
The petition outlines several specific allegations of reckless dereliction of duty and gross negligence against the 1st to 10th respondents, who comprise the board of directors. The primary allegations include failure of internal controls, whereby the board allegedly failed to establish and enforce an effective internal control environment within the Common Electronic Fund Transfer Switch (CEFTS) settlements unit.
It states the directors allowed an individual to remain in a sensitive settlement role for at least 21 months without adequate staff rotation, dual authorisation, or supervisory oversight; and also tolerated a system-access culture that allowed login credentials to be shared or misappropriated, defeating the essential control of segregation of duties.
The petition alleges the board, through its Board Audit Committee (BAC) and Board Integrated Risk Management Committee (BIRMC), “failed to detect, assess, or respond to an abnormal escalation of the CEFTS Inward Suspense Account balance”.
This balance escalated approximately 8-fold (from about Rs 1.42 billion to Rs 12.22 billion) between December 2023 and December 2025, yet the Board approved and published the FY 2025 audited financial statements without inquiring into this “manifestly inflated” CEFTS Receivables balance or ordering a forensic review.
The board also allegedly permitted the bank’s anti-money laundering systems to be “configured or operated in a manner which allowed the sustained structuring of fraudulent transactions below the automated monitoring threshold”.
In November 2025, a separate fraud of approximately Rs 290 million was discovered, the petition claims, leading to the remand of 5 suspects, including the bank’s General Manager of Information Technology. However, the board failed to treat this “as a serious warning signal, and in failing to institute an immediate bank-wide forensic review of system access controls upon the said earlier incident”.
The board allegedly failed to make timely and accurate disclosures to the Colombo Stock Exchange (CSE); and the initial disclosure on April 2, 2026, understated the actual Rs 13.2 billion loss by a factor of approximately 35-fold, the petition continues.
The directors declared a cash dividend for shareholders and then “abruptly” suspended it on April 6, 2026, “in circumstances where the said Directors knew or ought to have known of the fraud or of material risks to the financial integrity” of the bank.
The petitioner therefore seeks the court’s permission to bring derivative proceedings in the bank’s name to recover losses, ensure an independent investigation, and obtain appropriate corrective and protective orders in relation to the bank’s management and governance.
Faiszer Musthapha, PC, with attorneys-at-law Shaheeda Barrie, Dayasiri Jayasekara, Shivan Cooray, Thishya Weragoda, Tharaka Nanayakkara, Mehran Careem, Niranjan Arulpragasam, Vinura Kularatne, Nimantha Chandrasena, and Dithya Senaratne appeared for the petitioner, M Thiyagarajah.
Ali Sabry, PC, appeared for the auditor. K Kanag-Isvaran, PC, appeared for NDB and Romesh De Silva, PC, for the directors of NDB.
The court heard the matter on Friday. It is fixed for order on June 13.
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