Closing Shop, Legally
BY SHARON ARNOLDA
The fifth webinar of the SL Law Review series hosted by the American Chamber of Commerce in Sri Lanka (AMCHAM) focused on one of the most timely topics when it comes to the state of businesses in the light of the pandemic; insolvency, liquidation and winding up procedures that need to be followed by companies and how such procedures have been affected due to the current situation. As always the discussion was enlightened by an experienced, hand-picked set of professionals namely; President’s Counsel Dr. Harsha Cabral, President’s Counsel Kushan D’Alwis, and Legal Counsel and Attorney-atLaw Vasanthakumar Niles, whilst being moderated by Attorney-at-Law Gayanthi Gunawardhana.
The discussion was opened by Dr. Cabral, who enlightened the audience on the existing laws in relation to insolvency, liquidation and winding up in the country. “The legal existence of a person is commemorated by the Birth and Death Certificate, respectively. Similarly, the birth of a company is when it is registered at the registrar of companies and obtains a certificate of incorporation, and its death is marked when a company name is struck off the Registrar following the winding up process.” In getting to the current Act, namely the Companies Act 07 of 2007, Dr. Cabral shed a brief light on how the legislation in relation to corporates has evolved since the Joint Stock Companies Act of 1861. The Act was followed by the 1938 Ordinance and Act No. 17 of 1982 prior to the current Act.
He further added that the law in relation to winding up stands to be the same stereotypical law included in the Act of 1982, and that even though discussions were initiated with regard to separating the ‘winding up’ process and drafting separate legislation that deals with it similar to the legal system of the UK, such discussions became a moot point because it required significant legal reform. He also added that other than changes to the minimum amount payable, the law has remained pretty much the same in regard to the winding up procedure for companies. He also pointed out that there is an error in translation in the amounts as per the English and Sinhala Acts, with each stating that the minimum amount is Rs 50,000 and Rs 5,000 respectively, but that courts have accepted the amount to be Rs 50,000. Part 12 (Sections 226-399) therefore, sets out an archaic and stereotypical winding up procedure for companies. According to which companies can be wound up in three ways, namely; through courts, through the supervision of the courts or voluntarily.
What's the procedure for winding up?
The procedure for winding up is laid out in the ‘winding up rules’ which have pretty much remained the same, Dr. Cabral added. A petition supported by an Affidavit and three dates – a date for the matter to be looked into, a date for the inquiry where direction would be given for the publication of gazettes and notices, and a third date on which the publication of such will be looked into – are given. “All matters are private until the notices and gazettes are published, at this point any creditor can come to courts and make demands from and against the entity that is being wound up,” he added.
The role of the liquidator
When a company is going through the process of winding up, and once the plaint has been accepted by a court, a ‘provisional liquidator’ whose role will eventually become permanent, is appointed by the courts to ensure that the process happens accordingly. “It's similar to the job of an undertaker,” Dr. Cabral added. Once appointed the liquidator handles all matters pertaining to the functioning/ winding down of the company. A court appointed liquidator will therefore assess all the assets and liabilities in addition to preparing other court ordered due diligence documents on the company which need to be presented to courts.
Once this assessment is made creditors are settled giving priority in the following manner; statutory debts, secured creditors, and unsecured creditors. Dr. Cabral also went on to point out that given the time taken for the procedure to be completed and according to the manner in which preference is given, unsecured creditors often go unsettled. He further added that in the event there is a deficit in the money owed once the assets have been monetised, shareholders are liable to make such payments on behalf of the company in some instances. “Often the shareholders don’t have the money to pay the creditors,'' he added.
What does the system lack?
Dr. Cabral expressed his concerns that the Companies Act in the country only provides for winding up procedures and not for any procedure that could be followed to ‘restructure’ companies following financial hardship. He added that restructure in this instance would mean the ability to cut down on employment, operations and so forth in a manner that would allow the company to function with limited funding. However, he added that the Act through Section 13 elects a court appointed administrator to recover money, and similar to the role of the liquidator a court appointed administrator will take over the control and functioning of the company, which means the board of directors have no control over the functioning of the company after the said point. Part 08 of the Act provides for amalgamation of companies, part 09 provides for compromise procedures that can be followed with creditors, and Section 10 provides for the procedure for the arrangement of amalgamations and compromises by court.
Parate executions and other remedies available to banks and financial institutions
In commenting on the situation brought about by the current pandemic in which many organisations are facing financial difficulty, Dr. Cabral stated that it's important for banks and other financial institutions to think of the situation of the client. He added that before resorting to remedies such as parate executions such institutions should consider working on a plan or giving clients more time to make repayments based on facts such as the client’s credit score and the manner in which dealings have been done prior to the pandemic. He further went on to state that parate executions and such harsh methods of money recovery should ideally be sought as a last resort provided that all other means of recovery prove to be ineffective.
To be continued…