Closing Shop, Legally

By Sharon Arnolda | Published: 2:00 AM Sep 11 2021
Echo Closing Shop, Legally

By Sharon Arnolda 

The sixth webinar of the SL Law Review series hosted by American Chamber of Commerce in Sri Lanka (AMCHAM) focused on 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. The discussion was enlightened by professionals namely; President’s Counsel Dr. Harsha Cabral, President’s Counsel Kushan D’Alwis, Legal Counsel and Attorney-at-Law Vasanthakumar Niles, and was moderated by Attorneyat-Law Gayathri Gunawardhana. 

The previous article explored the comments made by Dr. Cabral on the matter in which he paid attention to the winding up procedure laid out in the Companies Act in addition to further commenting on what the system lacks and where it could be improved. D’Alwis was presented with the task of sharing the practical aspects of winding up and the situation with regard to the same in the light of the current pandemic. In commenting he stated that there has not been a significant increase in the number of Banks and other financial institutions resorting to legal action in respect of recoveries due to the availability of COVID-19 Moratorium and other concessions/directions given by the Government. 

In advising companies that are considering winding up; D’Alwis stated that companies should first look into all the remedies available to them prior to instigating winding up proceedings. He also mentioned that companies should also look into other ways of refinancing their entity through investors and shareholders. In sharing his thoughts about the approach that should be taken by banks and financial institutions in the light of the situation D’Alwis pointed out the following; The relationship between banks and customers have evolved beyond its traditional relationship of giving loans, with banks offering services other than financial help such as business advice and other concessions/services and operations of all magnitudes. 

In some instances banks try to match their customers, connecting customers and forming mutually beneficial relationships with all parties. The banks should ideally not rush into legal actions and parate executions once the moratoriums are no longer in effect and such remedies should only be sought after as a final resort. It’s crucial for banks to take an approach that ensures that their loyal customers are supported and sustained and should take into consideration the track record, effect of pandemic on the companies’ finances before instigating action. 

In a practical situation, the most beneficial situation for the bank would be to work with the companies and help them come out of their distress. “Even if they go for parate actions and sell the immovable and movable assets the current market is such that the bank will end up having to buy it, hardly serving any useful purpose,” he added. While banks have the interests of other parties to uphold, they should ideally take a supportive and proactive role in supporting companies out of the situation which will in turn be beneficial to the bank as well. 

Niles was asked to shed light on the alternative options to winding up and the way in which these procedures are backed-up by the law in the country. In his opening comments Niles stated that, “The other side of the coin is the survival of the companies,” even though the law in the country does not have a clear cut procedure laid out for financial and other restructuring of a company, the Companies Act provides for some practical roots for survival which give companies some breathing space. “All these options require a close corporation between the company and its shareholders, which is crucial, in the absence of such cooperation between the parties, many of these attempts would fail.” In elaborating on the existing options, Niles added; 

Takeovers and mergers; a procedure provided for by the Act and also the Take-Over Code which requires the equal and fair treatment of shareholders and also ensures their right to information. 

Amalgamations; an amalgamated company can be a continuation of one of the existing companies or form a completely new entity entirely. The procedure requires approval by the Board and that the company satisfies the solvency test, the Act further requires that the procedure should be approved by the shareholders and notice be given to creditors. 

Arrangements; A company can enter into an agreement in which they make negotiations with their creditors and shareholders to restructure their affairs. Such an agreement can be enforced in court to give it a more binding effect, he added. 

Compromises; the Act enables the company and its creditors to enter into a binding agreement without the Courts involvement. A compromise requires a mutually beneficial give and take between the parties, he added. This relatively less procedural method requires the approval of the creditors following which the company is bound by such compromise. 

Appointment of administrator; a very powerful process which ensures that the company cannot go ahead with its functions without the approval of the court, the power given to the administrator provides room for negotiation, compromise and gives the company an overall chance for survival. 

Is the procedure for winding up the same for financial companies and institutions? 

The procedure laid down applies to all companies registered under the Act. However, finance companies that are registered with the Central Bank have certain rules and regulations to be followed under the said institutions. 

What is the effect on banks and financial institutions with the proposed COVID-19 Bill which provides remedies for borrowers? 

While the Bill will have an impact, which will delay the procedure of recovering funds but does not necessarily have a negative impact on the creditors. Banks should be more proactive in helping the companies and both parties should aim to cut their losses and come to a mutually beneficial understanding. 

What is the difference between administrators and liquidators? 

Liquidator’s job is to take care of the closing procedure of a company while administrators play an active role in the liquidation process of a company. An administrator has the power to act on behalf of the company to enter into negotiations and aim at reviving the company. 

Can a company recover from insolvency due to the prevailing situation and what are the steps? 

According to the Act if a company is in an insolvent situation, the board has to make a serious call and inform the shareholders of the prevailing situation. Any progress should be made with the knowledge and cooperation of the shareholders; failure to do so may result in civil or criminal liabilities against the directors. 

When a company has a primary mortgage with Bank A, and a secondary with B, in the event of the company winding up with court, can bank A and B execute parte actions, and if bank A gets the certificate of sale how will bank B recover? 

Parate is unaffected by the winding up procedure since they are secured creditors. The two mortgages would be considered as primary mortgage and a secondary mortgage. In the event of a parate execution any remainder after funds are recovered by bank A will be given to bank B. 

If a foreign buyer doesn't pay, what remedies are available to the Sri Lankan company? 

Remedies will be available as per the contract between the parties. 

In the event of serious loss of capital can the company propose voluntary winding up? 

If they can come up with a formula to settle all their debts they can instigate the process of winding up. 

Can a party intertwine in a winding up procedure before publication of notice? 

Yes. 

What happens when a credit card bill is not settled? 

The bank can sue under the breach of contract, since a contract exists between the bank and its customer.

By Sharon Arnolda | Published: 2:00 AM Sep 11 2021

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