Buy-Back of Shares
New Advisory Commission
New Company Disputes Board
Tougher Penalties

Businesses in Sri Lanka anticipate the enactment of a new Company Act.

The draft act incorporates certain aspects of modern company law that are conspicuously absent from the existing legislation. Among other things, it includes provisions allowing companies to purchase their own shares and takes into account the need to toughen penalties for offenders who flout the law.

In addition to the provisions discussed in this update the draft also incorporates provisions to clarify the positions of directors and shareholders regarding a company's articles of association. The draft includes a section defining the effect of the articles of association as that of a binding contract between the company and its shareholders.

Significant changes in the draft Companies Act include the following:

  • provision for companies to buy back their own shares;

  • creation of an advisory commission;

  • creation of a Company Disputes Board; and

  • tougher penalties for offenders that break the law.

Buy-Back of Shares

The provisions in the draft act dealing with buy-back of shares will bring local company law into line with modern developments. According to the draft's provisions a company can:

  • buy back its shares by providing for this in its articles of association;

  • buy back redeemable shares; and

  • offer financial assistance to potential shareholders for the acquisition of its shares.

However, the buy-back of shares must be accompanied by a board resolution according to the terms laid down by the new draft, which are that the acquisition is in the company's interests and is in no way prejudicial to the rights of the existing shareholders.

New Advisory Commission

The draft act allows the minister in charge to create an advisory commission to provide recommendations and reports on company law. However, the draft act does not make it mandatory to follow the recommendations of parties such as trade chambers, professional organizations and the public.

It is anticipated that the advisory commission proposed by the draft act will actually be created and not remain confined to paper, as has happened under the present act.

New Company Disputes Board

The draft act incorporates provisions for establishing a Company Disputes Board that will settle disputes by mediation upon reference by parties or by a court in the case of a litigated matter. Where parties reach a settlement in a case that has been referred by a court this will have the same force and effect as a court judgment.

Commercial arbitration in Sri Lanka has been criticized for having evolved into a 'parallel judicial system' that has become expensive and procedure bound. The draft attempts to establish a framework for a faster and cheaper option for those who seek alternative dispute settlement mechanisms.

Tougher Penalties

If passed the draft act will impose harsher penalties than its predecessor on anyone who violates its provisions. For example, the penalty for committing fraud or making false representations (ie, to obtain goods on credit or come to any arrangement with creditors) for an officer of a company in the 12 months before winding up is a fine of SLRs1 million and/or five years' imprisonment; the current act makes no provision for a fine.

For further information on this topic please contact Simon Senaratna at Simon & Associates by telephone (+94 1 38 19 06) or by fax (+94 1 38 19 07) or by email ([email protected]).