Colonial Ties
New Companies Act
Investment Law
Other Relevant Developments

Colonial Ties

Sri Lanka has a plural legal system, being comprised of English and Roman Dutch law, some of which has been modified by national legislation. The Ordinance of 1847, for example, made the whole of English commercial law the law of the land in Sri Lanka.

Although Sri Lanka developed its own commercial law after severing its colonial ties with England, it has consistently drawn on English legal principles, and to a lesser extent, Roman Dutch legal principles. For example, while the substantive laws relating to the sale of goods, corporations, partnerships, agency, carriage of goods by sea and bills of exchange have been heavily influenced by English law, substantial areas of contract law (eg, sale of land) remain for the most part governed by Roman Dutch law.

Sri Lanka's procedural law also continues to be influenced by both English and Roman Dutch law. In fire and life insurance cases, for example, the action for recovery may be filed in the jurisdiction where the creditor resides - an English procedural maxim that the debtor must seek out the creditor. A case involving accident insurance is governed by Roman Dutch law, and so the creditor must seek out the debtor.

New Companies Act

Commercial law is one of the most dynamic areas of law in Sri Lanka as successive governments have focussed on developing a legal framework that would optimize economic growth with increased domestic and foreign investment. This area of law is expected to continue to develop quickly as proposed legislation is enacted by the new Parliament.

The Companies Act 17 of 1982 has not kept up with international legal trends and, as such, does not adequately encourage the incorporation of companies, nor entrepreneurial activity in general. In order to encourage economic growth, the government has drafted a new act that will make a number of sweeping reforms, including:

  • Incorporation procedures will be simplified allowing anyone, without professional assistance, to incorporate a company by filing a single form.

  • The need for a memorandum of association will be eliminated and thus companies will not be limited to the activities in their objects clause.

  • Three classes of companies will be recognized (ie, limited companies, unlimited companies and companies limited by guarantee) and it will no longer be required for a public limited liability company to have at least seven shareholders.

  • The incorporation of companies with a single shareholder will be permitted so long as (i) the shareholder is a body corporate or (ii) if a natural person is the only shareholder, that person appoints a body corporate as his/her nominee.

  • The issue of no-par value shares will be allowed in order to provide a more accurate picture of a company's net assets and credit worthiness and thereby enable unsophisticated investors to confidently make sound investments.

For a thorough discussion of the new Companies Act see Amended Act Alters Corporate Landscape.

Investment Law

Foreign investment is governed by the Board of Investment's Act 4 of 1978 (as amended) and the regulations promulgated thereunder.

The function of the Board of Investment is to facilitate investment, as well as to be the central point of contact for investors. It therefore provides guidance on environmental management and labour relations. If an enterprise meets certain qualifying criteria, the board is empowered to provide certain exchange control and tax incentives, as well as locate that enterprise in a free trade zone. Depending on the nature of the industry, incentives can include a tax holiday of up to 20 years and complete exemption from import duty and exchange controls.

Every enterprise that is approved, must enter into an investment protection agreement with the board, providing the following:

  • protection against nationalization under normal circumstances;

  • prompt and adequate compensation if nationalization is required;

  • free remittance of earnings and capital; and

  • the settlement of disputes under the International Convention for the Settlement of Investment Disputes.

Article 157 of the Constitution guarantees that the terms of an investment protection agreement will be honoured for the life of the enterprise and will therefore remain impervious to changes in government. Such agreements are valid for an initial period of 10 years and, if they are not terminated, they are automatically renewed for further periods of 10 years. If an agreement is terminated, any investments that were made by the enterprise remain valid for 10 years.

Sri Lanka has signed bilateral investment protection treaties with a number of countries such as Germany, Korea, Singapore, the United Kingdom and the United States.

Other Relevant Developments

A number of key legislative developments have had an impact on commercial activity in Sri Lanka, include the following.

Dispute resolution
Arbitration Act 11 of 1995 implemented the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. However, although arbitration is now a popular mechanism to resolve commercial disputes, arbitration proceedings have become increasingly formal, almost duplicating court proceedings. In response to this the government passed the Commercial Mediation Act in 2000, in a bid to make mediation a more informal forum to settle commercial disputes.

Corporate tax
The ongoing civil conflict has necessitated a national security tax (at the rate of 5.5%) on goods and services in addition to the 12.5% goods and services tax. To encourage foreign investment, Sri Lanka has become a signatory to several bilateral agreements for the avoidance of double taxation.

Intellectual property
Sri Lanka is a signatory of the agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) and amended national law in 2000 to meet most of its international obligations. For example, Act 40 of 2000 gives authors of computer programs copyright protection. Local law, however, is not wholly compliant with TRIPS. For example, the rights of broadcasting organizations have yet to be recognized.

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 e-mail ([email protected]).

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