Financial Times

Doing away with the par value of shares is a novel feature of the proposed Companies Act. The reason: Par value is historic, given the fluctuations of the currency and market values that resemble reality.

However, this is bound to add confusion to many who will wonder what the share certificate will actually state, among other things, so tuning the mind set to these changes is inevitable.

Another novel feature in the proposed act is the abolition of the ultra vires concept. For example, a business now engaged in condominium construction, realises that the market is reaching saturation point, may decide to seek ventures in, say, oil exploration; when under the present law such diversions are not easy; where special general meetings are required to obtain approval, which are time consuming and cumbersome.

The proposed act does provide for total liberation of object clauses that will facilitate the business process, however, the proposed law through the “concept of major transition and shifts of direction” will also provide relief to shareholders who do not want to go along with such diversionary ventures. Such people will be provided with the right to exit through a minority buy out. Disagreed shareholders, thus, could say good-bye with a compensation package.

Presidents Counsel K. Kanag-Isvaran, who is also the Chairman of the Advisory Commission on Company Law, made these observations at a seminar on “The Proposed New Companies Act” presented by the Institute of Chartered Accountants of Sri Lanka.

He went on to say that minority rights have been strengthened in the new act through a “Wrong Doer Control” mechanism where if it is found out that the Board of Directors is causing harm to the company, shareholders could sue them on behalf of the company’s best interest to prevent permanent damage.
However, shareholders will be entitled to exercise this right only with prior leave of the court. Another striking feature stressed by the Mr. Kanag-Isvaran was the formalisation of the right to seek advise of specialists, as well as informational advice, and the providers of such advice too could be sued if they are found negligent.

Colonial ties and history of Company legislation

Dr. Harsha Cabral, a member of the Advisory Commission on Company Law, traced the history of the present Companies Act no. 17 of 1982, based on English legislation of 1948, lamenting that “we are 58 years behind time and that Sri Lanka’s corporate law is predominantly structured on the English model, from 1796 to 1947, embracing English law blindly”. However, Dr Cabral said that with the development of other jurisdictions on Corporate Laws, Sri Lanka too had initiated moves in the n1990s to amend and modify its Corporate Laws in line with developed jurisdictions.

The present draft goes back almost 10 years when the Government appointed a Law Reform Committee that initially presented a draft in 1995 with assistance from David Goddard, a New Zealand legal expert, who had experience helping to put together the New Zealand Company legislation of 1993.

In 2003/4, the trend was changed when then the government initiated action to base the revisions on English Law, then back again during the regime of the present government. Status quo was restored to the original draft, and the draft act was presented to Cabinet in October 2005. It is hoped that the new legislation will come into effect during the second half of this year, giving a modern outlook to the outdated Company Law machinery.

Dr. Cabral welcomed the establishment of a companies’ Disputes Board to cut down on time and costs connected with such disputes, where the board would function as a mediator and aim to find an acceptable solution. Other features of the draft act include the facilitation of computers for data storage and the modernisation of the Company Registry. Dr. Cabral complimented several key members of the ICASL who have served on the Company Law Advisory Committee for their valuable contribution.

Impact on Financials

Attorney-at-Law and Chartered Accountant Naomal Goonewardena, while making a presentation on the financial aspects of the new act, elaborating on the abolition of par/nominal value of shares, explained that the total amount raised from the shareholders would henceforth be referred to as the company’s stated capital, which will be the combination of the current share capital and the share premium.

Consideration on the issue of shares has to be the responsibility of the company, quoting local examples that some companies enjoy a market price of Rs 70 but has issued rights at Rs 10, which offers benefits to the shareholder but not the company.

The new act provides for solvency tests prior to payments of dividends, reduction of stated capital, redemption by a company of its shares, purchase of own shares, and so on.

In determining solvency, the Board should take in to account the latest financial statements, which might affect the company’s assets and liabilities, a fair valuation or other methods of assessing the value of such assets and liabilities. The proposed changes also impose responsibility on the chief financial officers/accountants on the preparation of accounts, a departure from the present requirement of the onus being on only two directors.

In recent times Sri Lanka has been progressively modernising the business-legal environment with amendments to the Banking Act, Securities & Exchange Commission Act and enactments of Arbitration Act, Anti-Money Laundering Act, Electronic Legislation Act etc, and with the expected enactment of the new Companies Act, the business environment will be further enhanced.

It is also heartening to note that the World Bank funded the legal and judicial project, and it enhanced the Commercial High Court’s resources to meet the increasing demands of the business sector.