Directors’ role clearly defined in new Companies Act

By Sunil Karunanayake
After nearly decade and a half of deliberations Sri Lanka has managed to replace its company legislation which was nearly half a century behind time with a new piece of legislation that could be called simple as well as modern. In Sri Lanka though there’s a large number of companies registered as limited liability companies, listed companies are relatively few and most limited liability companies operate as private companies often keeping the business close to the families.

As a matter of fact Sri Lanka’s leading tea exporters as well as garment manufacturers/exporters operate as family controlled private companies. Rigidity and costs of the outdated legislations did not provide a conducive environment to motivate companies to go public and hence they preferred to keep their identities and control to themselves.

Addressing a packed audience of the private sector at the Ceylon Chamber of Commerce, K Kanag-Iswaran PC, who has been actively involved in the company law reform in Sri Lanka, said that company law is central to the country’s prosperity. It is important therefore that it is up to date and able to meet the needs of a modern dynamic economy.

Incorporation transfers the ultimate risk of business failure to the creditors which means that the liability of the investors is limited. A shareholder may lose the stake invested, but other assets are not at risk. Without this protection very many projects with the positive net present value would never be undertaken.

Limited liability also makes the diversification of investments rational and enables an investor to spread risk among a number of enterprises of varying risk profiles.The risk of course does not disappear, but the technique of allocating it across the different groups of stakeholders and consequently across the community, eventually makes the taking of business risks beneficial to the community.

Stressing on the range of revolutionary changes that will come along with the new act, he added that all change no doubt has its costs, and they fall in some measure on professionals who have built up an intellectual capital under the old regime, and need to understand the changed rules. But this is transitional cost only, and a clear well drafted law should minimize it.

For the business community, long term reduction of costs and uncertainties in the law will bring real benefits which outweigh the transitional costs. In winding up Kanag-Iswaran added that when abuse of power arises, even in the most extreme laissez-faire regimes ‘we’ cannot permit directors and majority shareholders expropriating corporate assets or riding rough shod over minorities or acting without proper regard to legitimate claims and expectations of creditors.
Salient features of the new act comprising 534 sections with 13 schedules are:

Dr Harsha Cabral, another specialist on this topic, speaking on “Directors Duties” said that directors duties are being catalogued in a statutory form for the first time in Sri Lanka in the new act. Hitherto the duties had to be ascertained from common law in the absence of express provisions.

The new act provides for a Directors’ Charter of duties and responsibilities and also provides for directors to rely on information and advice from experts to enable them to act in good faith. A perfect balance is achieved by the new provisions of the act wherein the directors know exactly what the perimeters are, how to protect themselves and what is expected of them when they are on the Board.

As illustrated by Chartered Accountant Deva Rodrigo former senior partner of the PWC a major responsibility falls on the accounting profession on the issues arising from some of the key provisions like solvency test which will determine a company’s debt playing ability, abolition of the par value/stated capital, purchase of own shares, serious loss of capital etc. Additionally AGM’s will now have to be held within six months from the Balance sheet date which will put pressure on the Audits. On the brighter side incorporation is made simpler and there are concessions for private companies not to hold AGM’s.