Corporate Collapses and Insolvency Regimes -The Sri Lankan Experience

Corporate Collapses and Insolvency Regimes -The Sri Lankan Experience

The law relating to insolvency of companies in Sri Lanka is not contained in a separate Act as it is in England.

Harsha Cabral


Winding-up or liquidation of companies in Sri Lanka is governed by the provisions stipulated in the Companies Act No. 17 of 1982.’ The procedure for winding-up is to be seen in the Winding-up Rules under the old Companies Ordinance of 1938. I have no hesitation to state that the liquidation process in Sri Lanka is totally archaic.

Part IX and X of the Companies Act deal with winding up of companies, the statutory process of bringing operations of a company to a close through realisation and distribution of its assets among its creditors and contributories according to their rights followed by dissolution of the company.

The Registrar of Companies in Sri Lanka finally issues the Certificate stating that the company is finally wound-up and dissolved. This is in fact the Death Certificate of that company and so it is recorded in the files maintained by the Registrar of Companies. The regulatory role played by him is limited to that act.

The Judges get involved in the winding-up process only in a limited manner as to the proceedings before them on the winding-up. These are governed by the Company Rules referred to later. There again no positive role is played by the judge except to see whether the provisions of the law are followed in the winding-up proceedings.

Liability of Members of a Company that is Being “Wound Up

Past and present members of a company that is being wound up become statutorily liable to the amount unpaid on their shares subject to certain exceptions applicable to past members such as being discharged from liability if one year has lapsed before the commencement of winding up since ceasing to be a member.

Hereinafter, “Companies Act”

Section 248, Companies Act, No. 17 of 1982

Modes of Winding Up

Section 247 of the Companies Act provides for a company to be wound up either

(a) by the court, or

(b) voluntary, or

(c) subject to supervision of court

Winding Up by the Court

Section 255 of the Companies Act sets out the grounds under which a company may be wound up by the court.

1. The company has by special resolution resolved that the company be wound up by the court.

The court may make an order for the winding up of the company so resolved after taking into consideration other matters that are deemed relevant. For an instance pubic interest could become relevant in case of a Government company.

2.Default is made in delivering the statutory report to the Registrar or in holding the statutory meeting. ‘

The shareholders may present a petition to the court after the expiration of 14 days from the last day on which the meeting ought to have been held

3.The company does not commence its business within a year from its incorporation, or suspends its business for one year.

Under ordinary circumstances the court would order the winding up of a company only if the delay or the suspension is not satisfactorily explained. Further only an entire suspension of the business of a company would give rise to a ground for winding up and even then it is open for the court to examine the ability of the company to resume its business.

4.The number of members is reduced to, in the case of a private company, below two, or, in the case of a public company, below seven.

For the purposes of this ground of winding up ‘member’ does not include past members and legal representatives of past members. If a company continues to exist without the prescribed minimum number of members beyond a stipulated period the members of such company become personally liable for the debts of the company and this provision caters for such circumstances for the existing members to exit without incurring personal liability.

5.The company is unable to pay its debts.

According to Section 256 a company is unable to pay its debts where:

(a) a creditor by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees (emphasis added) then due, has served on the company, by leaving it at the registered office of the company, a demand under his hand requiring the company to pay the sum so due, and the company has for three weeks from the date of so leaving, neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor

(b) execution or other process issued on a judgement, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part

(c) it is proved to the satisfaction of the court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.

The term ‘debt’ denotes a definite sum and therefore does not include any unliquidated damages or a sum of money incapable of being asserted. The emphasis added is to show the absurdity of the figure.

If the company fails to comply with a statutory notice given by a creditor under Section 256 the creditor is entitled to a winding up order ex debito justitiae i.e. as of a right subject to the court being satisfied that there is no prima facie dispute with regard to the petitioner’s debt. However, the court may refuse to make the winding up order if the majority of the creditors object to making of such order for some good reason or the company satisfies the court that it has a substantial and reasonable defence to plead. The company is not commercially insolvent and is in a position to pay its debts is not admitted by courts as a substantial and reasonable defence.

An application made by a creditor for the winding up of a company with knowledge of the existence of a bona fide dispute regarding the debt owed by the company is an abuse of process of court.

To prevent such abuse of process of court it has been suggested that where the debt is disputed actions for winding up of companies for their inability to pay debts shall be allowed to proceed only if the debt has been determined in ordinary proceedings as due.

6.The court is of the opinion that it is just and equitable that the company should be wound up.

Court is vested with absolute discretion to order winding up of companies under the just and equitable ground. The court is however unlikely to order winding up if the petitioner is acting unreasonably in seeking to wind up the company without pursuing other remedies available to him.

Persons Entitled to Petition for Winding Up

According to Section 257 the company, any creditor or creditors (including any contingent or prospective creditor or creditors), contributory or contributones or all or any of these parties are jointly or severally entitled to present a petition for winding up of a company.

The Court with Competent Jurisdiction

In terms of Section 254 of the Companies Act a petition has to be presented to the District Court of the District in which the registered office of the company sought to be wound up is situated (and this is defined as the place where the registered office of the company sought to be wound up has been situated for the longest duration during the six months immediately preceding the date of the presentation of the petition for winding up.)

Winding Up Rules

By virtue of the construction of Section 450 of the Companies Act the procedure to be followed in the winding up of companies continues to be governed by the Companies Winding Up Rules, 1939 made under the Companies Ordinance not withstanding the repeal of the said Ordinance.

Some of the important procedural rules contained in the Companies Winding up Rules are as follows:

Rule 6: Every petition for the winding up of a company by the court, or subject to supervision of court, shall be in Form 1 and 2 Regested that where for their inability the debt has been that the company

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Rule 7:

Rule 9:


Every petition shall be advertised seven clear days before the hearing once in the Government Gazette, and once at least in one daily English newspaper published m Ceylon. Every petition for the winding up of a company shall be verified by an affidavin and shall be sworn after and filed within four days after the petition is presented, and such affidavit shall be sufficient prima facie evidence of the statements in the petition.

Every person who intends to appear on the hearing of a petition shall serve on, or send by post to, the petitioner, or his proctor at the address stated in the advertisement of the petition, notice of his intention stated in the advertisement.

Rule 15(1)- Affidavits in opposition to a petition that a company may be wound up by or subject to the supervision of the court shall be filed within seven days of the date on which the affidavit verifying the petition is filed, and notice of the filing of every affidavit in opposition to such a petition shall be given to the petitioner or his proctor in the day in which the affidavit is filed.

Rule 15(2): An affidavit in reply to an affidavit filed in opposition to a petition shall be filed within three days of the date on which notice of such affidavit is received by the petitioner or his proctor.

Hearing Before Court

The hearing before court commences once the court is satisfied that rules regarding petition, affidavits and publication of petition are duly fulfilled. The hearing will constitute of affidavits filed for and against the petition unless the company, any creditor or contributory that may speak at the hearing has given notice of his intention to appear within the specified time.

Proceedings in Other Courts

The company, any creditor or contributory can apply before the winding up order is made to delay any proceedings against the company pending in any other court.

Provisional Liquidator

In terms of Section 271 of the Companies Act read with Rule 11 of the “Winding up Rules the court may upon an application being made by either a creditor or a contributory appoint a provisional liquidator at any time after the presentation of the winding up petition and the official receiver by virtue of his office becomes the provisional liquidator until another person is so appointed.

Powers of Court

Under the Companies Act the court has the power to dismiss the petition, adjourn the hearing either conditionally or unconditionally or make a winding up order or any other interim order as it deems fit.

Effects of the Winding Up Order

Number of consequences emanate from an order of winding up made by a court.

1. The winding up order retrospectively takes effect from the date on which the petition has been presented making any disposition of the company’s property void, any transfer of shares or any alteration in the status of members of the company a nullity if such disposition, transfer or alteration has taken place after the presentation of the petition unless the court orders otherwise and servants and agents of the company are discharged and the directors are dismissed from the date of the petition.

2. A copy of the winding up order should be forwarded forthwith by the company to the Registrar of Companies who shall make a minute thereof in his book.

3. No action shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose where the winding up order has been made or a provisional liquidator has been appointed.

4. Any floating charge created within 12 months before the commencement of the winding up, unless the company was solvent immediately after the charge was created is invalid except to the amount of any cash paid to the company in consideration of the charge at the time the charge was created.

5. All properties and effects of the company are deemed to be in the custody of court from the date of the order of winding up.

6. Every document in which the name of the company appears must bear a statement that the company is being wound up.


Separate meetings of creditors and contributories shall be held after an order for winding up is made for the purpose of applying for the appointment of a liquidator or of a committee of inspection.

A liquidator or liquidators who have the power to bring or defend actions in the name and or on behalf of the company, to carry on the business so far as may be necessary for the beneficial winding up of the company, to make payments to creditors, contributories etc., to sell the movable and immovable property of the company are appointed by the court. The liquidator so appointed should take into his custody or under his control all property and things to which the company is or appears to be entitled. The main responsibility of the liquidator is to handle the affairs of the company in such a manner as to wind up the company speedily and effectively.

The exercise of the powers of the office of the liquidator is subject to the control of court and any creditor or contributory can make an application to the court in respect of the exercise of these powers.

Dissolution of the Company

According to Section 304 of the Companies Act when the affairs of the company have been completely wound up the court shall make an order that the company be dissolved from the date of such order. The liquidator should forward a copy of the order made under Section 304 to the Registrar of Companies who shall make a minute in his book of the dissolution of the company. The legal personality of the company ceases to exist with the making of the order dissolving the company by the court. Section 372 provides for the court to declare dissolution of a company void upon application being made by the liquidator or any interested person within 2 years of the dissolution of the company.

Voluntary Winding Up

Members of a company may initiate the winding up of a company by passing a resolution at a general meeting that the company be wound up instead of presenting a petition to court. This type of winding up is known as ‘voluntary winding up’ and its object is to let the company and its creditors settle their affairs without coming to court. However every facility of applying to a court is given to the company that has passed a resolution for voluntary winding up. The company must within 4 days of the passing of the resolution give notice of the resolution by publishing in the Gazette and advertising in a newspaper.

A voluntary winding up is deemed to commence at the time the resolution for winding up is passed. From the commencement of winding up the company must cease to carry on its business except so far as may be required to secure a beneficial winding up although the corporate status and powers of the company continue until the final dissolution. Transfer of shares and alterations in the status of the members are void unless sanctioned by the liquidator. The powers of the directors cease and a liquidator has to be appointed to take necessary steps to effect the final dissolution of the company.

Voluntary winding up could be either ‘members voluntary winding up’ or ‘creditors voluntary winding up’. Different procedures are laid down in the Companies Act to be adopted in each of these methods of winding up and therefore the method to be adopted in the winding up should be ascertained before passing the resolution for voluntary winding up.

Winding up Under the Supervision of Court

The Companies Act provides for the court to make an order that the voluntary winding up shall continue, but subject to such supervision of the court, and that liberty for creditors and contributories or others to apply to the court, and generally on such terms and conditions as the court thinks fit at any time after the company has passed a resolution to voluntarily wind up. A petition for the winding up subject to the supervision of court may be presented by any person or persons entitled to present a petition for a compulsory winding up of the company. Applications of this kind are rare and are not granted unless the petitioner alleges and proves that the existing voluntary liquidator cannot continue with fairness to all concerned.


It is relevant to note that the liquidation process in Sri Lanka is far behind time when compared to other developed jurisdictions and its is timely to amend the said laws or to develop new laws altogether taking into consideration the provisions of Chapter 11 in the United States, the Insolvency Act of England and statutory provisions in countries such as India and Malaysia. In order that ailing companies can be resurrected in many instances rather than having them killed instantaneously. There is no proper role played by the regulators in this jurisdiction except by the Registrar of Companies as referred to above and the role played by the judge is again limited to the winding-up proceedings. It is correct to say that there is no positive role played by any regulator or the courts to resurrect companies in insolvency situations unlike in many developed jurisdictions. This is a serious matter that has been brought to the attention of the law reformers in Sri Lanka as the death rate of companies is quite high at present. The famous corporate collapses in Sri Lanka such as Pramuka, HPT and several other Finance Companies speak volumes of the dangers and the urgent need for reform in this sphere.

…Corporate insolvency law has developed enormously during the last century … however, have not supplied complete answers. In one sense this is inevitable since laws have to develop and adapt to social and economic changes. In another sense, however, current approaches to corporate insolvency law have failed to come to grips with certain challenges that have to be faced if corporate insolvency law is to develop in a manner that contributes appropriately to the (business) life of the nation. Two challenges are of central importance. The first is to see corporate insolvency law as a complete process: not merely as a set of rules but as a system of institutions, rules, procedures, implementation processes and practical effects. This demands that, in developing corporate insolvency law, there is an awareness of implications on the ground and of impacts on the resilience of enterprises as well as on credit and employment relationships. The second challenge is to develop clarity in setting out the general purposes of corporate insolvency law and in effecting balances between different competing interests. …3