Insolvency Law at Sri Lanka
Sri Lanka's insolvency framework is primarily governed by the Companies Act No. 7 of 2007, which outlines procedures for both corporate and individual insolvency. The Act provides mechanisms for liquidation, administration, and compromises with creditors, aiming to address the financial distress of companies and individuals.
🏛️ Legal Framework
Companies Act No. 7 of 2007
The Companies Act No. 7 of 2007 serves as the cornerstone of corporate insolvency law in Sri Lanka. Key provisions include:
Winding Up: The Act outlines procedures for the winding up of companies, including the appointment of liquidators and the distribution of assets to creditors.
Official Receiver: The Act establishes the role of the Official Receiver, who is responsible for overseeing the winding-up process and ensuring compliance with legal requirements. (Companies Act)
Compromises with Creditors: The Act provides mechanisms for companies to propose compromises with creditors to settle debts and avoid liquidation. (Companies Act)
⚖️ Insolvency Process Overview
1. Initiation of Insolvency
Insolvency proceedings can be initiated through:
Voluntary Liquidation: Initiated by the company's directors or shareholders.
Compulsory Liquidation: Initiated by a creditor through a court application.
Administration: Appointed by the company to manage its affairs and attempt to rescue the company.
2. Appointment of Liquidator or Administrator
Upon initiation:
Liquidator: Appointed to wind up the company's affairs, sell assets, and distribute proceeds to creditors.
Administrator: Appointed to manage the company's affairs and attempt to rescue the company as a going concern. (Sri Lanka Business News | Online edition of Daily News - Lakehouse Newspapers)
3. Distribution of Assets
In liquidation:
Secured Creditors: Paid first from the proceeds of the sale of secured assets.
Preferential Creditors: Paid next, including employees and tax authorities.
Unsecured Creditors: Paid from any remaining funds.
Shareholders: Paid last, if any funds remain.
4. Compromise with Creditors
The Act allows for the company to propose a compromise with creditors to settle debts and avoid liquidation. This process requires court approval and must be agreed upon by the creditors. (Companies Act)
🧾 Key Considerations
Legal Representation: Parties involved in insolvency proceedings should seek legal counsel to navigate the complex legal landscape.
Timely Filing: Creditors must file their claims within the stipulated time frame to ensure consideration.
Compliance with Regulations: Companies and individuals must adhere to the provisions of the Companies Act to avoid legal complications.
📚 Further Reading
Winding Up of a Limited Liability Company in Sri Lanka - HG.org
Corporate Collapses and Insolvency Regimes - The Sri Lankan Experience
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