The Government has appointed Sri Lanka’s first ever Official Receiver (OR), who serves as liquidator of last resort and the regulator of insolvency proceedings, filling a longstanding gap in the corporate regulatory and legal framework.
The Official Receiver is empowered to carry out investigations into the affairs of bankrupt companies and could help unsecured creditors, such as employees and small businesses who are suppliers and also help depositors of finance companies recover their dues.
The Official Receiver, the Assistant Registrar of Companies, Heshan Suranga Mathugamage, an Attorney-at-Law, was appointed by Minister of Industry and Commerce, Rishad Bathiudeen through a gazette notification under the Companies Act.
The appointment of the Official Receiver (OR) is expected to help raise Sri Lanka’s ranking in the World Bank’s Ease of Doing Business Index as it will improve the insolvency system in the country, bringing transparency and accountability in the liquidation process, according to legal experts. The appointment of the OR is one of the recommendations of the Government’s task forces set up to improve Sri Lanka’s investor climate and ranking in the Ease of Doing Business index. The Companies Act provides for the appointment of the Official Receiver, an independent third party, the default liquidator dealing with companies facing bankruptcy or winding-up orders in court.
The Commercial High Court, which handles winding up proceedings of companies, has been functioning for over 10 years, but the Official Receiver’s post has never been filled.
As a result, the process of liquidating a firm, in practice, has not been done by an independent party, and instead by a private liquidator usually appointed by the creditors, which also means that, till now the winding up of firms has happened without any regulatory supervision.
One of the drawbacks of this process has been that, if the firm being wound up did not have enough assets to pay debts or the fees of the liquidator, there was no incentive for the private liquidator to investigate the company’s finances and the reasons why it failed.
Investigations by the Official Receiver, in contrast, take place in the public domain, with officials such as company directors liable to be summoned to court and questioned, bringing transparency into the process.
Under the Companies Act, when a firm is being wound up, its directors must give a statement of affairs showing details of assets, liabilities and debts, to the Official Receiver.
The Official Receiver must then submit a report to court specifying the firm’s assets and liabilities, why it failed, and whether further inquiry is needed on its failure or conduct of business.
The Companies Act also provides for the liquidator to probe a company’s transaction history and set aside un-commercial or voidable transactions, and recover funds so that creditors can be paid their dues.
These can include related party payments or loans or paying off favoured creditors connected to company directors ahead of other creditors, transactions that are difficult to probe and need lengthy investigations.