Insolvency Law at Sri Lanka

30 Apr 2025 --
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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)