News Features


Onerous responsibilities on directors

Kandiah Neelakandan, Attorney at Law, partner, Murugesu & Neelakandan and author of the book, Companies Act – Part 1 was interviewed by The Nation

Following are excerpts

By Stanley Samarasinghe
Q: When did the new Act come into operation?
Although the new Companies Act was enacted by Parliament on the October20, 2006, it was certified by the Hon. Speaker only on March 20, 2007. It was brought into operation on May 3, 2007.

Q: Can you explain the provisions in the new law, which will help the shareholders?
While it contains several provisions, which simplify the administration of the Private Companies, the new law places onerous responsibilities on directors to protect the interests of the shareholders. The introduction of the Solvency Test is a good example. Provisions in respect of minority buy out, reliefs for oppression and mismanagement and derivative actions are a few other provisions, which will protect the interests of the shareholders.

Q: We are told that new companies need not have an objects clause or memorandum of association. What is the purpose of doing away with those provisions?
The doctrine of ultra-vires is no more a rule of our company law, as the new Act does not recognise it. A memorandum of association is not required under the new law. If a company is a BOI enterprise, a joint venture or a listed company, it may be necessary to have such objects which the new Act permits to be incorporated in the Articles. Companies have to be mindful of the ‘major transactions’ provisions, also.

Q: What is meant by ‘major transactions’? Is it a new concept?
Yes, it is a concept new to Sri Lanka. A company cannot enter into any major transaction unless such transaction is -
(a) approved by special resolution;
(b) contingent on approval by special resolution;
(c) consented to in writing by all the shareholders of the company; or
(d) a transaction which the company is expressly authorised to enter into by a provision in its articles, which was included in it at the time the company was incorporated.
However, this restriction will not apply to -
(a) a transaction under which a company gives or agrees to give, a floating charge over all or any part of the property of the company;
(b) a transaction entered into by a receiver appointed pursuant to an instrument creating a floating charge over all or any part of the property of the company;
(c) a transaction entered into by an administrator or liquidator of a company.
‘Major transaction,’ has been defined in the Act

Q: You said that the directors will have an onerous responsibility. We understand that the Companies Act codifies the directors’ duties.
You cannot say that the directors’ duties are codified. In fact, the directors had almost the same duties earlier. Now, the new law specifies and includes the important duties. What is in the Act are inclusive provisions and does not amount to codification. The directors’ responsibilities become more onerous with the introduction of provisions such as solvency test and major transactions provisions. They should act in good faith and in the best interests of the company but also should comply with the Companies Act and the Company’s Articles of Association. They must also comply with the disclosure of interest provisions and to act in terms of the new law, if there is serious loss of capital.

Q: How can the directors protect themselves?
A company can indemnify, or directly or indirectly affect insurance, for a director only if the Articles permit.

Q: When can a minority shareholder ask the company to buy his shares?
If he has opposed an alteration to the Articles or any amendment of the Articles of Association, which amendment imposes or removes a restriction on the business or activities in which the company may engage, or opposed any major transaction or amalgamation proposal if he is a member of an interest group and taking of any action that affects the rights attached to that group has been decided despite his voting against it, he can require the company to purchase his shares in accordance with section 94 of the Act.

Q: What are the special provisions in respect of private companies?
By a unanimous resolution, a private company can dispense with keeping an interest register. However, such a resolution will cease to have effect, if a shareholder gives notice and requires keeping it. The important provision is in section 31, which enables all the shareholders to unanimously resolve in writing to any action which has been or is to be taken by the company, and the taking of such action is deemed to be validly authorised by the company. Such unanimous resolution will be effective notwithstanding any provision in the Articles to the contrary. By such unanimous resolution, certain sections specified in the second schedule to the Act, will not apply to or in relation to that action.

Q: We understand that there are about 60,000 companies on the register of the Registrar of Companies, but only 15,000 companies are really functioning. How does the new law affect them?
The new law requires every existing company to apply on Form 40 and register and obtain a new company registration number on or before May 2, 2008 (within 12 months). If a company fails to do so, the Registrar-General will notice them and failure to comply with it will result in such company’s assets vesting in the state.

Q: Who can make such an application?
It can be applied for by a director or a shareholder of that company. Not only that, even a creditor who has a claim in a litigation or arbitration can apply for such registration.

Q: Will this new Act help small entrepreneurs?
Yes, particularly the simplified provisions in respect of private companies could go a long way to help them. Even incorporation procedure is simplified.

Q: How can you apply for incorporation of a new company?
Initial shareholder can apply on Form 1, which is only two pages, with consent of first directors and first secretary. If you do not adopt the model articles in the first schedule to the Act, you will have to annex your set of Articles.

Q: Is it necessary for an initial shareholder to obtain legal advice?
I would say it would be prudent to obtain professional advice. In my experience, I have seen that clients who wish to ‘save money’ by not obtaining professional advice initially, ultimately spend time and money on litigation.

Q: There are a number of pensioners and retired people investing their savings or provident fund monies. They look for good investments. Will the new Companies Act attract them to invest in companies?
Those people are likely to invest only in shares in listed companies. I do not think that the new Act will make a greater impact on such investments. Nevertheless, the new law will protect the shareholders’ interests and enhance shareholder confidence.