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
Q: When did the new Act come into operation?
A: 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,
Q: Can you explain the provisions in the new law, which will
help the shareholders?
A: 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
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?
A: 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
A: 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
(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
(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.
A: 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: 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
A: 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
A: 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
A: 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?
A: 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?
A: 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?
A: 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
A: 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
A: 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