New Companies Act meets needs of fast changing business world
 

by Gamini Warushamana

The new draft of the Companies Act approved by the cabinet and pending approval by Parliament is simple and meets the requirements of the fast changing business world, but puts a heavy burden on directors, experts said.

President's Counsel C. K. Kanag Isvaran, Chairman of the Ceylon Chamber of Commerce, Deva Rodrigo along with President partner of Nithya Partners Arittha Wickramanayake critically analysed the new Companies Act and the challenges ahead for directors at a discussion organised by the Sri Lanka Institute of Directors recently.

Wickramanayake said that the new Companies Act has the effect of moving our companies regime to a level playing field. Wickramanayake, a former chairman of the Securities and Exchange Commission (SEC) said that for many years the SEC has been trying to convince large companies both public and private to get quoted on the stock exchange.

Our market is woefully short of liquidity and size to become a significant destination for large international portfolio investments. Large listings are vital, if we hope to make our capital market attractive to foreign portfolio investors.

The new Act moves in that direction. Unquoted companies consider a listing as being an unnecessary submission to another layer of regulation. Unlisted companies are generally regulated only by the Companies Act while listed companies are subjected to several layers of regulations - Companies Act, SEC Act and various codes and rules and regulations under it and rules of the Stock Exchange, Accounts and Auditing Monitoring Board, Wickramanayake said.

The new Act remedies this by strengthening the provisions of generally applicable company law and automatic compliance with other laws. There will be no downside to a listing but instead only bring with them the advantages of a listing.

The new Act will facilitate a greater amount of capital market activity in the future, because it permits transactions which had hitherto been prohibited under our law.

Examples are ability for financial assistance, engage in management buyouts, and ability for companies to buy their own shares. Wickramanayake said that all these provisions will result in stimulating market activity.

The law requires that when such processes are permitted, they must be monitored and regulated. In each of these situations, the new Companies Act places a very heavy burden on directors to ensure that there is no abuse while there are heavy sanctions placed on the directors if they fail to meet these responsibilities, he said.

Deva Rodrigo said that the new Act has made incorporation simpler for companies other than a company limited by guarantees. Under the new Act incorporation of a company will need to only make an application to the Registrar of Companies with a few documents.

A company can have a single shareholder if that is a corporate body, or if he is the Secretary to the Treasury, and if not a minimum of two shareholders is necessary.

Rodrigo said that the new Act has simplified decision making by permitting private companies to take a valid decision if authorised by all shareholders, subject to safeguards against insolvency.

A lively discussion took place on Section 49(4) of the new Act which stated that no share in a company shall have nominal or par value. Isvaran said that the nominal value or par value does not have a meaning today because the share value is the market value.

Under the new Act reference to a share shall confer on holder the right; for one vote on a poll, to an equal share in dividends and to an equal share in the surplus assets on liquidation of the company. Stated Capital is the new concept introduced and Section 57 defined the Stated Capital as "the total amounts received by the company and due and payable to the company in respect of the issue of shares and calls on shares."

Under Section 57 the solvency test would effectively prohibit a company from declaring dividends out of current year profits without making good accumulated (prior year) profits. The auditors will have to pay special attention to ensure companies do meet the Solvency Test and comply with the provisions relating to serious loss of capital by directors.

Section 59 of the new Act gives the power to a company to reduce stated capital by special resolution after publishing a public notice of the proposed reduction of the stated capital not less than 60 days before the resolution to reduce the stated capital subject to a number of other considerations.

It should be authorised by the Court under the existing Act.