New Companies Act will ensure interest of all stakeholders

by Lalin Fernandopulle

The new Companies Act will promote better corporate governance that will ensure the interest of all stakeholders including the directors, major and minority shareholders and creditors, said Managing Director, Chemanex Industries Colombo and Vice Chairman Ceylon National Chamber of Industries Preethi Jayawardena.

The Act will also simplify the procedure of company incorporation. It has introduced a simplified and modernised concept of taking away the memorandum of association in company incorporation, Jayawardena said.

The Companies Act has similarities to the 1993 Companies Law of New-Zealand and would unify the former Acts into one Act, thereby reducing the complexities of the statutes and promoting transparency.

The duties of the director have been classified and catalogued. The responsibilities and penalties are greater especially to directors of public listed companies who can be taken to court by a single shareholder.

The new Act does not provide for a bonus issue although it is said that a future bonus issue could be validly passed in compliance with Section 60 and not violating Section 57 - the solvency test but it is not practical and sensible because Section 52 says before issuing shares the board shall decide on the consideration for which they will be issued and the board will resolve that in their opinion that consideration is fair to the company and to all existing shareholders.

Under the new Act the share capital will be recognised as stated capital referred to as the amount of capital contributed by or raised from stockholders of a company. The concept of par value and share premium will not be applicable henceforth.

Companies have to spend heavily on solvency tests and litigation under the new Act which calls for greater transparency in governance and the discharge of duties by directors.

Members will be reluctant to be directors of a company since they have to be meticulous in their duties and responsibilities. Lawyers and auditors will benefit due to the provisions in the new Act, he said.

Under the previous Companies Act share split is done by bringing down the par value of the share and increasing the number of shares outstanding by the equivalent proportion. A share split does not involve any capitalisation of reserves. It merely increases the liquidity of the share.

Since the split does not demonstrate structural changes in the balance sheet there would be an impact over the stated capital. Share split is beneficial to a company over a bonus issue under Section 60 in the new Act.

The government enacted the new Companies Act No. 07 of 2007 on May 3 repealing the previous Companies Act No. 17 of 1982. Companies (special provisions) Law No. 19 of 1974 and Foreign Companies (special provisions) Law No. 9 of 1975.

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