Introduction to Company Law in Sri Lanka by Maxwell Ranasinghe


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Introduction to Company Law in Sri Lanka by Maxwell Ranasinghe

  1. 1. An Introduction to company in Law in Sri Lanka By Maxwell
  2. 2. <ul><li>The concept of Limited liability company is a concept of English Law. It was introduced after the Industrial revolution in 17 th Century mainly to raise capital for larger companies </li></ul><ul><li>One should read the historical evolution of limited liability companies to get a good idea about this concept </li></ul><ul><li>English company law was introduced to Sri Lanka by sec 2 of the Civil Law Ordinance of No 5 of 1852 in which it stated that English Company Law will be applicable to SL subject to any law that would be enacted in SL </li></ul>
  3. 3. <ul><li>Joint Stock company ordinance No 4 of 1861 was the first law enacted specially for Sri Lanka </li></ul><ul><li>Then there were many other statutes and Companies, Ordinance No 15 of 1938 was a major milestone </li></ul><ul><li>Then the Companies Act No 17 of 1982 was enacted and finally all were repealed and the Companies Act No 7 of 2007 was enacted to consolidate all the laws and clear many ambiguities of the companies law. </li></ul><ul><li>The ACT came to operation from 3 rd May 2007 </li></ul><ul><li>It is a lengthy Act and has 43 chapters and 534 sections </li></ul>
  4. 4. <ul><li>A company is a legal personality distinct from its members ( shareholders) </li></ul><ul><li>As per the sec 2 of the Act, a company is a body corporate under the name it has been registered. It has the capacity to carry on any business or activity, do any act or enter into any transaction and have all rights, powers and privileges necessary ( subject to law of the country) for the same purpose whether it be within or outside SL </li></ul>
  5. 5. <ul><li>A company is a legal personality distinct from its members ( shareholders) </li></ul><ul><li>It is also called that a company structure covers the real owners by a corporate veil </li></ul><ul><li>Salomon Vs. Salmon ( 1897) </li></ul><ul><li>Salomon had a sole proprietor business, a leather merchant </li></ul><ul><li>Salomon formed a company, Salomon and Co Ltd. which comprised of himself, his wife, daughter and his 4 sons. The wife, daughter and sons had one share each. </li></ul><ul><li>Salomon sold his sole proprietor business to Salmon and Co Ltd. and obtained 20000 shares and 10000 debentures ( one pound each) . Debentures were secured on the assets of the company. </li></ul><ul><li>Salomon acted as the director of the company. </li></ul><ul><li>Salomon & Co. Ltd, borrowed around £6000 from outside creditors. They did not get any security for the credit given. </li></ul>
  6. 6. <ul><li>Company suffered heavy losses and became bankrupt. </li></ul><ul><li>The assets of the company was nearly £ 7000 and the liabilities were around £16000. </li></ul><ul><li>The company was wound up and the question arose as to whether the Debentures secured on assets issued to Salomon will get preference as against the other debts of the company. </li></ul><ul><li>The argument brought by Creditors was that Salomon and Salomon and Co Ltd are the same person and therefore he should be paid after payment of outside debtors </li></ul><ul><li>Court held: Salmon and Co Ltd. and Salmons are two different legal persons and therefore, Salmon can claim to be a secured creditor for his debentures. Therefore, proceeds of the assets should be first allocated to settle the debentures of Salomon. </li></ul>
  7. 7. <ul><li>Salomon’s case established many legal principals as to companies </li></ul><ul><ul><li>It recognised family owned companies </li></ul></ul><ul><ul><li>It recognised separate legal personality principal </li></ul></ul><ul><ul><li>It recognised the limited liability of members </li></ul></ul><ul><ul><li>It also recognised that a member can give a loan to a company </li></ul></ul><ul><ul><li>It recognised that a secured creditor(over assets), even he is a member or director of the company, will have preference over unsecured creditors </li></ul></ul>
  8. 8. <ul><li>The doctrine in Salmon’s case caste a veil over the personality of a limited company through which no one cannot see. </li></ul><ul><li>But there are exemptions to this rule and have been many instances that the courts ordered to caste aside the veil </li></ul><ul><li>1. Agency and the alter ego doctrine </li></ul><ul><ul><li>Although a company is a separate entity, possible to treat it is as an agent of the holding company or other controlling power </li></ul></ul>
  9. 9. <ul><li>2. Fraud </li></ul><ul><li>Court can lift the veil to prevent fraud. </li></ul><ul><li>3. Single economic unit </li></ul><ul><ul><li>Where there are several companies belonging to the same group, courts are willing to treat all or some of them as one </li></ul></ul><ul><li>4. Determination of residence for tax purposes </li></ul><ul><li>5. National Security </li></ul>
  10. 10. <ul><li>Types of companies that can be established under the Act </li></ul><ul><ul><li>Limited companies </li></ul></ul><ul><ul><ul><li>Public companies ( name should end with PLC) </li></ul></ul></ul><ul><ul><ul><li>Private companies ( … Private Ltd.) </li></ul></ul></ul><ul><ul><ul><li>Off shore companies ( .., Private Ltd or PLC) </li></ul></ul></ul><ul><ul><li>Unlimited Companies </li></ul></ul><ul><ul><ul><li>Share holders have an unlimited liability to contribute towards assets in the case of settling debts </li></ul></ul></ul><ul><ul><li>Company limited by guarantee </li></ul></ul><ul><ul><ul><li>Company does not issue shares but members undertake to contribute to its assets in the event of its being put into liquidation, in an amount specified in the articles of the company limited by guarantee. </li></ul></ul></ul>
  11. 11. New Features introduced to the company law in SL by ct No 7 of 2007 <ul><li>Doctrine of ultra vires removed and No Memorandum of Association is required. </li></ul><ul><li>In the older versions of company’s laws if the company has acted beyond the powers given by the Memorandum of Association ( which contained the objects of the company) such acts were considered void. </li></ul><ul><li>The doctrine of ultra vires ( beyond powers) has been removed from the company’s law. No memorandum is required to establish a company under the new Act of 2007. </li></ul><ul><li>Sec 17 of the companies Act states that even if the objects of a company are stated in the Articles of Association, the capacity and power of the company shall not be affected by such restriction. For existing companies by 2007, memorandum is deemed to form part of the articles. Therefore the doctrine of ultra vires is removed. </li></ul>
  12. 12. <ul><li>Articles of Association </li></ul><ul><li>The Articles of Association constitutes a contract between the company and the members . It grants rights and obligations on members in their capacity as members. </li></ul><ul><li>In the articles of association, company can provide anything not inconsistent with the provisions of the ACT other than the First Schedule, and in particular may provide for </li></ul><ul><ul><li>The objects of the company </li></ul></ul><ul><ul><li>The rights and obligation of shareholders </li></ul></ul><ul><ul><li>The management and administration of the company </li></ul></ul>
  13. 13. <ul><li>Common Seal </li></ul><ul><li>There is no mandatory requirement to have a common seal under the new Act. However, if the company is having a common seal it says that it should clearly indicate the name and the company number. </li></ul>
  14. 14. <ul><li>Pre incorporation contracts </li></ul><ul><li>In the past company law, pre incorporation contrast were void against the company. </li></ul><ul><li>The current act says that in pre incorporation contracts can be ratified by the company, in the absence of ratification, the individual who made the contract on behalf of the company will be liable on the contract </li></ul>
  15. 15. <ul><li>Single Shareholder Companies </li></ul><ul><li>Law before the 2007 Act prescribed at least two shareholders should be there to form a company. </li></ul><ul><li>The current Act says even one person companies can be established. </li></ul><ul><li>No Nominal value for shares </li></ul>
  16. 16. <ul><li>Duties of Directors </li></ul><ul><ul><li>read what is available in the book. </li></ul></ul><ul><ul><li>This is just a glimpse of the Company law and there is no time to devote more on this vital subject. </li></ul></ul>
  17. 17. Do not worry… you will do well in the exams Thanks for your patience with me