Directors Duties set out in the Sri Lankan Companies Act 7 of 2007

by: Prashath Pushpaharan 

1.0 Introduction

This Report fully comprises and discusses about Good Corporate Governance. So before getting on to the main body of the assignment it will be first important to say what is corporate governance and its importance in the today’s corporate systems.

Corporate governance comprises the long-term management and oversight of the company in accordance with the principles of responsibility and transparency. The Corporate Governance Code sets out basic principles for the management and oversight of publicly listed companies.

According to Sir Adiran Cadbury “Corporate governance is concerned with holding the balance between economic and social goals and individual and communal goals”. In the current trends it is important for companies to compulsorily practice good Corporate Governance. It is important for the purpose of making the company aware of their corporate responsibilities as well as to protect or defend the shareholders, stakeholders and environment from the increasing company scandals.

In today’s business environment Corporate Governance is not a thing that would be just spoken within the organization and then just ignored without following accordingly. Now a day’s businesses are in a stage where they should follow proper corporate governance to be on top of their stakeholders mind.

After the huge effects of Golden Key credit card, Enron, Hilton Hotels and Satyam scandals, Sri Lankan companies act has been amended accordingly and has defined the duties of Board Bearers (Directors) in a way where these can be avoided or tolerated. And also have restructured their penalizations for not following, which will bring more concerns to the company as well as the director boards to follow good corporate governance.

This report comprises how the Directors duty set out in Sri Lanka by the currently enforced Companies act (7 of 2007) and it’s proper implications by the directors in the today’s entrepreneurial behaviour.

2.0 Brief about Companies Act in Sri Lanka: (7 of 2007)

The Companies Act No. 7 of 2007 marked a significant milestone in the development of company law that governed companies in Sri Lanka. This original draft was first released for public comments in 1995, due to the strong opposition towards it from the public it took twelve solid years for the final document to come out. Consequently, it was only in May 2007 that the law was finally passed in parliament.

This law resulted in a major switch from the traditional law which was affiliated from England to the legal system based on a model that exists in Canada and New Zealand. This change introduced several crucial changes by eliminating some fundamental concepts that had formed the essence of our company law and substituting other concepts in their place. This change have also modernized company law in Sri Lanka, and at least theoretically, placing it ahead of its counterpart laws in the rest of South Asia.

The Act has imposed several responsibilities on directors which appear onerous in the context of the encouragement of good corporate governance. For instance, sections 219 and 220 of the Act require directors to resolve whether or not to liquidate companies when they are faced with solvency issues.

 

3.0 Overview of Directors & their duties

Directors are not the owners of the business; they are only the representatives of all the shareholders. The director has a compulsory duty on managing the investments of shareholders towards the business, without permitting the business to fail at any point as well as by providing a value to its interested stakeholders of the business. Mainly directors can be classified in to two major groups that are Executive Directors and Non Executive Directors. The composition of the board should have at least 1/3 of Non Executive Directors’ out of the total.

In the today’s businesses the reasons for the corporate collapses and scandals have been clearly understood and their very few in specific that is; corporate mismanagement, fraud, inappropriate disclosure of relevant information’s to shareholders and mainly because of the directors in proper corporate governance. These vulnerabilities can be overcome if the corporate is made to follow good corporate governance in practice.

In high-level the compulsory duties of the directors are;

• Duty of directors to act in good faith and in the interest of the company
• Director to comply within the act and company’s articles
• Should always make his strategies lined towards earning and enhancing of value and return of the shareholder
• Approve major investments and accounts
• Disclosure of information’s, directors should be accountable and transparent to the shareholders

4.0 Corporate scandal to explain the duties of directors

Hilton Colombo a part of Hotel Developers Lanka PLC was captured by the government on the basis of maintaining good corporate governance in the country. Where the capture was made due to Hotel Developers Lanka’s in proper following of, board of director duties assigned by the companies’ act 7 of 2007. The following were some of the reasons which were noted by the government as the reason for the takeover;

Hotel Developers Lanka Plc did not submit fully completed and audited annual reports of Hilton Colombo to shareholders for last 17 years.

The lease payment for the land of the building was not paid to the government by the middle man who was supposed to pay it on time.

Lawyers have estimated the debt of Hotel Developers Lanka to the government at the end of 2010 is to be over Rs 11 billion, this also includes the accumulated losses, has resulted in a serious loss of capital. Hotel Developers Lanka’s share capital is Rs. 452 million. Also it have been noted that the companies net asset value is below than zero levels.

The main responsible personals of the board did not disclose any piece of information about the company’s debt situation in the current stage, to the shareholders of the company. They sold their major shares in the secondary market and resigned their respective positions in the company.

5.0 How has the law influenced the Board of directors?

• Companies Act 187 says it is one of the fiduciary duties of the Board Director to act in good faith and in the interest of the company. That means if the same director is in a subsidiary company he has to act in the same manner in all the companies. Basically should equally treat all his companies.

Here in the Hotel Developers Lanka case it’s clearly stated in the reports published by the government that the directors who were in the main board of Hotels Developers Lanka PLC (HDL) is also playing the similar roles in other popular companies where those companies have made profit and gained a good value among its shareholders. Where HDL was not earning a good value, it’s because of the unequal treating done by the board directors of the company.

• According to the Companies Act 188 it is also a duty for the director to comply within the act and company’s articles. Where it is mentioned, in the act that a public company should publish their annual report every year.

HDL have failed to comply this above said act for last 17 years which clearly indicates that the duties of directors assigned by the companies act have not been followed by the board of directors. If this would have been published to the public annually the shareholders would have known the businesses actual state and would have not made their investments expecting higher returns.

• One of the main duties of the Board director is to look after the shareholders by disclosing the required and relevant information to them on time they require. As well as poke in to activities which will gain value to the shareholders.

Here in HDL the main board did not at all disclose any of the activities of the company. Even though most of the directors of the board knew that HDL is going to be captured by the government due to its heavy debt to the government, still they kept quiet and took out all of their individual investments out of the company and they simply resigned their respective positions.

Also they did not at all have a concern about whether their lease amount is being paid by the middle man to the government on time.

• Companies Act no 219 states about duty of directors on insolvency of the company. Where, a director has a duty to call a meeting for board, if he believes that the company is unable to pay its debt. It is to consider whether an application should be made to courts for the winding up of the company.

Here in HDL as at 2010 the total debts of the company have been estimated 11 billion where the share capital is just 452 million. So at this stage if the act 219 would have been followed in good manner then it is the director’s duty to call for a meeting and decide whether to make an application to the courts for the winding up of the company. Where such meeting was not called as well as the board did not disclose to their shareholders about their owing to the government (11 billion).

• Companies Act no 220 talks about duty of a director on serious loss of capital. This law states whenever the company’s net assets are less than half of its stated capital; it is the director’s duty to call for an Emergency General Meeting within twenty days from the occurrence of the incident. Where this meeting, have to be held within forty days from the call of meeting.

HDL’s Net asset value is below zero levels where since the duties were not properly followed by the HDL, it doesn’t seems they have conducted such sought of meetings to stop the falling of net asset value below zero levels or at least to make their shareholders aware of this.

6.0 Conclusion

Even there is company act and articles of associations which state how a board of director should conduct his self within a company board, most of the assigned fiduciary duties are not being followed by the board of directors of Sri Lanka. Even though there are penalizations exist for punishing those who are not abiding the laws but still the penalty they need to pay which is always not a huge amount on the victim’s side. Even that, they somehow try and manipulate or negotiate with the relevant party and find a way out to get rid of it. So as my recommendation I would say the corporate governance should not only be in theory, it has to be made in practice and it have to be lived too. This would only come possible if all the sectors bring this to practice this include government as well as private sectors. When all the sectors give high priority and importance on following good corporate governance then there will be no chance for corporate scandals to occur and there won’t be any way out for a victim to get rid of his penalty.

7.0 Refferences

• ·         Cowan, N. 2004, Corporate Governance That Works, Pearson Prentice Hall, Singapore.
• ·         Anonymous., 2011, Hilton Colombo owning firm HDL’s debt tops Rs. 11b. [online http://www.ft.lk/2011/03/07/hilton-colombo-owning-firm-hdl%E2%80%99s-debt-tops-rs-11-b/ 2/4/11]
• ·         Chinwi., 2011, Colombo Hilton taken over by Government. [online http://www.lankanewspapers.com/news/2011/3/65275_4.html 1/4/2011]
• ·         Fernando, J. A., 2011, Sri Lanka Hilton Hotel taken over by Government-Basil Rajapakse. [online http://www.asiantribune.com/news/2011/03/10/sri-lanka-hilton-hotel-taken-over-government-basil-rajapaksa accessed 31/3/11]

•  ·         Kelum Bandara. & Yohan Perera., 2011, Hilton taken over by govt. [online http://print.dailymirror.lk/business/127-local/37742.html 1/4/11 ]