Monday May 04, 2026
Monday May 04, 2026
Monday, 4 May 2026 05:44 - - {{hitsCtrl.values.hits}}
A proposed insolvency and restructuring law reviewed by the Committee on Public Finance (CoPF) could unlock a pipeline of distressed assets and improve capital recycling, but concerns over tax treatment, legal alignment, and execution capacity may limit its impact if left unresolved.
Investment banker, entrepreneur, Public-Private Partnership (PPP) specialist, and TWC Holdings Chairman and Owner Thilan Wijesinghe told the Committee that more than $ 50 million had already been brought into Sri Lanka for distressed assets, with a further pipeline exceeding $ 100 million (over Rs. 30 billion), particularly in the hotel sector. However, transactions remain constrained by the absence of a predictable, time-bound resolution framework.
He said large distressed exposures often remain on bank balance sheets without resolution, while smaller borrowers face faster enforcement, pointing to structural imbalances in the current system. A time-bound insolvency process could bring these assets to market, enabling restructuring, sale, and redeployment of capital.
Wijesinghe said the effectiveness of the insolvency framework will depend in part on complementary legal structures, particularly the absence of a Limited Liability Partnership (LLP) regime in Sri Lanka. He noted that LLP structures are widely used internationally to aggregate capital without creating multiple layers of taxation, enabling funds to be domiciled efficiently and deployed into assets.
He said that despite the availability of capital, the lack of such a framework has led to investment vehicles being structured offshore, including funds incorporated in jurisdictions such as the Cayman Islands. This, he noted, limits Sri Lanka’s ability to attract and retain capital for restructuring and investment in distressed assets.
Wijesinghe added that an effective insolvency regime, combined with an LLP framework, would support the aggregation of capital and improve the flow of both local and foreign investment into distressed and underperforming assets.
The Bill seeks to replace Sri Lanka’s liquidation-driven regime with a framework allowing distressed businesses and individuals a court-supervised moratorium during which restructuring plans can be negotiated and approved by creditors. If supported by a specified majority, such plans would become binding on all stakeholders, shifting resolution towards a creditor-driven model.
At present, insolvency in Sri Lanka is governed by fragmented and dated statutes, including personal bankruptcy laws dating back to the 1800s and corporate winding-up rules from 1939, with limited use beyond liquidation. The proposed law consolidates these into a single framework and introduces provisions for rehabilitation, addressing a longstanding gap in the legal system.
Tax treatment emerged as a central concern during the review. KPMG Sri Lanka Principal – Head of Tax and Regulatory Suresh Perera noted inconsistencies in the Bill, including references to obsolete taxes and unclear interaction with the Inland Revenue Act. He warned that restructuring actions such as debt write-offs, asset transfers, and changes in ownership could trigger additional tax liabilities, potentially undermining rescue efforts unless addressed through amendments or regulations.
Questions were also raised about priority rules, including the treatment of tax claims relative to other creditors. Advocata Institute Chairman Murtaza Jafferjee said insolvency frameworks should provide predictable outcomes for all stakeholders and argued that tax claims should not necessarily be prioritised over other creditors, noting that equal treatment could improve recovery outcomes and support capital flows.
Execution risks were also flagged. Stakeholders questioned whether courts would be able to meet the timelines envisaged under the law and whether sufficient institutional capacity exists to manage complex restructuring processes. Officials acknowledged that the framework would require supporting regulations, trained insolvency practitioners, and a strengthened Official Receiver function.
The interaction with existing recovery mechanisms, including parate execution, was also raised, with stakeholders noting uneven application across borrowers. While the proposed law brings multiple creditor classes into a single process, its effectiveness will depend on how it integrates with existing enforcement tools.
The Bill also permits new financing during restructuring with priority status to support viable turnarounds. However, stakeholders said the practical application of these provisions will depend on clarity in regulations and consistency in implementation.
The CoPF indicated that stakeholder inputs could be incorporated through Committee-stage amendments, particularly on tax provisions and operational details, before the Bill is taken up for debate in Parliament.
Participants included officials from the Justice and Finance Ministries, Central Bank of Sri Lanka (CBSL) representatives, industry chambers, small and medium enterprise (SME) bodies, financial sector associations, professional institutions, advisory firms, and think tanks.
The Bill has been gazetted and is now at the final pre-debate stage, with the CoPF, chaired by MP Dr. Harsha de Silva last week reviewing stakeholder submissions ahead of it being taken up in Parliament for second stage debate, potentially within the upcoming sitting week.
However, members indicated that the scope for changes at this point is limited, as the Bill cannot be sent back to the drawing board. Any revisions are therefore likely to be confined to targeted Committee-stage amendments and subsequent regulations, leaving several of the identified gaps to be addressed through implementation rather than legislative redesign.
SME stakeholders also raised concerns over how the proposed framework would interact with existing recovery mechanisms, particularly the use of parate execution. It was noted that banks typically move to enforcement within short timeframes, including around 60 days in some cases, which may not align with the longer cash conversion cycles faced by SMEs.
Participants said that while the Bill introduces a moratorium and restructuring window, there is uncertainty as to whether this would sufficiently offset current enforcement practices, especially for smaller borrowers who are more vulnerable to early recovery action. In contrast, larger exposures were noted to remain on balance sheets for extended periods, highlighting an imbalance in how distress is currently managed.
SME stakeholders cautioned that unless the new framework is calibrated to account for SME credit cycles and provide adequate restructuring space, a creditor-driven, time-bound process could disproportionately pressure smaller firms rather than enable recovery.
