A lifeline for small businesses

• How MSMEs can invoke the rescue, rehabilitation and insolvency (Corporate and Personal) Act

Sri Lanka's insolvency law changed for good on 17 June 2026, when Hon. Speaker Dr. Jagath Wickramaratne endorsed the certificate on the Rescue, Rehabilitation and Insolvency (Corporate and Personal) Bill, first read in Parliament on 17 March and passed following debate on 6 May. It now stands as the Rescue, Rehabilitation and Insolvency (Corporate and Personal) Act, No. 12 of 2026, the statute that finally retires the Insolvency Ordinance of 1853 and replaces a liquidation-first regime with one built around rescue.

But the certificate is not a starting gun. Section 1(3) of the Act provides that, apart from the institutional provisions establishing the Insolvency Regulatory Authority (which took effect immediately on certification), every other provision, including the MSME mechanism this article focuses on, only comes into operation six months after certification, in mid-December 2026. Section 1(4) lets the Minister extend that window further, by up to two years in aggregate from certification date. For a small business owner, that is both a warning and an opportunity: the rescue is coming, but not yet, and the months in between are exactly when a distressed MSME and its advisors should be preparing.

A law written with the small business in mind

Unusually for insolvency legislation, the Act does not treat small enterprises as an afterthought. Part XI creates a dedicated MSME Company Debt Restructuring Arrangement, a standalone procedure built specifically so that a small company, working with an insolvency professional, can negotiate a flexible repayment plan with its creditors “avoiding liquidation and the unnecessary expense and complexity of administration.” The philosophy is explicit in the section itself: rehabilitation through negotiation, not liquidation through default.

The threshold for qualifying is generous by design. An “MSME debtor” is a company whose total outstanding secured and unsecured debt does not exceed Rs. 50 million at the time its proposal is submitted to the Official Receiver. Two or more related MSME companies with intertwined finances can even have their proposals bundled and dealt with as one, provided the terms spell out how joint assets, debts and payments are to be apportioned.

When can an MSME actually invoke it?

Eligibility is narrow but not harsh. A company qualifies where it is unable, or likely to become unable, to pay its debts as they fall due in the ordinary course of business, the standard “cash-flow” insolvency test, and provided it is not already in liquidation. Notably, there is no requirement to already be in default; a company that sees the wall coming can invoke the mechanism pre-emptively, which is precisely the “early intervention” behaviour the Act is designed to encourage.

Building the team and the proposal

An MSME cannot self-file. It must first appoint a personal insolvency proposer, a registered insolvency professional, who investigates the company's financial affairs, certifies that the eligibility criteria are met, and helps prepare the proposal. The same person may go on to serve as the personal insolvency administrator once the arrangement takes effect, giving continuity from negotiation through implementation. The proposal itself must be accompanied by a full statement of the company's financial affairs and the proposer's professional opinion that the plan has a reasonable prospect of approval and offers a fair outcome to both the debtor and its creditors. Terms can restructure secured debt, hire-purchase obligations and rental arrears alike, though any reduction of a secured amount cannot cut below the value of the underlying security.

The negotiation meeting  and the “Silence is Consent” rule

Once the Official Receiver receives the proposal, the proposer convenes a negotiation meeting, giving every known creditor at least 21 days' notice along with a claim form and postal or email voting options. The Act's most striking practitioner point sits here: a creditor who does not attend, does not vote, and does not object is deemed to have voted in favour. If no creditor votes at all, the arrangement is deemed approved outright. This default-to-approval design puts pressure on disengaged or dilatory creditors and rewards a company that documents its notice process meticulously, because a creditor who never engaged also loses standing to object later in court.

Approval itself requires creditors holding two-thirds in value of claims voting in favour; where the plan touches secured creditors or hire-purchase counterparties specifically, that same two-thirds threshold must be met within that sub-class as well.

Court confirmation and the protective shield

An approved plan then goes to the Official Receiver for certification and on to court. The court can refuse confirmation only on defined grounds, non-compliance, material inaccuracy, or unfairness, and once confirmed, the arrangement binds every affected creditor. Confirmation also triggers a protective shield strikingly similar to an administration moratorium: while the arrangement is in force, creditors are barred from initiating legal proceedings, demanding payment, executing judgments, terminating essential services, or repossessing rented premises in respect of included debts. For a small business, this is the practical value proposition, breathing room, on legally enforceable terms, without the cost of full administration.

When it fails: Variation and termination

The mechanism is not a one-way street. The debtor, administrator and creditors can jointly vary the plan, and any of the debtor, a creditor, the administrator, or the Official Receiver can apply to court to terminate it, on grounds ranging from material misrepresentation to three months' payment arrears. A terminating creditor may even couple that application with a request for a bankruptcy order, so the mechanism is not a shield against consequences, only a structured first attempt at avoiding them.

The conclusion 

With commencement realistically landing between December 2026 and mid-2028, this is not yet a live remedy, but the runway matters more than the wait. MSMEs carrying debt near or under the Rs. 50 million threshold should be using this period to get financial records audit-ready, identify a prospective insolvency proposer, and map their creditor base, so that when the mechanism switches on, the first eligible companies through the door are the best-prepared ones, not merely the most desperate

(The author is an Attorney-at-Law (LLB), FCMA(UK), CGMA, FCMA, was awarded Tax Practice Leader of the Year 2024 (ASPAC) by International Tax Review (ITR) and was a top-four finalist for Tax Litigation and Disputes Practice Leader of the Year)