Rescue, Rehabilitation and Insolvency Act No. 12 of 2026: A fresh path for debt recovery

Introduction

Sri Lanka has undergone back to back severe economic catastrophes starting from COVID -19 pandemic extended to the economic mayhem triggered with foreign currency crisis and massive policy issues finally exacerbated with the external shocks emerging from the global war situation.  A number of local businesses have been drastically collapsed during the period of economic crisis; especially SMEs and MSMEs have been operationally terminated due to the intolerable cost escalations within the businesses. Sri Lanka cannot expect any economic prosperity without any growth in SMEs and MSMEs which are the backbone of the economy of the country. 

Hence, there should be a business friendly ecosystem within the country where support to the entrepreneurs to boost up their businesses even in the catastrophic moments. The Rescue, Rehabilitation and Insolvency (Personal and Corporate) Act No. 12 of 2026 is effective from 17.06.2026 while gradually navigating the entire ecosystem inclusive of the financial institutions and the judiciary system towards a business restructuring direction rather initiating cumbersome litigation process against the defaulted entrepreneurs who are unfortunately, the victims of the current vicious eco cycle, but not the willful defaulters.

Rescue, rehabilitation and insolvency laws in USA, Singapore and India

In the USA, under the Chapter 11 Framework which is established on the “Debtor – In – Possession” concept, businesses are allowed to operate even in a situation of financial distress. The debtor remains in possession of the distressed business while enjoying the restructuring mechanism which is enforced by the judicial authority. The arithmetic behind the Chapter 11 Framework is to estimate the gap between the income that can be generated from the total assets of the company and the amount of the proceeds that can be generated by the way of realisation of the existing assets of the company. When there is a positive value, the company is allowed to have restructuring due to the going concern value of the company is larger than the liquidation value.

Following the USA, the Insolvency, Restructuring and Dissolution Act (IRDA) was enacted by Singapore in 2018, while legally enforcing a debt moratorium, a cross class cram down, pre- packaged schemes and rescue financing provisions for the defaulted debts.

India introduced Insolvency and Bankruptcy Code (IBC) in 2016 with some commendable infrastructure like dedicated Corporate Law Tribunals, an insolvency regulatory mechanism and an insolvency procedural timeline. Prior to this IBC, the Company Act was updated with the measures of rescue and restructuring of the companies while allowing them to make an application to the National Company Law Tribunal (NCLT) with a draft scheme of revival and rehabilitation of the distressed company. Within a week, the NCLT had to appoint an interim administrator to assess the draft of the revival proposal and finalise it on the approval of the creditors. This was called “a scheme of arrangement” which was not very popular due to the excessive procedural requirements, delays in court processes and lack of the cooperation of the creditors.

With the IBC in 2016, National Company Law Appellate Tribunal (NCLAT) was established with the composition of judicial members and technical members. This includes the retired judges of Supreme Court, India as the judicial members and corporate lawyers, labor lawyers, chartered accountants and company secretaries as technical members. Insolvency Process is regulated by the Insolvency and Bankruptcy Board and followed by three policy objectives namely maximisation of the value of the assets, facilitating restructuring based on renegotiation and quick and fast liquidation. However, unlike in the USA and Singapore, India follows the “Creditor/ Administrator/ Trustee – in – Possession” model.

Key aspects of Rescue, Rehabilitation and Insolvency (Personal and Corporate) Act No. 12 of 2026

It is not only about the Insolvency, but the Rescue and Rehabilitation are strongly prioritised. More specifically, it is not addressed only the defaulted corporations inclusive of SMEs and MSMEs, but also the personal insolvency procedure is precisely included.

Establishment of the Insolvency Regulatory Authority

The Insolvency Regulator Authority is the apex body for regulating the insolvency framework stipulated by the Act inclusive of both Personal Insolvency and Corporate Insolvency. This authority mainly consisted of Official Receiver, Deputy Official Receiver and Insolvency Practitioners.

Personal insolvency procedure

The debtor should submit a full statement of all the financial affairs inclusive of the disclosure of income, properties and liabilities to Personal Insolvency Official who is appointed under the Act as an independent statutory officer to administer and investigate the assets and financial affairs of the debtor and to supervise the personal insolvency procedure.

Eligibility to have a Debt Protection Moratorium Order for a debtor

A Debt Protection Application can be made by a distressed debtor who intends to prepare a proposal for a debt restructuring arrangement.  During the Debt Moratorium Period, the creditor should not take any remedial action in respect of the debt inclusive of any recovery of interest, charges, penalties or any other fees. And the non- payment of the debt during the Debt Protection Moratorium Period should not be considered as a default or breach of the contract between the debtor and the creditor.

The debt moratorium period is 60 days and can exceed up to 90 days to the maximum of 360 days. During the debt moratorium period, the debtor shall inform the material information of the financial position to the official receiver. This is a period of analysis available for the official receiver while keeping the debtor under observation in order to have a justifiable resolution for both debtor and the creditor. The creditor can object to this debt protection moratorium order on special grounds, the court can cancel the order accordingly.

Debt restructuring arrangement

The Personal Insolvency Proposer or the Personal Insolvency Administrator can negotiate a flexible repayment arrangement with the debtor’s creditors. A debt restructuring proposal is prepared by the Personal Insolvency Proposer where the tenure of proposal should be 3 Years or 7 years if the total debt is exceeded Rs. 10.0 million. All the payments should be done through the Personal Insolvency Administration.  

Further, all the expenses derived during the restructuring process should be prioritised to pay before other liabilities. If the majority of the creditors approve the Debt Restructuring Arrangement, it will be published in the Personal Insolvency Register and by a public notice. Up on the completion of the Debt Restructuring Arrangement, the debtor is provided “ A Certificate of Completion”

Debt Rehabilitation Order

The purpose of the debt rehabilitation order is to provide immediate working capital for urgent economic rehabilitation and to have a relief from over indebtedness and finally to generate the repayment to the creditor. A certificate is issued by the official receiver with a recommendation for a Debt Rehabilitation Order. Then the court issues a Debt Rehabilitation Order and it is published in the Personal Insolvency Register and by a public notice.

The Debt Rehabilitation Order can be continued until an order of discharge for a period of 1 Year with the extension of 90 days up to the maximum time period of 1 year. After this one year, the court issues an order confirming the Certificate of Discharge.

If none of these remedial measures are not succeeded, finally as a final insolvency process available for the debtor, the court issues the Bankruptcy Order. The purpose of the bankruptcy procedure is to relieve the debtor from overwhelming debts subsequent to the fair distribution of the available assets among the creditors. Ultimately, the debtor can establish a new financial start with a more balanced approach with the learned lessons and nourished exposure in a resilient manner.

Corporate insolvency procedure

The corporate insolvency procedure is thoroughly clarified in the Act. It is significantly contrasting with the typical winding up process which is currently operated.

Appointment of “the Administrator”:

The administrator can be appointed by the company by its own, liquidator or provincial liquidator with the approval of the creditors / the court or a substantial creditor / a receiver or by the court. The main purpose of appointment of the administrator is to administer the company’s affairs and the assets in order to maximise the company’s own potentiality for the best interest of the creditors and the shareholders. The administrator should publish his appointment and duly notify all the parties who hold any obligation with the company.

There should be a series of negotiations with the company and the creditors by the administrator with the purpose of having a resolution for the debt obligations.

The administration process stipulated in the Act

1. Holding an initial meeting

The administrator should give notice to all the creditors and publish the same within a stipulated time period of 7 working days before the meeting. At this meeting, all the creditors will discuss how the company debts will be dealt and what kind of resolution can be finalised.

2.Constitution of Administration Creditors’ Committee

In order to consult the administrator, the Administration Creditor’s Committee is established with the composition of all the creditors and to consider the reports submitted by the administrator. This is the body which considers and evaluates the resolution process for the purpose of maintaining the going concern of the company for the best interest of the creditors and other shareholders.

3.Holding an outcome meeting

The outcome meeting should be held within 5 working days after the convening period of 20 working days from the commencement of the administration process. However, the convening period can be extended on the resolution of the creditors or the approval of the court before the expiry of the existing convening period.

The creditors should be duly notified by both the ways of personally and publicly prior to 7 working days of the meeting. At this meeting, the deed of company arrangement which is the resolution proposed by the administrator can be approved by the majority of the creditor with the necessary amendments. This deed of company arrangement should be submitted to all the creditors and it should be published and notified to the Registrar of Companies and relevant other authorities.

  4. Deed Review Hearing at the court

As per the act, there is an expedited route which is combining the initial and outcome meeting together and to approve the deed of company arrangement, subsequently to apply the court for a deed review hearing in order to determine whether the parties should be bound by the deed of company arrangement which has been approved by the majority of the creditors. This step is followed under the expedited route.

By the way of voting for the deed of company arrangement which has been proposed at the initial meeting of the administration process, all the rights of the creditor which are reserved under the law suit are superseded by the said deed of company arrangement.

Debt restructuring arrangement for micro small medium enterprises

The sector of MSMEs being an integral part of the Sri Lankan economy is well identified and specially treated under this Act by stipulating a separate section for restructuring the debts of MSMEs. The identified MSMEs which have the secured and unsecured debts not more than Rs.  50 million  are entitled to submit a Debt Restructuring Arrangement through the debtor by his own or by a personal insolvency proposer on behalf of the debtor to the Official Receiver.

The Personal Insolvency Proposer should submit a statement with the Debt Restructuring Arrangement Proposal confirming that the proposal provides reasonable measures of facilitating the economic rehabilitation of the MSME debtor while allowing it to contribute the payments for the obligations with the creditors from the available assets and the cash flows. This proposal should be presented to the creditors and obtained the votes of the majority of more than two third of the total creditors. Finally, the official receiver issues a certificate recommending the Debt Restructuring Arrangement and presents it to the court.

However, on the factors of having a material inaccuracy, inability to reasonably forecast the cash flow projections and the future endeavors of the company which are stipulated in the proposal and unreasonable treatment to either debtor or a creditor, the official receiver may not issue a Certificate of Recommendation for the Debt Restructuring Arrangement. 

Then the Court can call objections for creditor or debtor or personal insolvency proposer for the refusal of the issuance of the Certificate of Recommendation over the Debt Restructuring Arrangement. If the court satisfies with the evidence and submissions of the parties, the court shall make an order confirming the Debt Restructuring Arrangement. Then the Debt Restructuring Arrangement is enforceable as full and final.

However an individual creditor can object to the Debt Restructuring Arrangement and the secured creditor can be excluded from this entire process if the proposal does not allow to modify or limit the rights of a secured creditor or hire purchase agreement counterparty. In this occasion, such a secured creditor can initiate their right under the appropriate lawsuit can be enforced in spite of this Debt Restructuring Arrangement. As per the Act, the purpose of stipulating a separate process for the debt restructuring arrangement for MSMEs is to achieve economic rehabilitation while avoiding liquidation and unnecessary expenses incurred due to the cumbersome legal process.

Brief analysis of the Rescue, Rehabilitation and Insolvency procedure

The Rescue, Rehabilitation and Insolvency Act No.12 of 2026 is not just a legal enactment, it is an utmost need of the times. Sri Lanka needs to have rapid economic growth in order to achieve the National Economic Objectives. The easiest way to enhance the manufacturing and the production of the county is to rehabilitate the existing businesses by providing them the financial assistance and reducing the debt burden gradually over those businesses. The existing businesses which are experiencing ups and downs with the economic downturns from time to time, have the potentiality and the resilience to re-stabilise once again in the ground. It is more cost effective than introducing a new businessman to the field.

This Act takes the creditors and the business debtors into the negotiation table for discussing a proper way forward for the rehabilitation of the business. The typical Business Revival Process which has been implemented in the licensed commercial banks recently is legalised under this Act. The cumbersome legal process initiated by the creditors against the debtors will be converted to a constructive negotiation process which is more effective and supportive to achieve the business goals for both parties.

The Debt Restructuring Arrangement in personal and MSME insolvency and corporate insolvency is mainly prepared by the personal insolvency proposer or the administrator on behalf of the debtor. The debtor is not isolated; there is a supportive and cooperative mechanism to revitalise the debtor’s business with the approval of the creditors. The Debt Restructuring Proposal is legally enforced by the court and implemented for the best interest of both the debtor and the creditor within a prescribed period of time. The maximum effort is taken to reinstate the business; the liquidation is taken place as the ultimate recourse available for the business.

Establishment of the creative debt recovery process

The legal process of the debt recovery is currently limited to the few of legal enactments such as Debt Recovery (Special Provisions) Act No. 02 of 1990, Recovery of Loans by Banks (Special Provisions) Act No. 04 of 1990, Mortgage Bond Act No. 6 of 1949, Civil Procedure Code and Small Claims Court Procedure Act No. 33 of 2022. In addition, there are other special legal enactments allowing the State Banks to initiate the Parate Execution against the Mortgage Properties. The banks are used to influence the customers for the repayments of the defaulted liabilities by enforcing their rights reserved from the said legal enactments.

Some of these legal actions are unilateral; completely deprive the limited capacity available for the business to revive with the huge reputational damage incurred by the adverse publicity of the indebtedness. Rescue, Rehabilitation and Insolvency Act No. 12 of 2026 provides a breathing space for such businesses and the financial creditors should be patient and follow the process stipulated under this Act. The recovery staff of such financial institutions should be more creative and vigilant to discuss a proper resolution over the debts of the defaulted customer with a holistic view of having a 360 degree analysis of the customer’s financial position without demanding the last cent in due from the customer.

Conclusion

This process is exclusively applicable only for the genuine customers who are defaulted on the adverse macro and micro economic downturns, but not for the defaulters who have deliberately refused to pay. As per the articulation of the name of this Act, it is not an insolvency procedure, the rescue and rehabilitation process is prioritised before the insolvency. Compared to traditional litigation, which is slow, rigid, and focused only on short-term recovery, this approach is far more beneficial and it acts for the best interest of the creditors. The creditor should recognise that their own security ultimately depends on the debtor’s business being protected and financially stable. In this way, the law introduces a fresh path for debt recovery which transforms the older, reactive collection methods into well-thought-out, fair, and constructive restructuring strategies.

(The author is banker and an Attorney-at-Law)