Understanding proposed Rescue, Rehabilitation and Insolvency Law

Sri Lanka has long recognised the need to modernise its insolvency framework, yet meaningful reform has remained in the pipeline for years. The proposed Rescue, Rehabilitation and Insolvency (Corporate and Personal) Law now represents a significant step forward. It is not merely another statute, but a structural recalibration of how the country approaches financial distress. At a time when businesses, financial institutions and individuals continue to navigate the aftereffects of economic turbulence, this legislation signals an effort to move from a system focused primarily on enforcement and liquidation towards one that seeks rehabilitation, continuity and long-term economic stability.

Sri Lanka’s commercial legal landscape may soon witness one of its most significant structural reforms in decades. After years of discussion within legal, financial and policy circles, the proposed law has finally moved forward in legislative form. For many practitioners, bankers and economists, this development represents a long-awaited attempt to modernise how the country deals with financial distress in an increasingly complex economic environment.

In the aftermath of economic restructuring efforts that tested the resilience of businesses and individuals alike, the need for a modern insolvency framework has been widely recognised. The proposed law signals a shift in philosophy, moving away from a system largely centred on enforcement and liquidation towards one that seeks to balance creditor recovery with rehabilitation, economic continuity and institutional stability.

Why this reform matters now

Sri Lanka’s existing insolvency framework is rooted in older legal concepts that were not designed for today’s interconnected financial system. Over the years, professionals across the legal and financial sectors have pointed out that outdated procedures often led to premature closures of viable enterprises, prolonged litigation, and uncertainty for creditors and debtors alike.

Against this backdrop, the proposed legislation can be seen as part of a broader effort to align commercial law with contemporary economic realities. It reflects a recognition that insolvency law is not only about winding up failed ventures; it is also about preserving value, maintaining employment and creating predictable outcomes that support investment confidence.

The structure of the proposed law

1. A dedicated Insolvency Regulatory Authority

 One of the most notable features is the creation of an independent regulatory body to oversee insolvency practitioners, establish professional standards and maintain registers. The intention appears to be the professionalisation and modernisation of a field that has traditionally operated under fragmented oversight.

2. A new approach to personal insolvency

 For individuals facing financial distress, the law introduces a structured pathway that includes debt protection measures, restructuring arrangements and rehabilitation orders before bankruptcy becomes necessary. This represents a significant cultural shift, acknowledging that honest debtors may require a realistic opportunity to rebuild rather than face permanent economic exclusion.

3. Corporate rescue through administration

 Perhaps the most transformative element is the introduction of an administration regime. Administrators may be appointed to manage struggling companies while temporarily pausing enforcement actions by creditors. The aim is to create space for restructuring negotiations that could preserve viable businesses and protect long-term economic value.

4. Special mechanisms for MSMEs

Recognising the central role of micro, small and medium enterprises in Sri Lanka’s economy, the Bill proposes tailored restructuring mechanisms designed to make the process more accessible for smaller businesses.

5. Modernised liquidation and receivership

 While rescue is prioritised, the law also updates traditional liquidation procedures, clarifying duties, reporting obligations and accountability of liquidators and receivers.

6. Cross-border insolvency recognition

Given the increasing internationalisation of finance, provisions dealing with foreign insolvency proceedings aim to bring Sri Lanka closer to global standards.

Perceived benefits of the proposed framework

Supporters of the reform view it as a step toward a more mature and predictable commercial environment.

First, a rescue-oriented framework may help preserve enterprise value by allowing viable businesses to reorganise rather than collapse prematurely. For creditors, structured negotiations and collective processes could lead to more efficient recoveries compared to fragmented enforcement actions.

Secondly, the professional regulation of insolvency practitioners may strengthen confidence in the system by promoting transparency and consistent standards. From an economic perspective, modern insolvency laws are often regarded as essential infrastructure for attracting investment, as lenders and investors tend to favour jurisdictions with clear restructuring mechanisms.

Finally, the personal insolvency provisions may carry important social implications by offering individuals a structured path toward financial rehabilitation.

Areas of concern and professional debate

No major legal reform arrives without questions, and the proposed law has generated thoughtful discussion within professional circles.

One frequently noted issue relates to the temporary moratoriums imposed during administration. Financial institutions and secured creditors may examine how these provisions affect contractual enforcement and lending risk. The challenge will be to strike a balance between collective restructuring and commercial certainty.

Another area of debate concerns the powers granted to the proposed Insolvency Regulatory Authority. While regulation may improve standards, observers will naturally consider how its oversight functions interact with judicial independence and existing institutional structures.

The introduction of wrongful trading provisions and expanded duties for directors also marks a notable departure from past practice. These measures aim to encourage responsible decision-making during financial distress, yet their practical implications will likely evolve through judicial interpretation.

Implementation challenges ahead

The success of any reform ultimately lies in its implementation. Courts, practitioners and regulators will require specialised training to navigate a more sophisticated restructuring framework. Procedural clarity and judicial consistency will be essential to prevent delays that could undermine the very objective of rescue.

The transition from the existing legal regime to the new system may also present initial challenges, particularly for ongoing proceedings and established commercial practices. Financial institutions, lawyers and corporate boards may need to reassess contractual structures and risk management strategies in light of the new legal environment.

An overall assessment

Viewed in context, the proposed Rescue, Rehabilitation and Insolvency Law represents a long-anticipated attempt to bring Sri Lanka’s insolvency framework in line with modern economic realities. It reflects an evolving understanding that insolvency law must serve not only as a mechanism for enforcement but also as a tool for economic stability and recovery.

Whether the legislation ultimately achieves its objectives will depend on careful implementation, balanced interpretation and the collective effort of the legal and financial communities. The proposed framework invites a broader conversation about how Sri Lanka manages financial distress. It is not merely a legal issue, but an integral part of the nation’s economic development.

If enacted and applied thoughtfully, this reform has the potential to reshape how businesses, lenders and individuals navigate periods of financial difficulty, signalling a shift toward a more structured, transparent and rehabilitation-focused insolvency culture.

Ultimately, the true test of this reform will not lie in the ambition of its drafting, but in our collective ability, as lawmakers, judges, professionals and market participants, to ensure that insolvency becomes not merely an end, but a pathway toward renewal and economic resilience.

(The author is Former Justice, Finance and Foreign Affairs Minister.)