6. Company Law

COMPANY LAW
Charuni Gamage
LLM (UK), PGD in International Banking & Finance Law (UK), BA(Hons) Economics (UOC)
Attorney-at-Law & Notary Public
Commissioner for Oaths
Registered Company Secretary
The legal status of a company offers distinct economic advantages. The concept of limited
liability ensures that the liability of shareholders is limited to the issue price of the
company’s shares. Hence, the personal estates of shareholders are not at risk even in the
event of the company’s insolvency. This facilitates entrepreneurship by encouraging
persons to engage in business without the fear that a failure of the business could lead to
personal bankruptcy.
Another advantage is that a company continues its existence even if there is a change in
shareholders. A company’s shares therefore can be sold or transferred to third parties
without having to reconstitute the entity, unlike a partnership. These features facilitate the
pooling of resources for business activity and increase the ability to raise large amounts of
capital.
Registration of a company
Any person may apply to the Registrar to incorporate a company. The application must be
accompanied by;
• A declaration by the applicant that to the best of his knowledge the proposed name of the
company is not identical or similar to an existing company
• The articles of the company signed by the initial shareholders
• Consent from the directors and secretary to act in such capacities. [Section 4 (2)]
Number of shareholders
The Companies Act No. 7 of 2007 allows a company to have even a single shareholder.
The single shareholder can be an individual, a body corporate or secretary to the treasury
holding shares on behalf of the Government of Sri Lanka.
Certificate of Incorporation
Once the application is accepted, the Registrar must assign a number to the company and issue a
certificate of incorporation. The certificate will specify the name and number of the company, the
date of incorporation and its legal status.
Company Names
Public notice of incorporation must be given by companies within thirty days of their incorporation.
The notice must specify the company name, company number and reisgtered address.
Every company must indicate its legal status in its name in full or in an abbreviated form. A limited
company other than a public limited company must end its name with the word
“Limited” or “Ltd”; a private company with the words “(Private) Limited” or “(Pvt) Ltd”; or a
public limited company with the words “Public Limited Company” or “PLC”.
Articles of Association
The sole constitutional document of a company is its articles of
association. Companies have a choice of either having its own
articles or opting to adopt the model articles. If they elect for the
former, the articles can provide for any matter not inconsistent with
the Act, including objects, rights and obligations of the shareholders,
management, and administration of the company.
Stated Capital
The stated capital of a company is the total amount received by it, or due and
payable to it, in respect of the issue of shares and calls on shares. If the
shares are issued for consideration other
than cash, the board must determine their cash value for the purpose of
calculating stated capital. If a share has an obligation attached to it other than
an obligation to pay calls, the board must determine the cash value of that
performance and such performance shall be deemed to be a call paid on that
share for computing stated capital.
Dividends
A dividend is a distribution out of the profits of the company other than a company’s acquisition or
redemption of its own shares. They are the primary return that shareholders receive as consideration
for the use of the money contributed by them to the company. If a distribution fits the description of
a payment made to shareholders out of profits and other sums available for distribution, it will be
determined to be a dividend. The board has discretion on the timing and amount of a dividend. The
board is not obliged to declare dividend, and it can decide to set aside profits to meet the general
needs of the company.
When a dividend is declared, shareholders of the same class are entitled to equality of treatment. The
board cannot discriminate between them unless the reduction is in proportion to any liability
attached to the share under the articles, or the shareholder agrees to it in writing.
Accounting and Auditing standards
The content of accounting records is primarily governed by the

Accounting and Auditing Standards Board Act. This law
empowers the Institute of Chartered Accountants of Sri Lanka
to adopt accounting and auditing standards.
Duties of Directors
1. Act in good faith

The Act requires that every person who exercises powers or performs duties as a director must
act in good faith, in what he believes to be in the interests of the company. Unlike a
shareholder, who can act or vote in his own interests even if a conflict exists, a director must
act in the interests of the company. Directors must not use their powers for a collateral purpose.
When there are mixed motives, courts will look at the primary purpose. The directors have a
duty to act fairly if a decision will affect categories of shareholders differently.
2. Duties owed to the company
When a director sits on a board, his duties are to the company and not to the appointer.
However, the Act specifies exceptions. A director of a wholly owned subsidiary may, if
provided in the articles of that company, act in the interests of the holding company,
even though it may not be in the interests of the subsidiary.
Directors owe duties to the company and not to individual shareholders. However, in
certain instances, directors may undertake to act as an agent of shareholders, in which
event, the directors would owe duties to the shareholders. In certain other situations, such
as in the face of a takeover, the directors may owe duties to the shareholders to ensure
that they get the best possible price.
3. Compliance with law and standard of care
A director must not act or agree to the company acting in a manner that contravenes the Act
of the articles. Further, a director must not act recklessly or be grossly negligent in
exercising power. A director must exercise the degree of skill and care reasonably expected
of one with his knowledge and experience. This means that a director is not expected to be
an expert, unless appointed as such. The standard required is the exercise of care and
diligence of a reasonable person.
Powers of Directors
Generally, the business affairs of a company shall be conducted by the board subject to the control of the
shareholders and provisions in the articles. The Act grants the board with all powers necessary for that
purpose, subject to certain exceptions. Certain transactions that are classified as major transactions must
be, contingent upon or approved by a special resolution; consented to in writing by all the shareholders, or
expressly authorized by a provision in the articles which was included in the articles at the time of
incorporation.
These major transactions are defined in the Act. They are the acquisition or disposal of assets, or
agreement to acquire or dispose of assets (whether contingent or otherwise) that are greater than half the
value of the company before the acquisition or disposal, transactions that cause, or are likely to cause, the
company to acquire rights, or interests, or incur liabilities, exceeding half the value of its assets before the
acquisition; or a transaction, or series of transactions, that have the purpose or effect of substantially
altering the nature of the company’s business.

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6. Company Law

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COMPANY LAW

The content of accounting records is primarily governed by the

1. Act in good faith

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