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GK awaits SC green light to liquidate assets to repay depositors Vote_lcap68%GK awaits SC green light to liquidate assets to repay depositors Vote_rcap 68% [ 178 ]
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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » GK awaits SC green light to liquidate assets to repay depositors

GK awaits SC green light to liquidate assets to repay depositors

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SHARK aka TAH

SHARK aka TAH
Expert
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by Suresh Perera

Golden Key is awaiting the Supreme Court (SC) go-ahead to liquidate some identified assets to raise Rs. 2.848 billion to launch the fourth phase of the repayment plan to settle 41% of holdings of investors of this crisis-hit company, a senior official said last week.

With the completion of the earlier three stages, depositors who had invested up to Rs. 731,000 have already been cleared, while another Rs. 11 million is required to reimburse the targeted 41% of those with investments below Rs. 1 million, says Dushanthi Hapugoda, a director of the newly-revived company.

"We have sufficient funds in the kitty to settle 476 depositors in this particular segment, but needs the green-light from the SC to implement it", she noted.

"Though GK‘s depositor base was 9,000, the number of dependents exceed 100,000 and with most of them struggling to eke out an existence, not a day passes without a multitude of appeals for relief from these struggling families", she said. "Their fate is so tragic and heart-rending".

She said the proposed 41% settlement will encompass investments up to Rs. 200 million, though the bulk of depositors involved are small-timers, who had placed their life-long savings in this Ceylinco subsidiary for a better return.

The GK Fundamental Rights (FR) case has created history in the legal sphere and, perhaps, qualify for a Guinness world record entry as a petition heard by three respective Chief Justices (Sarath N. Silva, Shiranee Bandaranayake and Mohan Peiris) over a six-year period, Hapugoda asserted.

She complained that intervenient petitioners who are totally irrelevant parties to the case were causing inordinate delays and trying to change direction of the action by filing motions. Earlier, the SC had disallowed intervenient petitioners not connected or relevant to the FR plea filed by a group of GK depositors.

When they attend court, depositors and parties who had filed the action are edged out and have to stand outside as there is no seating accommodation, she complained. "We are the relevant party to the case, but they keep on filing motions causing delays".

The GK FR case, now being heard before a five-member Bench, on October 3, 2014, granted 10 days for parties to make their submissions. Further hearing has been listed for November 3, 13 and 28.

Filing a motion on behalf of GK depositors, Hapugoda stated that the shares held by CIESOT in Ceylinco Insurance PLC are assets of Lalith Kotelawala and must be realized for the repayment of GK depositors as per the SC Order dated October 23, 2009 and to implement the Repayment Plan submitted by the Monetary Board dated March 30, 2013 and approved by Court on April 4, 2013.

CIESOT (Private) Limited was incorporated on March 31, 2000 and the initial shareholders of the company were Jivaka Lalith Bhupendra Kotelawala, and Solomon Jesudian Ratnadas each holding 50% of the shares in the company. Kotelawala declared his 50% shareholding in CIESOT as an asset by affidavit dated November 20, 2009 pursuant to the Order of Court dated October 23, 2009, the motion said.

The Trust for which CIESOT was incorporated was set up by Deed of Trust bearing No. 2221 dated March 31, 2000, attested by Mangala Seneviratne, Notary Public. The Articles of Association of CIESOT and Deed of Trust have ensured that Kotelwala remains in control of the shares held by CIESOT in Ceylinco Insurance, it said.

The beneficiaries of the Trust according to the Deed are employees of Ceylinco Insurance PLC who have either completed five years of service in the company, or who have accumulated five years of service through service in other companies in Ceylinco Consolidated as at March 14, 2000 and as identified by Ceylinco Insurance PLC, the motion said.

The principal benefit of the Trust is payment made from the Trust Fund to employees who cease employment with Ceylinco Insurance PLC after completion of at least five years i.e. a terminal benefit. The shares held in Ceylinco Insurance PLC need not be held in the name of CIESOT (Pvt.) Ltd. in order for CIESOT to fulfill the described purpose of the Trust and pay the primary benefit of the Trust, the motion noted.

The motion, inter alia, further stated:

"Although the shares held by CIESOT are not required for the fulfillment of the primary benefit of the Trust, the Trust Deed mandatorily requires the Trustee to only invest the monies in the Trust in the shares of Ceylinco Insurance PLC.

"The Independent Auditors’ Reports as prepared by KPMG Ford, Rhodes, Thornton & Co. (Chartered Accountants) on September 19, 2012 for the financial year ended December 31, 2011, and November 21, 2011 for the financial year ended December 31, 2010, provides that the said principal benefit upon cessation of employment has not been paid.

"The dividends that have been paid in respect of the shares are token sums that divert attention from the collateral purpose of CIESOT (Pvt.) Ltd. and not because of any bona fide entitlement that CIESOT and/or Kotelawala intended to confer on the employees to the shares held by it in Ceylinco Insurance.

"The collateral purpose of the shares held in the name of CIESOT (Pvt.) Ltd., is further borne out by the fact that Ceylinco Insurance PLC has held out to the Securities and Exchange Commission that the company does not recognize the shares held in the name of CIESOT (Pvt.) Ltd. in the company as shares held for the benefit of employees of Ceylinco Insurance PLC.

"The Securities and Exchange Commission (SEC) has in its Transitional Provisions of the 2012 Continuing Listing Requirements of the SEC sought to identify and remove such mala fide employee share schemes from the shareholdings of listed companies.

"In the event the listed entity does not transfer all or any of the shares to the employees on or before March 2015, the listed entity is then required to dispose the shares in such employee share schemes through the SEC. The SEC had to write to Ceylinco Insurance PLC on a number of occasions to inquire about the compliance by the insurance company with the transitional provisions as regards the shares in the company that were held in the name of CIESOT (Pvt.) Ltd.

"Ceylinco Insurance PLC did not attempt to remedy their non-compliance with the said Transitional Provisions and allow for the shares to be transferable to the employees. The company instead, insisted, as borne out through the correspondence exchanged with the SEC, that the shares in Ceylinco Insurance that are held in the name of CIESOT (Pvt.) Ltd. are not part of an employee share scheme thereby confirming that the shares held by CIESOT in the insurance company are not offered at all to the employees.

"The SEC however, has made it clear to Ceylinco Insurance that regardless of the company’s perception of the amenability of the shares held by CIESOT to the Transitional Provisions for employee share schemes, the shares cannot continue to be held by CIESOT (Pvt.) Ltd., perpetually.

"Ceylinco Insurance thereafter, held out to the SEC that the company will dispose the shares through the Exchange and informed the SEC of this decision by letter dated September 19, 2012.

"Ceylinco Insurance PLC by opting to dispose the shares held by CIESOT through the Exchange held out that the shares were never intended to be given to the employees of Ceylinco Insurance. After giving the undertaking to the SEC that Ceylinco Insurance will dispose the shares held by CIESOT, the company amended the Trust deed to seemingly make the shares held by CIESOT more investor friendly.

"The amendments removed all benefits to employees from the shares held by CIESOT in Ceylinco Insurance so that even dividends were no longer payable to employees. The new Trust Deed provided no basis for CIESOT to hold on to the shares of Ceylinco Insurance;

"On June 9, 2014, the employees of Ceylinco Insurance purported to support an application for intervention dated May 16, 2014 made representations to Court. The employees effectively sought the same reliefs that CIESOT had previously sought i.e. a reversal of the Court on CIESOT. The employees also seemed more concerned with a management change in Ceylinco Insurance and sought to restrict the voting rights of CIESOT ‘particularly in a manner which could alter the composition of the Board and the management of Ceylinco Insurance;’

"The above has clearly established that the CIESOT Trust and the shares of Ceylinco Insurance PLC held in the name of CIESOT (Pvt.) Ltd., are not intended to confer any bona fide benefit on the employees of Ceylinco Insurance PLC.

"Kotelawala was Chairman of Ceylinco Insurance until his retirement with effect from May 28, 2010 and his shareholding in the insurance company has always been negligible and his shareholding in the company according to the 2013 Annual Report, is 36,745 shares, and a further 18,141 shares which he jointly holds with Mrs. S.P.C. Kotelawala.

"Kotelawala wields control over companies in the Ceylinco Group through indirect shareholdings or shareholdings that are not directly held in his name but over which he exercises significant influence and which are used to control the management of the company, as seen in companies like The Finance Co. Ltd. and Seylan Bank.

"The ten (10) shares held by S.J. Ratnadas were recorded from 2009 onwards as held by H.D.K.P. Alwis and E.T.L. Ranasinghe (joint shareholders). This was the year in the immediate aftermath of the collapse of GK and during which time, Kotelawala and his assets was subject to investigation by the regulatory authorities in view of his liabilities to the depositors of GK.

"The transfer of shares in 2008/2009 coincides also with an increase in the shares held in the name of CIESOT (Pvt.) Ltd. in Ceylinco Insurance PLC and a departure of a number of companies in the Ceylinco Group from shareholdings in the insurance company (and even the emergence and/or swelling of a number of pension and gratuity funds in the insurance company). In 2009, the shares held in the name of CIESOT (Pvt.) Ltd. in Ceylinco Insurance PLC increased by 297,560 shares, and all companies in the Ceylinco Group divested their entire shareholding of 6,167,969 of shares in the insurance company (constituting 30.84% of the shareholding).

"The transfer of shares to H.D.K.P. Alwis and E.T.L. Ranasinghe is a mechanism employed by Kotelawala to conceal his assets from GK. Although Kotelawla disclosed the 50% he held in CIESOT as an asset to the Supreme Court in his affidavit in terms of the Order of the Supreme Court dated October 23, 2009, Kotelawala was able to avoid disclosing the full value of the CIESOT asset by concealing the 50% shareholding in CIESOT that he indirectly controlled through Alwis and Ranasinghe.

"Alwis and Ranasinghe are not known to have sufficient personal wealth to purchase the 50% shareholding of CIESOT from S.J. Ratnadas. The only connection that Alwis and Ranasinghe had to their shareholding in CIESOT is their membership on the Board of Directors of Ceylinco Insurance, given that they were never on the Board of CIESOT itself.

"It is apparent that Alwis and Ranasinghe are themselves, men of straw of Kotelawala recruited to hold the said shares of CIESOT in Ceylinco Insurance on behalf of Kotelawala in place of Ratnadas whose links to Mr. J.L.B. Kotelawala are difficult to conceal.

"The only real and intended beneficiary of the CIESOT Trust and the shares held by CIESOT in Ceylinco Insurance is Kotelawla who was using the said Trust and its shares in the insurance company to perpetuate control in the management of Ceylinco Insurance".

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