REGULATORS - DUTY OF CARE

CSE Regulators lackadaisical approach in taking appropriate action to suspend trading of some listed companies that has reported serious loss of capital for many years despite deadlines issued to these companies by the CSE is causing concern among the investors.

This delayed action by the regulators is likely to cause loss to investors and further debacle to Colombo Stock Exchange as similar to what transpired in the case of  Vanik Incorporation, Touchwood and Magpel Exports to name a few.

Investors lost millions of rupees due to delays of the CSE  in delisting the Vanik Incorporation and Touchwood Investments PLC on a timely manner.

More recently Crypto Exchange FTX was declared bankrupt causing concern about the crypto trading which is likely to affect other exchanges as well.

As given below in the case of Serendib Engineering PLC and Asia Capital PLC, directors of the company is taking the regulator for a joke by repeated issuing the same excuse letter even after completion of 12 months despite statutory decline issue by the CSE.

Letter issued by Serendib Engineering PLC on 7th September 2021.
https://cdn.cse.lk/cmt/announcement_portal_prod/Letter%20to%20CSE%20-%2007-09-2021_1814892250717938.pdf


Same letter issued by Serendib Engineering Group PlC on 8th November 2022.
https://cdn.cse.lk/cmt/announcement_portal_prod/SEGP%20-%20CSE%20Letter%2008.11.2022_22741538083838.pdf


No action taken by CSE against the Serious Loss of Capital at Serendib Engineering Group PLC
Latest Corporate Results of Serendib Engineering Group PLC (IDL.N0000): As at 30 September 2022
https://cdn.cse.lk/cmt/upload_report_file/624_1668158690621.09.2022.pdf




No action taken by CSE against the Serious Loss of Capital at Asia Capital PLC
Latest Corporate Results of Asia Capital PLC (ACAP.N0000): As at 30 September 2022
https://cdn.cse.lk/cmt/announcement_portal_prod/Public%20Float%20as%20at%2030.04.2020_3075447041918234.pdf



The Company’s net assets stand at LKR (341,329,000) which is below the 50% of its stated capital. This situation has triggered a serious loss of capital as at 30th September 2022 in terms of section 220 Of the Companies Act No 07 of 2007. The Board of Directors has paid much attention to this matter subsequent to the balance sheet date and subsequent to a preliminary discussion with the auditor and the Indipendent consultants of the Company have identified assets wherein the company holds a minority stake that could be liquidated in order to restructure the balance sheet. Consequently the Directors have had discussion with owners of the majority stake of the identified assets who in principle are willing to exercise their first right of refusal subject to an independent valuation and board approvals. Information gathering to facilitate the independent valuation is in progress. The Board expects, once substantial information is available, to provide a plan in terms of section 220 Of the Companies Act No 07 of 2007 to the shareholders of the Company.

https://www.srilankachronicle.com/t62815-asia-capital-plc-serious-loss-of-capital-confidence#405851

Solvency Test as per the Companies Act of Sri Lanka

SOLVENCY TEST
- A company will be deemed to have satisfied the solvency test, if: (a) it is able to pay its debts as they become due in the normal course of business; and (b) the value of the company's assets is greater than: (i) the value of its liabilities; and (ii) the company's stated capital.

SECTION 57
57. (1) A company shall be deemed to have satisfied the solvency test, if—
(a) it is able to pay its debts as they become due in the normal course of business; and
(b) the value of the company’s assets is greater than —
(i) the value of its liabilities; and
(ii) the company’s stated capital.

(2) In determining whether a company satisfies the solvency test, the board—
(a) shall take into account the most recent financial statements of the company prepared in accordance with section 151 of the Act ;
(b) shall take into account circumstances the directors know or ought to know which affect the value of the company’s assets and liabilities ;
(c) may take into account a fair valuation or other method of assessing the value of assets and liabilities.

Duty of Directors: Section 220 of the Companies Act of Sri Lanka


https://www.parliament.lk/uploads/acts/gbills/english/3776.pdf

Response by the Colombo Stock Exchange (CSE) via Twitter
https://twitter.com/CSE_Media/status/1593081382506745856?s=20&t=USrM67azAKYnSZiY1horPg







Request by Financial Chronicle
https://twitter.com/ChronicleLK/status/1593222575177732097?s=20&t=USrM67azAKYnSZiY1horPg



LISTING RULE RELATING TO ENFORCEMENT
https://cdn.cse.lk/pdf/Section-11-Updated-as-at-14-02-2022.pdf






SECTION 7
CONTINUING LISTING REQUIREMENTS
https://cdn.cse.lk/pdf/Section-7-17.01.2018.pdf

Serious Loss of Capital

As per Section 220, if it appears to a Director of a Company, that the ‘net assets’ of the Company are less than 50% its ‘Stated Capital’, then the Board, within 20 working days of such fact becoming known to the Director, shall call an Extra-ordinary General Meeting of the Shareholders to be held, not later than 40 working days from the date of calling of such Meeting.

The Notice calling such Meeting shall be accompanied by a Report prepared by the Board, which advises the Shareholders of – (a) the nature and extent of losses incurred, (b) the causes for the losses incurred, (c) steps, if any, being taken by the Board to prevent further losses or to recoup the losses incurred.

At the Meeting, this Report of the Directors and the financial position of the Company shall be discussed and the Shareholders given a reasonable opportunity to ask questions, discuss and comment on the Report and the management of the Company.

Such provisions compel the management of a Company to be always mindful and conscious of the solvency of the Company, and to take strategic steps to endeavour to arrest and reverse the erosion of the ‘Stated Capital’ of a Company.

As per Section 219, if a Director believes that a Company is unable to pay its debts as they fall due, he shall forthwith call a Meeting of the Board to consider whether the Board should apply to Court for the winding-up of the Company and the appointment of a liquidator or an administrator or carry on further the business of the Company.

If a Director in such circumstances fails to so act, and the Company is subsequently placed in liquidation, the Court may on the application of the liquidator or creditor, make Order that the Director shall be liable for the whole or any part of any loss suffered by the creditors, as a result of the Company continuing to carry on its business.

If at the Meeting called by the Director, the Board does not resolve to apply to Court for the winding-up of the Company and for the appointment of a liquidator or administrator, and at the time of such Meeting there were no reasonable grounds for believing that the Company was able to pay its debts as they fell due, and the Company is subsequently placed in liquidation:-

The Court may, on the application of a liquidator, or a creditor make order that the Directors, other than those Directors who attended the Meeting and voted in favour of applying to Court for winding-up of the Company, and the appointment of a liquidator or administrator, shall be liable for the whole or any part of any loss suffered by creditors, as a result of the Company continuing to carry on its business.

This places an onerous duty on the Directors of a Company to always ensure the adequacy of ‘solvency’ and not to continue to carry on business, when a Company is insolvent, exposing themselves to personal liability !

This also gives protection to unsecured creditors and bankers, who hitherto did not have such protection.

https://www.consultants21.com/pdf/Enactment%20of%20Companies/Salient%20Features%20of%20Companies%20Act%20No.%207%20of%202007.pdf

REGULATORS - DUTY OF CARE
Regulators have a duty of care to suspend listed securities that affect the fair and orderly market. CSE can also suspend securities by operation of laws such as Companies Act relating to serious loss of capital as per Listing Rules 11.4b.

Accordingly CSE has been given the necessary powers to suspend trading of securities outside the listing rules as given below.



https://twitter.com/ChronicleLK/status/1593463346551988227?s=20&t=46Jz0hC7tV11nWRCLASYog



CSE Regulators lackadaisical approach in taking appropriate action to suspend trading of some listed companies that has reported serious loss of capital for many years despite deadlines issued to these companies by the CSE is causing concern among the investors.

This delayed action by the regulators is likely to cause loss to investors and further debacle to Colombo Stock Exchange as similar to what transpired in the case of  Vanik Incorporation, Touchwood and Magpel Exports to name a few.

Investors lost millions of rupees due to delays of the CSE  in delisting the Vanik Incorporation and Touchwood Investments PLC on a timely manner.

More recently Crypto Exchange FTX was declared bankrupt causing concern about the crypto trading which is likely to affect other exchanges as well.

As given below in the case of Serendib Engineering PLC and Asia Capital PLC, directors of the company is taking the regulator for a joke by repeated issuing the same excuse letter even after completion of 12 months despite statutory decline issue by the CSE.