COMPANY LAW

Companies Act No. 7 of 2007

The new Companies Act No. 7 of 2007 was enacted by the Parliament on 20th October, 2006
and was certified by the Speaker on 20th March 2007. The provisions of the Act have been
brought into operation on 3rd May 2007 by an Order made by the Minister of Trade, Marketing
Development, Co-operative and Consumer Affairs, and published in the Gazette Extraordinary
No. 1493/20 dated 20th April 2007.

Limited Liability Concept

The Company has Limited Liability

Liability of the company limited by shares. Liability would not go beyond company. A person
dealing with company will be dealing with a legal personality called “Company”. There is a
separation between company and its creators/investors/shareholders.

Example: A company issue shares – 10000 shares of 10/= each Ordinary share value x No.
of shares will be the shareholding. On the basis of shareholding a person will have to pay a
contribution to the company.

10,000 shares x 10/= each = 100,000 has to pay to the company. If there are 3 shareholders,
holding 10,000 shares of 10/= each, then company will have a stated capital of 300,000/=.

Each SH has to pay 100,000/= on issuance of 10,000 shares each.

If the shareholders had paid the full amount due on their shares then that liability becomes a
liability of company. No liability on shareholders in or at point of winding up if paid full. But
suppose if they paid half that is 50,000 – then 50,000 would be the amount payable by each
person if company went into liquidation – this is the amount that they owe to the company.

The liability is limited only to the amount that each and every shareholder is liable to pay to the
company.
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INCORPORATION

Legal status of a company

Section 2
- Body corporate Section 2(1)
- Power to carry out any lawful activity S.2(2)

A company is a body corporate and a juristic person. It has a distinct legal personality separate
from its shareholders. [Section 2(1)]. Company has the capacity to carry out or undertake any
business or activity and to undertake or engage in, or enter into, any transaction within or
outside Sri Lanka. It also has the rights, powers and privileges that may be necessary for that
purpose, subject to written law. [Section 2(2)].

Consequence of Incorporation -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.

SEPARATE LEGAL ENTITY/ PERSONALITY

- A company is separate and distinct from its members (those who own it), i.e. the
shareholders. A company is also different from those who direct and manage it, i.e. the
directors and other employees. - The existence of the company is unaffected by changes in its
shareholders/ directors/ other employees. The company’s assets, liabilities and contracts
belong to the company; not to the shareholders/directors/ other employees. A company can
sue its own employees and directors if they have caused any loss to the company by their
actions. This separate existence of the company is a significant principle in company law. This
principle was judicially established in 1897 by the House of Lords, England’s highest court, in
the famous case of Salomon vs. Saloman & Co. Ltd. (1897) AC 22. This important decision is
called the “Saloman principle”.
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Salomon vs. Salomon & Co. Ltd. (1897) AC 22: Salomon was a boot and shoe manufacturer who
traded as a sole proprietor for nearly 30 years. Consequently, he incorporated a company and
gave his wife and children 1 share each in the company and kept the balance shares in his own
name. As security for the shares in the company, Salomon obtained debentures from the
company. Subsequently, the company went bankrupt. On the company’s winding up it was
found that its remaining assets were insufficient to satisfy both its debenture holders and its
trade creditors. The question arose as to whether the debentures secured on assets issued to
Salomon will get preference as against the other unsecured debts of the company. The
unsecured trade creditors argued that Salomon and the company (i.e. Salomon & Co. Ltd.) were
truly the same person since he and his wife and children owned the company; therefore, he
could not owe money to himself; and accordingly, his rights as a debenture holder should not
get priority and he should be paid after making payment to third party unsecured trade
creditors.

Court held: Salomon’s company was a separate legal entity from Salomon, although he owned
almost 99% of the shares, and therefore, the debentures issued to Salomon was a secured debt
which should gain priority over the unsecured debts owed to the trade creditors. Thus
Salomon’s claim should prevail over that of the third party trade creditors and proceeds of the
assets should be first allocated to settle the debentures of Salomon.

Salomon’s case established many legal principals as to companies and recognized the following:
• principal of separate legal personality; • family owned companies; • the limited liability of
members; • a member can give a loan to a company; • a secured creditor (over assets), even if
he is a member or director of the company, will have preference over unsecured creditors.

Number of shareholders
Section 4
- No prescribed minimum number of SHs needed other than a Gurantee Company S.4(1)

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.

Process of incorporation and the certificate of incorporation S.4 & S.5

Documents Needed
- Application on Form 1
- Adopt Model Articles or annex a set of Articles – Article of Association
No memorandum of association but objects clause can be included in the Articles.
- declaration that name is not identical or similar to a registered company
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- Consent form of initial directors (as per 203)

- Consent form of initial secretaries (as per 221)

Section 5 -
- On receipt Registrar shall incorporate a company;
(a) enter the particulars of the company on the Register ;
(b) assign a unique number to that company as its company number ; and
(c) issue a certificate of incorporation in the prescribed form to the applicant company.
(d) Notify the general public..
The certificate of incorporation issued shall specify—
(a) the name and number of the company ;
(b) the date on which the company was incorporated ;
(c) whether the company is a limited company, an unlimited company or a company limited by
guarantee ;
(d) whether the company is a private company ; and
(e) whether the company is an off-shore company ;

Section 4: A company may be incorporated by making an application to the Registrar in the

prescribed form (i.e. Form 1) signed by each of the initial shareholders, together with the
articles signed by each of the initial shareholders, consent from each director (Form 18) and
initial secretary (Form 19).
Section 5: The Registrar will enter the particulars of the company in the Register, assign a unique
number and issue a certificate of incorporation. Consequently, within 60 working days of the
incorporation of the company, the RGOC will notify the general public, by a notice published in
a daily newspaper which has circulation in Sinhala, English and Tamil languages specifying (i)
the name of the company; (ii) the company registration number; and (iii) the address of the
registered office of the company

COMPANY NAME
Section 6
Name Requirements –
Type of Company Name should end with the words
Every Listed Company "Public Limited Company", or "PLC" Every
other limited company "Limited" or 'Ltd'
Private Company "(Private) Limited", or "(Pvt) Ltd."
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Section 7
(a) Restrictions on names:
- not identical
- not to contain the words 'Chamber of Commerce' unless it is a company limited by guarantee
with licence under Section 34
- not to be misleading in the opinion of the Registrar.

(b) Qualified Restrictions

- Not to use the following words without the Minister's consent
* 'President' or 'Presidential'...............
* 'Municipal' or 'other Local Authority' or suggesting connection with any Society or body
incorporated by an Act of Parliament
* 'Co-operative' or 'Society'
* 'National', 'State' or ' Sri Lanka ' or similar words........
(Section 7)

Section 8 - Change of Name

v Prior, Name Approval from R.G.C.

v Only by special resolution with the Registrar's prior approval
- Special resolution with the prior approval in writing of the RGOC is required. A company is
deemed to have resolved to change the name upon a change of status of a company
v Notice to the Registrar – Form 03
- Upon resolving to change its name the company must give notice to the RGOC within 10
working days of the change, in the prescribed form (i.e. Form 3).
v Registrar's Certificate under Section 8(3)(b)
- Upon receiving notice, the RGOC (a) enters the new name on the Register in place of the
former name; and (b) issues a fresh certificate of incorporation, altered to indicate— (i) the
change of name; and (ii) where the company has become or has ceased to be a private
company, the fact of that change.
v Not to affect rights and obligations or pending legal proceedings - Change of name does not
affect any rights or obligations of the company, or render ineffective any legal proceedings by
or against the company

Section 9 - Public notice of name.

 Public Notice to be given - A company changing its name must give public notice of it within
20 working days of such change, specifying (i) the former name of the company; (ii) the
company number; (iii) the address of the registered office of the company; and (iv) the new
name of the company
 Procedure –
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Section 10 - Direction to change name

 The Registrar is empowered to give directions to change a company's name under Section 10.
Registrar may direct a company to change its name in the following circumstances :—
(a) where through inadvertence or otherwise, it has been registered with a name which
contravenes the provisions of section 6 ;
(b) a request is made to the Registrar to do so within three months of the company giving
public notice
of the name objected to under section 9, by another company or by a registered overseas
company,
where—
(i) the name of the first-mentioned company is so similar to the name of the requesting
company that it is likely to cause confusion ;
and
(ii) the requesting company was registered with its current name before the first-mentioned
company was registered with the name objected to ; or
(c) a request is made to the Registrar to do so by any person and the Registrar is satisfied that
the name was not applied for in good faith for the purpose of identifying the company.

Section 11 –
 Consequent to change of status (i.e. Public Company / Private Company)

Section 12
 Giving Company Name and Number mandatory
A company should ensure that its name and its company number are clearly stated in—
(a) all business letters of the company;
(b) all notices and other official publications of the company;
(c) all bills of exchange, promissory notes, endorsements, cheques and orders for money or
goods signed on behalf of the company;
(d) all invoices, receipts and letters of credit of the company;
(e) all other documents issued or signed by the company which creates or is evidence of a legal
obligation of the company; and
(f) the company seal, if any.
Where a company fails to comply
(a) the company shall be guilty of an offence and be liable on conviction to a fine not exceeding fifty
thousand rupees ; and
(b) every officer of the company who is in default shall be guilty of an offence and be liable on
conviction to a fine not exceeding fifty thousand rupees.
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CONSTITUTION – ARTICLES OF ASSOCIATION

The single Constituent document of a company is its articles of association.

 Previous Position
 Prior to the Incorporation of New Companies Act – under the Previous Act – Act No. 17 of
1982 – Two Constituent Documents namely;
 Memorandum of Association:
 Article of Association
 Object clause was stated in the memorandum of association and the legal scope of work
limited to the objects stated.
 Ultra Vires Doctrine
o If company had acted beyond the legal powers it had to operate then such act was to be
UV and could be unlawful and Void. Anything that is done outside the scope of objects
considered as illegal and no valid.
Ashbury Railway carriage & Iron Co. Ltd V Riche
 Illustrates a situation where a company acted outside its powers.
 Object clause of this Company gave the Company to make & sell railway
carriages.
 The Company decided to buy a concession for constructing a railway in
Belgium
 Held that the contract was Ultra Vires and even subsequent assent of
the shareholders could not ratify it.

Cotman V Brougham
 Held that act done under independent general power to under-write issue
of share was Ultra vires
o The doctrine got its legal recognition through Constructive notice.
 Constructive Notice
o Law presumed that anybody dealing with the company’s activities knew the
limitations & competencies of the Company – The persons dealing with the company
are taken as read and understood the Company’s constitution. Before entering into a
transaction with the company, it is presumed that you have gone through the
Company’s constitution. (It is a public document).
o The knowledge a person obtains having documents was known as the
Constructive notice.
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 New Law
 Section 2(2)
o Power to carryout/ engage in any lawful activity
 Contents of Articles S.13
o Not Compulsory for a Company to state their Object clause. Company under S.2 is
competent to carryout any lawful business.
o the objects of the company ;
o the rights and obligations of shareholders of the company ; and
o the management and administration of the company.
 Applicability of model Articles S.14 & 18
 Effects of Articles S.16
o AOA - contains the Contract that exists between the Company and its shareholders
o S.16 -the articles of a company shall bind the company and its shareholders as if there
were a contract between the company and its shareholders.
o Breach of contract – If the company acted outside the object
 Effect of stating object clause in Article S.17
o S. 17(1) - objects of the company, shall be deemed to be a restriction placed by the
articles in carrying on any business or activity that is not within those objects, unless
the articles expressly provide otherwise.
o S.17(2)(a) - the capacity and powers of the company shall not be affected by such
restriction ; and
o S.17(2)(b) - no act of the company, no contract or other obligation entered into by
the company and no transfer of property by or to the company, shall be invalid by
reason only of the fact that it was done in contravention of such restriction.
o S.17(3) –
 the ability of a shareholder or director of the company to make an application to
court under section 233 to restrain the company from acting in a manner
inconsistent with a restriction placed by the articles, unless the company has
entered into a contract or other binding obligation to do so. (To obtain a restraining
order in terms of S.233)
 the liability of a director of the company for acting in breach of the provisions of
section 188.
 Adoption /Amendment of Articles S.15
o A Company has the power to amend or alter its Articles
 By passing a special resolution (S.143)
Section 15 - A company may at any time by special resolution —
(a) adopt new articles ;
(b) if it has articles which differ from the articles of association set out in the First Schedule,
adopt such articles as its articles ; or
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(c) alter its articles.

(2) Where a company by a special resolution alters its articles, it shall give notice of such
resolution to the Registrar within ten working days, setting out in full the text of the
resolution and of any new articles or of any alterations to the
company’s articles

 Right of SHs to copy of the Articles – S.18

Section 18. (1) A shareholder has a right at any time to request a company in writing for a copy of the
articles of the company, and subject to subsection (2), the company shall comply with such request
within five working days of the date of receipt and such request.
(2) A company to which a request is made under subsection (1) may—
(a) require the shareholder to pay a fee of not more than five hundred rupees before providing a
copy of the articles; or
(b) decline to provide a copy of the articles, if a copy has been provided to that shareholder
within the previous six months.
(3) Where a company fails to comply with the requirements of subsection (1) —
(a) the company shall be guilty of an offence and be liable on conviction to a fine not exceeding
two hundred thousand rupees; and
(b) every officer of the company who is in default shall be guilty of an offence and be liable on
conviction to a fine not exceeding one hundred thousand rupees.

 Abolishment of Constructive Notice – S.22

The Constructive Notice taken away by Section 22.

Articles of Association of a Company, as per Section 13 may provide for, the objects, the rights
and obligations of Shareholders, and the management and administration of the
Company. The First Schedule gives a model set of Articles, which may be adapted as
appropriate or amended, read with Sections 13, 14 and 15.

Section 17 stipulates the restriction placed to confine business activity, where objects are set
out in the Articles, whilst Section 33 mandates a ‘company limited by guarantee’ to set out
the objects in its Articles.4

A Company has the power to amend (or alter) its Articles (Section 15). This is a Statutory right
that cannot be taken away by a contract. Eg: Punt v Symons & Co. Ltd. 1903(2) Ch. 506.

However this has to be done with the prior approval of the Registrar with regard to
Companies licensed by the Registrar as per Section 34(4).

Types of Companies
The following types of Companies can be established under the provisions of the Companies
Act No.7 of 2007:-
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COMPANIES

(a) Limited Company (b) Unlimited Company (c) Company Limited by Guarantee

Public Private Off-Shore

Company Company Company

Listed/Quoted unquoted on

Stock

Exchange

As per Section 3, read with Sections 4, 5, 6 and 7, a Company could be incorporated as a ‘limited
company’ or an ‘unlimited company’ or as a ‘company limited by guarantee’. A listed
Company, would have the abbreviation ‘PLC’ at the end of the name, to distinguish from
unlisted public companies.

(Refer to the note discussed in the class in relation to ‘company limited by

guarantee’).
1. Unlimited Company
2. Limited by guarantee
3. Offshore Company
4. Overseas Company
5. Limited Company (Limited by Shares)
a. Private Ltd
b. Public Ltd

Private Companies
 There has to be a specific statement in AOA that it is a Pvt Company and thus no shares are
issued to the public – S.27
 Designed for companies which do not need large amounts of capital and shares held by a
limited number of SH or closely held by family or group.
Can't offer to public and SH should be limited to 50 excluding those who obtain shareholding by virtue
of employment.
 IF a Pvt company by altering articles ceases to be a pvt company or enables the company to
issue shares to public and takes away that prohibition of issuing then it becomes a public
company – S.28
 S.11
 S.29 – Become a public to pvt company – Need change article and S.27 prohibition apply and
no longer become a public company. The requirement under S.11 need to be also followed
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otherwise become guilty.

 S.30 - dispence of interest register with consent.

Public limited
companies
 Shares are issued to the public.
 Opt to list on the stock exchange.
 regulatory protection offered and liquidity created by their trading systems results in the
attraction of a larger investor base to invest in listed securities making it possible to raise
capital at lower costs.
 Must comply with rules of stock exchange, securities and exchange board commission act
and Accounting and auditing standards board's act.
 Includes stringent disclosure, minimum public float of shares, prohibition against insider
dealing
 Fundamental requirement- shares must be publicly held can be done by offers for
subscription, offers for sale or introductions.

Unlimited companies
 SH have unlimited liability to contribute to the assets of the company under its articles.
 No great demand for this type but there are instances where persons willing to stand behind
business but wish to use corporate form to protect identity and facilitate flexibility in
transfers of ownership.
 Law sometimes prescribes it as a requirement such as in the case of professional firms that
are permitted to incorporate.

Companies limited by guarantee

 Requires members to undertake to contribute to the assets of the company in an amount
specified in its articles in the event of it being put into liquidation.
 Law prescribes that certain entities such as chamber of commerce can only be formed as
limited by guarantee.

S. 32 - Any two or more persons may apply to form a company limited by guarantee by
making an application to the Registrar for the same in the prescribed form signed by
each of the initial members, together with the following documents :-
(a) the articles of association of the company;
(b) a consent under section 203 from each of the initial directors, to act as a director of the
company; and
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(c) a consent under section 221 from the initial secretary, to act as secretary of the
company.

Sec. 33(1) - A company limited by guarantee shall have articles which sets out-
(a) the objects of the company; and
(b) the amount which each member of the company undertakes to contribute to the assets of
the company, in the event of such company being put into liquidation.

Sec. 34(1) - Where the Registrar is satisfied that an association about to be formed as a company limited
by guarantee is to be formed for promoting commerce, art, science, religion, charity, sport, or any
other useful object, and intends to apply its profits, if any, or other income in promoting its objects,
and to prohibit the payment of any dividend to its members -

(a) the Registrar may by license direct that the association be registered as a company limited
by guarantee, without the addition of the word "Limited" to its name; and
(b) the association may be registered accordingly and shall on registration enjoy all the
privileges and subject to the provisions of this section, be subject to all the obligations of a
limited company.

Sec. 34(3) - A license granted under this section may be subject to such terms and conditions as
the Registrar thinks necessary for the purpose of ensuring that the association conforms to
the requirements of subsection (1). The terms and conditions shall be binding on the
association and shall, if the Registrar so directs, be incorporated into the articles of such
company.

Sec. 34(4) - No alteration may be made in the articles of a company to which a license has been
granted under this section, without the prior written approval of the Registrar.

OFF-SHORE COMPANIES
 Part XI of the Act makes provision for registration of off-shore companies in SL.
 They offer advantages including reduced tax liabilities, simplicity of operations to fewer
compliance and reporting requirement.
 Usually used for tax planning and asset protection purposes.

Sec. 260 - In this part of this Act, "company” includes a company or a body corporate incorporated
under the laws of any foreign country.

Sec. 261(1) - Any company may make an application to the Registrar in accordance with the provisions
of this Part of this Act to be registered in Sri Lanka as an off-shore company and to be so referred
to, and in the case of a company incorporated abroad, to be deemed to be incorporated in Sri Lanka,
as if it had been incorporated under the provisions of this Act.

Sec. 261(2) - An application must include the following documents:

(a) a certified copy of the charter, statute or memorandum and articles of association of the
company or other instrument constituting or defining the constitution of the company, and
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where such instrument is not in an official language or in English, a translation of

the instrument in such language as may be specified by the Registrar;
(b) a list of the directors or those managing the affairs of the company, containing their full
names, addresses, occupations and the offices they hold in the company;
(c) the names and addresses of one or more persons who are resident in and are citizens of Sri
Lanka, who is or are authorised to represent the company;
(d) a statement containing the full address of-
i the registered or principal office of the company in the country of incorporation; and
ii the office of the company in Sri Lanka;
(e) a certified copy of the incorporation of the company

Sec. 261(3) - The company shall notify the Registrar of any amendments or alterations in respect
of any of the aforesaid particulars within the prescribed time, and in the prescribed form.

Sec. 262. Registrar may, having regard to the national interest and the national economy of SL
issue a certificate of registration to an off-shore company for carrying on its business outside
SL. This will be subject to payment of prescribed fee, certificate from bank saying fee paid.

Sec. 262(2) - A certificate of registration issued to an off-shore company under this part of this
Act, shall exempt the company from complying with any other provision of this Act.

Sec. 262(3) - No certificate of registration granted where-

(a) Winding up/ liquidation of company has commenced.
(b) Receiver of property of company has been appointed.
(c) A scheme is in force under which rights of creditors restricted/suspended.

Sec. 262(4) Before registrar issues certificate, he shall also ensure that a company incorporated
abroad has no legal impediments and that the issue of certificate does not render ineffective
any legal or other proceedings instituted or to be instituted by or against the company.
Registrar can issue certificate subject to conditions he deems necessary in national interest.

Sec. 262(5)- Registrar has right to cancel registration for good cause and when this is done, all
privileges and benefits grants to the company as an off-shore company shall cease.

Sec. 263-An off-shore company which intends to continue its business shall, in every calendar
year, renew their certificate of registration through Registrar under this section.
Sec. 264(1)- An off-shore company shall have power to carry on any business outside Sri Lanka; but shall
not be entitled to carry on any business within Sri Lanka.

Sec. 265-Can cease to carry on business as an off-shore company by giving notice in prescribed
form.

OVERSEAS COMPANIES
 Required to comply with Part XVIII of the Act.

Sec. 488- An "overseas company” means any company or body corporate incorporated outside Sri
Lanka, which -
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(a) after the appointed date, established a place of business within Sri Lanka; or
(b) has, before the appointed date, established a place of business within Sri Lanka and
continues to have an established place of business within Sri Lanka on the appointed date

Sec. 488-"place of business" includes a share transfer or share registration office.

Sec. 489(1)- Every company incorporated outside Sri Lanka which after the appointed date,
establishes a place of business within Sri Lanka, shall within one month from the date of
establishment of its place of business, deliver to the Registrar for purpose of registration-

(a) a certified copy of the company's constitution

(b) a list of the directors of the company, with the details required by the Act to be included
about them in the register of the directors of a company
(c) names and addresses of one or more persons resident in SL who are authorized to accept
documents notices on behalf of the company
(d) the full address of the company's registered of principal office, and its principal place of
business within SL
(e) A recent certified document effecting or evidencing the company’s incorporation.

Sec. 489(2)- Registrar can extend period of registration if company shows sufficient cause.

Overseas companies that existed before the 2007 Act are bound to comply with the
conditions imposed by the Act.

Sec. 489(5) When the Registrar receives all the required documents, he may register the
company as a registered overseas company, enter in the register of overseas companies and
issue a certificate of registration

Sec. 489(4) - if an overseas company had complied with the relevant provisions of the
17/1982 Act they would be deemed to be in compliance and the Registrar shall register such
company.

Sec. 489(7)- The Act prohibits companies which do not conform with the provisions of the
Exchange Control Act from establishing a place of business within SL or be registered as an
overseas company.

Sec. 490-A registered overseas company has the same power as a company incorporated
under this Act to hold lands in SL

Sec. 491 Any alteration made in the documents given under subsection (1) must be
communicated to registrar.

Sec. 492 -Must prepare and deliver certified copies of financial statements to registrar every
year with translation if necessary.

The Act extends the application of rules on company names that apply to Sri Lankan
companies to overseas companies carrying on business in SL in order to avoid circumvention
of rules by incorporating companies abroad.

Sec. 493 -The Registrar may serve a notice on the registered overseas company stating why
the name could not have been registered
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- If a registered overseas company has a name that would be precluded from being registered
under sec. 7 of the Act
- Or in respect of which the Registrar could have given a direction for a, change of name under
sec 10(1)

However, the notice must be served no later than 12 months after the company submits the
required documents for registration or communicated a change of name.

Sec. 493(5) The name by which an overseas company is for the time being registered, shall for
all purposes of the law of Sri Lanka, be deemed to be the name of the company.

Sec. 496-Must immediately notify Registrar when it ceases business in SL.

Sec. 497-Can wind up company in the same way as a SL incorporated company under Part XI-
this process only, results in a realization or assets that overseas company had in SL and the
payment of Creditors and does not result in dissolution of company as this can only be affected
in jurisdiction in which company incorporated.