Corporate Restructuring in Sri Lanka

Introduction – A Crossroads for Corporate Sri Lanka

Every economy faces a moment when survival alone is not enough. Sri Lanka has reached that moment emphasising the need for Corporate Restructuring.

The past few years have tested boardrooms and balance sheets, and many of us in practice have seen the same scene repeated: clients arriving not with expansion plans but with questions about how to hold the line.

From that turbulence a new conversation has emerged. Companies are no longer asking only how to wind up. They are asking how to restructure, how to rebuild value, credibility and trust. As one CFO told me, “In this climate, resilience is the only currency left.”

The Legal Landscape Is Finally Shifting

For decades our insolvency laws were written for closure, not recovery. The Companies Act No. 7 of 2007 and the Insolvency Ordinance of 1853 offered liquidation procedures but few tools to rescue viable firms.

Law Commission of Sri Lanka responded with the Rescue, Rehabilitation and Insolvency Bill. It described this as the core institution for an effective insolvency regime.

The draft law introduces rescue procedures for companies that still have commercial potential and liquidation routes for those that do not. In plain terms it gives Sri Lankan businesses a second chance.

Confidence, Creditors, and the Bigger Picture

The reform story cannot be separated from the national debt story.

In the IMF Extended Fund Facility Programme , debt restructuring was called critical to restoring macroeconomic stability.

In Hamilton Bank v. Democratic Socialist Republic of Sri Lanka, foreign courts granted a stay of enforcement, recognising that Sri Lanka was negotiating in good faith with its creditors.

The Central Bank’s newer rules also require lenders to recognise and provision for restructured debt. That forces earlier conversations between borrower and lender and gives investors what they crave most: predictability.

SOEs: Reform in Real Time

State owned enterprises are at the centre of this debate. They are both the largest fiscal burden and the largest opportunity for reform.

The State-Owned Enterprise Restructuring Unit (SOERU) under the Ministry of Finance has started unbundling loss making entities, inviting private partnerships and demanding better governance.

The Ceylon Electricity Board reported a Rs 13.2 billion loss in the first half of 2025, compared with a Rs 119.2 billion profit in 2024. That single statistic shows that reform is not theoretical. It is happening right now, and it has real balance sheet consequences.

Practical Pathways for Restructuring

• Due diligence and legal diagnostics: Every successful restructuring begins with a hard look at the company. Counsel should verify registration under the Companies Act, review inter creditor rights and test whether the core business is still viable. In groups, cross guarantees and shareholder loans must be mapped because hidden exposures often derail good plans.
• Negotiation and agreement design: Restructuring is negotiation. Standstill agreements amended covenants and moratoria are now practical tools. Sri Lanka does not yet have a Chapter 11 style statute, but court approved workouts are emerging. Each clause on moratorium triggers, repayment schedules and exit events should be drafted as if it will be tested in court.
• Implementation and governance: A plan is only as good as the board that implements it. This stage calls for transparent communication with lenders, regular audits, and performance dashboards. Follow through is what separates a rescued company from one that relapses.

Emerging Legal and Policy Reforms

Sri Lanka is moving toward a unified insolvency framework that can distinguish between solvency and insolvency in real time.

The World Bank and Insolvency Law Academy have been assisting models that reward early intervention and aim to keep viable firms alive.

If these reforms are enacted they can preserve jobs, stabilise supply chains and reassure foreign investors that Sri Lanka has learned from its crisis.

A Counsel’s Reflection

For those of us advising businesses every week, restructuring has become normal vocabulary.

It is not a sign of weakness. It is a sign that management is willing to confront reality and preserve value.

Whether the client is a state entity, a commercial bank or a family-owned manufacturer, the lesson is the same: delay is expensive. Doing nothing now costs more than acting early.

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