Sri Lanka’s proposed bankruptcy and corporate restructuring law has drawn pushback at the parliamentary Committee on Public Finance (COPF) over a clause that places the Inland Revenue Department ahead of other creditors when a distressed company restructures.
The draft requires that one year of income tax and value added tax owed by the restructuring company be settled before other creditors are paid. Beyond that, the state would join the general queue.
Advocata Institute Chairman Murtaza Jafferjee argued the carve-out is not justified. “If the state has a claim on economic interests of a business through the tax system, then it should not necessarily be prioritised, because basically, the other creditors also took equal risk,” he told the committee. “So they should be on equal terms in participating in any kind of reduction in their interests.”
Chanaka De Silva PC, a former Law Commission member representing the Ministry of Justice, defended the design. He said the one-year window was settled after extensive debate and reflected the state’s broader public role. “We prioritise only a small amount of that, because at the end of the day the state is also public. That’s why one year of tax; after that they stand in the queue with the others,” he said.
Jafferjee returned to the point, framing it as an internal contradiction in the bill’s stated objective. “If the state has public interest because what you want from this law is for firms not to fail, you prefer resuscitation to liquidation, because in liquidation all creditors will lose out much more than resuscitation,” he said. “So in the resuscitation, since the government gets involved in a lot of public policy, why doesn’t the tax person also participate in that pool? Why are we even prioritising one year? To me economically it doesn’t make sense.”
The hearing is part of an ongoing COPF review of the restructuring framework. A separate session earlier this month heard submissions on the treatment of apartment buyers as creditors under the same bill.
