Sri Lanka Proposes Comprehensive Insolvency Law Reforms

Sri Lanka is on the verge of implementing one of the most significant commercial law reforms in its history with the proposed Rescue, Rehabilitation and Insolvency (Corporate and Personal) Bill, 2026. This extensive legislation aims to overhaul the existing insolvency framework, introducing modern mechanisms for business rescue, liquidation, bankruptcy, debt restructuring, and personal insolvency.

Key Features of the Proposed Bill

The nearly 600-page draft legislation seeks to:

• Replace Outdated Laws: Repeal the decades-old Insolvency Ordinance and introduce a new legal structure governing corporate and personal insolvency.
• Emphasize Business Rescue: Shift focus from liquidation to rescuing viable businesses through formal corporate administration regimes.
• Introduce MSME Restructuring: Create dedicated frameworks for micro, small, and medium enterprises to renegotiate debts and avoid unnecessary closures.
• Expand Director Liability: Implement 'wrongful trading' provisions, holding directors personally liable if they continue operations when insolvency is inevitable.
• Establish Regulatory Authority: Set up an Insolvency Regulatory Authority to oversee practitioners, issue standards, and investigate misconduct.

Implications for Businesses and Financial Institutions

The proposed reforms are expected to have far-reaching effects:

• For Businesses: Provide mechanisms to restructure and survive financial distress, preserving jobs and economic value.
• For Financial Institutions: Alter credit risk assessments due to changes in recovery rights and enforcement mechanisms.
• For Directors: Increase accountability and encourage proactive management of financial difficulties.

Challenges and Considerations

While the reforms are ambitious, challenges include:

• Ensuring the judiciary and insolvency professionals are equipped to handle new procedures.
• Balancing creditor rights with the need to rescue viable businesses.
• Managing the transition from the old framework to the new system effectively.

Stakeholders are encouraged to engage in the consultation process to refine the Bill and ensure it meets the needs of Sri Lanka's evolving economic landscape.