Sri Lanka is preparing to overhaul one of its oldest commercial laws in a bid to transform how financially distressed businesses and individuals are treated, replacing a system centred on liquidation with one that prioritises rescue, rehabilitation and economic recovery.
The proposed Rescue, Rehabilitation and Insolvency (Corporate and Personal) Bill, recently tabled in Parliament, is being described by senior government officials as one of the country’s most significant legal and economic reforms in decades. If enacted, it will replace the Insolvency Ordinance of 1853, a colonial-era law that has long been criticised for favouring asset liquidation over business revival.
Senior Finance Ministry officials said the objective is to provide legal safeguards that ensure the timely, transparent and impartial rehabilitation of viable businesses while facilitating the orderly closure of enterprises that are no longer economically sustainable.
The reform signals a fundamental shift in policy. Instead of allowing struggling firms to collapse under creditor pressure, the proposed law introduces a rescue-first approach designed to preserve productive businesses, protect employment and minimise economic disruption.
At the centre of the legislation is the creation of an independent Insolvency Regulatory Authority, which will supervise insolvency practitioners, establish professional standards and improve accountability throughout the restructuring process. Officials believe stronger regulation will increase confidence among lenders and investors while aligning Sri Lanka’s insolvency framework with internationally accepted practices.
Justice Ministry sources say the legislation introduces modern restructuring mechanisms that give distressed companies valuable “breathing space” before bankruptcy proceedings begin. One of the most significant provisions establishes an administration regime under which qualified administrators can temporarily take control of struggling businesses while creditors are prevented from enforcing debt recovery actions. This temporary legal protection allows companies time to negotiate restructuring plans instead of being forced into immediate liquidation.
The reforms are also expected to strengthen the banking sector by improving the recovery of non-performing loans. Financial institutions are encouraged to waive unpaid interest accumulated between April 2019 and December 2024 for eligible borrowers undergoing restructuring, excluding previously capitalised interest.
Another major safeguard prevents banks from automatically rejecting loan applications solely because borrowers have adverse Credit Information Bureau (CRIB) records if those borrowers are participating in approved restructuring programmes. Officials believe this measure will allow financially distressed but otherwise viable businesses to regain access to credit needed for recovery.
The Finance Ministry argues that adopting globally recognised insolvency standards will improve Sri Lanka’s investment climate by reducing uncertainty in the domestic credit market. Foreign investors have frequently identified outdated insolvency laws as a barrier to investment, making the proposed legislation an important structural reform.
, Sri Lanka will move away from a punitive insolvency model towards one focused on rehabilitation, business continuity and economic resilience. For thousands of companies still recovering from successive economic crises, the legislation could represent the difference between closure and survival.