Sri Lanka’s proposed insolvency and restructuring law is being positioned as a turning point for unlocking distressed assets and reviving stalled investments. Yet, as policymakers push the Bill toward parliamentary approval, analysts warn that unresolved tax issues, legal gaps, and weak execution capacity could blunt its intended impact.
Appearing before the Committee on Public Finance, investment banker Thilan Wijesinghe revealed that more than $50 million has already flowed into distressed assets, with an additional pipeline exceeding $100 million particularly concentrated in the struggling hotel sector. However, deals are moving slowly due to the absence of a predictable and time-bound resolution framework.
Currently, Sri Lanka’s insolvency system is fragmented and outdated, relying on laws dating back decades, with a heavy emphasis on liquidation rather than recovery. The new Bill aims to change that by introducing a unified, court-supervised process that allows businesses to pause creditor action while negotiating restructuring plans. If approved by a majority of creditors, these plans would become binding, shifting power toward a more coordinated resolution system.
Despite these improvements, structural weaknesses remain. Wijesinghe highlighted the lack of a Limited Liability Partnership (LLP) framework, a widely used international structure that enables efficient capital pooling without multiple layers of taxation. In its absence, many investment funds targeting Sri Lankan assets are being domiciled offshore, limiting the country’s ability to retain capital and build a robust restructuring ecosystem.
Tax uncertainty has emerged as one of the most critical concerns. Suresh Perera warned that inconsistencies in the Bill including outdated tax references and unclear links to existing legislation could result in unexpected liabilities during restructuring. Debt write-offs, asset transfers, and ownership changes may trigger additional taxes, potentially discouraging investors and undermining rescue efforts.
Debate has also centred on creditor priority rules. Murtaza Jafferjee argued that tax authorities should not automatically take precedence over other creditors, noting that equal treatment could improve recovery outcomes and encourage capital inflows.
Execution remains another major hurdle. Questions have been raised about whether Sri Lanka’s courts and institutions can handle complex restructuring cases within tight timelines. Officials acknowledge that success will depend on new regulations, trained insolvency professionals, and a strengthened administrative framework.
While the Bill allows fresh financing during restructuring offering priority to new lenders—its effectiveness will depend heavily on how consistently these provisions are implemented.
With the Bill now in its final stages before parliamentary debate, only limited amendments are expected. This means many of the identified gaps may need to be addressed during implementation rather than through legislative revision.
Ultimately, while the proposed law could unlock significant investment and improve capital recycling, its success will depend on whether Sri Lanka can resolve these critical weaknesses before they deter the very investors it hopes to attract.
