Sri Lankan depositors should seek quick liquidation of failed firms: lawyer

July 16 2009 Depositors of a collapsed Sri Lankan financial firm should seek its liquidation under civil law to realize assets while criminal proceedings may put pressure on directors surrender other assets, a senior lawyer has said. "If you try to use the criminal process as the primary means, then you are going to lose focus on realizing as much as possible from the assets of the company," says Naomal Goonewardene, a senior partner at Nithya Partners, a corporate law firm. "I think the civil process has not been utilized to the extent to which it should have been utilized." Gunewardene is advising clients who put money in Golden Key Credit Card Company, a member of Sri Lanka's Ceylinco group that collapsed late last year, triggering a run on other companies in the group. Quick Action Administrators, liquidators and receivers can be appointed under the islands revamped company law to deal with situations when firms don't have assets to settle all their liabilities. Depositors of some Ceylinco group firms have filed criminal changes to recover capital and interest and also petitioned the Supreme Court but none have sought the firm's liquidation. "The criminal process is about putting pressure for people to bring back money voluntarily and to maybe give up personal assets voluntarily to increase the pool of assets," says Goonewardene. "But in my view there is a limit to what could be realized and in my view that's not going to be a substantial realization." While Golden Key Credit Card Company owes 26 billion rupees, two other troubled Ceylinco firms the F&G group - which includes a licensed finance company - and Ceylinco Shriram are also struggling to repay depositors. Analysts estimate deposits at these firms to top 40 billion rupees. "If there is a liquidation process then there is a responsibility to court of that liquidator carrying out asset realizations in a proper manner," says Goonewardene. "Secondly somebody responsible is in charge." Gunewardene was also appointed to the board of Ceylinco controlled Seylan Bank to stabilize its operations after the Golden Key triggered a run. Source – Lanka Business On Line LBO "What has happened is the directors have resigned or are unavailable or in prison. So there is no direction in any of those companies in terms of the realization at all," he says. Directors of top Ceylinco firms, including chairman Lalith Kotelawala, are now in remand custody. The Supreme Court has asked the Central bank to help recover Golden Key assets. As part of the process on July 10, the Central Bank asked directors of troubled Ceylinco firms to refrain from mortgaging assets or transferring private assets to others. Goonewardene says a straight jacket approach to troubled firm asset disposals isn't the way forward. Time Value He says collections on financial assets like loans and credit card receivables outstanding have to be maintained at high levels. "You can actually sell these portfolios and recover money and a profit up-front because they would have been granted at higher interest rates." Property and long term investments like schools and a hospital, he says, can be liquidated over time. The group also has service firms with distributorships, which have to be managed well up to the sale. "So I think different types of assets need different approaches. Property is the one on which you have the most leeway," says Goonewardene, who is also a qualified accountant and financial analyst. "Immediate action is needed on other assets, if not a lot of value will be lost quite fast." He points out; there is an obligation on directors to settle all unsecured creditors equally and fairly in a civil law case filed under the island's company law. If depositors get even a part of their money back quickly they can re-invest their assets elsewhere and get a return. Delays will simply increase losses. Source – Lanka Business On Line LBO