Debacles of finance companies: Finance Act and Companies Act at odds?

Monday, 3 February 2014 02:01 - - {{hitsCtrl.values.hits}}

Panellists raised regulatory issues, problems with the legislative framework and the plight of depositors during a public interest seminar titled ‘Repetitive Debacles of Finance Companies’ held at The Kingsbury last week.

The Finance Business Act of 2011 that governs finance companies grants sweeping powers to the Monetary Board and the Minister of Finance, and these are often at odds with the provisions of the new Companies Act and causes serious constitutional issues, a senior lawyer charged at the seminar. Draconian powers President’s Counsel K. Kanag-Iswaran, while addressing the gathering at the event, said that under the provisions of the Finance Act, the Minister of Finance was empowered to decide on the priority of repayment claims when a finance company is in the process of winding up. Under the Companies Act, a court-appointed adjudicator has to ensure proceeds are equally distributed during a wind up, Kanag-Iswaran PC said. “Isn’t there a constitutional issue here? Isn’t there an inconsistency in the law?” he asked. The senior corporate lawyer said that the Finance Business Act also granted powers to the Monetary Board’s

directors to freeze passports and seize property. “But under the Companies Act, that process is a judicial process. So there are concerns whether this infringes on due process and the rule of law,” Kanag-Iswaran explained. He warned that what he called the ‘draconian powers’ of the Monetary Board could allow people to take the law unto themselves. Collapse of finance companies Also addressing the seminar, former NDB CEO and public servant Ranjith Fernando argued that the absence of a level playing field, the lack of a proper assessment of company directors, through a fit and proper persons test, and regulatory weaknesses had contributed to the repeated collapse of finance companies. “Banks entered the leasing sector and then suddenly it was no longer a level playing field. Finance companies had to compete with banks for funds,” he explained. Underscoring the fact that the present situation with finance companies was ‘pregnant with potential’ to cause further untold misery, Fernando said that several steps needed to be taken to create stability in the sector. He emphasised the need to establish risk-based supervision, apart from mere transaction testing, counting securities and cash in testing the health of finance companies. The risk-based approach relates to both policy and interpretation and ascertains capital adequacy, which was a broader supervision mechanism, he asserted. Fernando added that deterrent punishment was also key, while it was also the responsibility of regulators to isolate companies that are risky today and may endanger the system in the future, and help them achieve stability. He also emphasised the necessity to educate depositors and empower them to distinguish between good and bad companies for investment. Violation of human rights In his introductory overview of the seminar, former Justice of the Supreme Court and Chairman of the Presidential Commission of Inquiry to

Investigate into Matters relating to Failed Finance Companies in 2008, Priyantha Perera, laid out the recommendations made by the Commission, whose report was never made public. “The question before us is to what extent the recommendations made by the Commission were given effect to in light of these repetitive failures of finance companies,” Justice Perera said. In the present situation, depositors were facing a serious problem, enormous financial crisis and even bankruptcy, all of which are a violation of their human rights, said Perera, who is also the Chairman of the Human Rights Commission of Sri Lanka. “If these recommendations had been given effect to, a terrible crisis could have been avoided,” he explained. Happening across the globe Professional consultant, accountant and public interest litigator and activist, Nihal Sri Ameresekere, whose firm Consultants21 organised last

week’s seminar, said the phenomenon of failing finance companies was not unique to Sri Lanka. “Sri Lanka is not in isolation, this is happening throughout the world,” Ameresekere said. Ameresekere said that it was unclear why President Mahinda Rajapaksa had declined to publicise the Commission’s report on failed finance companies. “However, we must be grateful to the Chairman of the Commission, Justice Priyantha Perera, for giving us their recommendations,” he said. The public interest seminar on the repetitive debacles of finance companies was moderated by Attorney-at-Law Viran Corea. The discussion ranged from regulatory inefficiency and failure to bring culprits to justice following the collapse of the finance companies to the legislative framework within which spectacular collapses have taken place.