Sri Lanka is preparing for one of the biggest commercial law reforms in its post-independence history, with the proposed Rescue, Rehabilitation and Insolvency (Corporate and Personal) Bill, 2026 set to radically transform how businesses collapse, restructure, survive, or recover from financial distress. 

The nearly 600-page draft legislation seeks to repeal the country’s decades-old Insolvency Ordinance and replace it with an entirely new legal architecture governing corporate rescue, liquidation, bankruptcy, debt restructuring, receivership, and personal insolvency. The Bill also proposes amendments to the Companies Act, Inland Revenue Act, and several related statutes. 

Legal and financial sector observers say the Bill marks a decisive shift away from Sri Lanka’s traditional liquidation-focused approach toward a modern “business rescue” model more closely aligned with insolvency systems in the United Kingdom, Singapore, and Australia.

At the heart of the reform is a new philosophy: financially distressed businesses should not automatically be dismantled if they remain economically viable.

From Liquidation to Rescue

For decades, insolvency proceedings in Sri Lanka have largely revolved around creditor enforcement and asset liquidation. In practice, this often resulted in lengthy court disputes, destruction of enterprise value, job losses, and minimal recovery for creditors.

The proposed Bill attempts to reverse that model.

The draft law explicitly emphasizes the “timely, efficient and impartial rescue and rehabilitation” of viable enterprises while ensuring closure of non-viable businesses. 

Perhaps the most commercially significant feature is the introduction of a formal corporate “administration” regime effectively Sri Lanka’s equivalent of judicial management or corporate rescue proceedings seen in advanced restructuring jurisdictions.

Once a company enters administration, creditors may be temporarily prevented from enforcing security, filing legal proceedings, or executing recovery actions against the company. This creates a statutory breathing space intended to allow restructuring negotiations to proceed.

For distressed companies, particularly those affected by the post-2022 economic crisis, this may offer a critical survival mechanism.

However, for banks and financial institutions, the implications are substantial.

Banks Face Major Shift in Recovery Rights

Sri Lankan banks have historically relied heavily on strong enforcement mechanisms, including mortgage enforcement and recovery rights under the Recovery of Loans by Banks (Special Provisions) Act.

The proposed insolvency framework materially restricts immediate creditor enforcement once administration proceedings commence.

Legal analysts warn this could fundamentally alter credit risk calculations across the banking sector.

Banks may now face:

• Delayed recoveries;
• Increased restructuring negotiations;
• Greater exposure during moratorium periods;
• Reduced certainty in security realization.

The likely commercial response may include:

• Higher lending rates;
• Tighter collateral requirements;
• Reduced lending to high-risk sectors;
• Stricter MSME financing conditions.

While the Bill aims to preserve viable enterprises, lenders may ultimately pass increased restructuring risk back into the market through more conservative credit policies.

MSMEs Receive Dedicated Rescue Mechanism

One of the Bill’s most ambitious reforms is the creation of a specialized restructuring framework for micro, small and medium enterprises (MSMEs).

Sri Lanka’s MSME sector, which accounts for a significant portion of employment and domestic economic activity, has struggled heavily in the aftermath of currency depreciation, high interest rates, inflation, and weak consumer demand.

Until now, many smaller businesses lacked realistic access to formal restructuring tools.

The proposed law creates dedicated MSME debt restructuring arrangements intended to help small enterprises renegotiate debt obligations without immediate collapse. 

Economists argue this may reduce unnecessary business failures and preserve employment during economic downturns.

However, practical concerns remain over whether smaller enterprises can afford the professional and legal costs associated with formal restructuring proceedings.

Directors Could Face Personal Liability

The Bill also introduces one of the strongest expansions of director liability in Sri Lankan corporate law through “wrongful trading” provisions.

Under the proposed framework, directors may become personally liable if they continue operating a business when they knew or ought reasonably to have known that insolvency was unavoidable. 

This represents a major departure from Sri Lanka’s historically limited insolvency-related director liability framework.

Corporate lawyers say the change is likely to alter boardroom behaviour significantly.

Directors may increasingly seek:

• Early restructuring advice;
• Legal risk assessments;
• Financial solvency reviews;
• Formal restructuring options before deterioration becomes irreversible.

While supporters argue this will improve governance and financial discipline, critics warn it may also create excessively defensive corporate decision-making during periods of economic uncertainty.

New Insolvency Regulator to Oversee Industry

The Bill further establishes an entirely new Insolvency Regulatory Authority tasked with regulating insolvency practitioners, monitoring restructuring professionals, issuing practice standards, maintaining insolvency registers, and investigating misconduct. 

The proposed Authority includes representation from:

• The Central Bank;
• Inland Revenue Department;
• Registrar of Companies;
• Securities and Exchange Commission;
• Ministry of Finance;
• Chambers of Commerce. 

This introduces a level of institutional oversight previously absent in Sri Lanka’s insolvency sector.

Supporters say this could improve transparency and professional accountability. Critics, however, caution that the extensive regulatory powers may create additional compliance burdens and bureaucratic complexity.

Phoenix Companies and Asset Transfers Under Scrutiny

The Bill also targets so-called “phoenix companies” situations where a failed business allegedly transfers assets or operations into a new entity while avoiding liabilities owed to creditors.

The proposed framework introduces new restrictions, personal liability exposure, and court powers relating to successor businesses and undervalue transactions. 

This may increase scrutiny over related-party restructurings and distressed asset transfers, particularly in sectors where informal restructuring practices have historically occurred.

Commercial lawyers predict these provisions may become a major future source of litigation.

Foreign Investors Watching Closely

International investors and lenders are likely to monitor the reform carefully.

Modern insolvency systems are increasingly viewed as a key component of investment attractiveness, particularly for:

• Project finance;
• Foreign direct investment;
• Capital markets;
• Private equity restructuring.

Sri Lanka’s current insolvency framework has often been criticized for delays, unpredictability, and weak restructuring tools.

If implemented effectively, the new law could improve investor confidence by introducing internationally recognizable restructuring mechanisms.

However, much will depend on the efficiency of Sri Lanka’s courts and the availability of trained insolvency professionals.

Concerns Over Implementation Capacity

Despite broad recognition that insolvency reform is necessary, many practitioners question whether Sri Lanka presently possesses the institutional capacity to implement such a sophisticated framework.

The Bill introduces:

• Complex administration procedures;
• Creditor committee structures;
• Cross-border insolvency concepts;
• Professional licensing systems;
• Judicial restructuring oversight.

Without specialized commercial courts, trained insolvency judges, and sufficient restructuring professionals, critics warn that proceedings could become highly technical, expensive, and delayed.

Some also fear the legislation could inadvertently increase commercial uncertainty during the transition period.

A Turning Point for Sri Lankan Business Law

Despite the concerns, the proposed Bill is widely viewed as a landmark attempt to modernize Sri Lanka’s commercial legal framework.

The legislation reflects a broader shift in economic thinking: that preserving viable businesses may ultimately produce better outcomes for creditors, employees, banks, and the wider economy than immediate liquidation.

Whether the reform succeeds will depend not only on Parliament passing the Bill, but on how effectively Sri Lanka can implement an entirely new insolvency culture.

For corporate Sri Lanka, the message is becoming increasingly clear.

The era of informal debt workouts and delayed crisis management may soon be replaced by a far more regulated and legally sophisticated restructuring environment one in which directors, lenders, shareholders, and businesses themselves will face new responsibilities, new risks, and entirely new rules of survival.