Sri Lanka’s proposed insolvency law is designed to modernise debt resolution and attract investment, but small and medium enterprises (SMEs) warn that it could inadvertently increase pressure on already vulnerable businesses if key issues remain unresolved.
The Bill, currently under review by the Committee on Public Finance chaired by Harsha de Silva, introduces a shift from a liquidation-focused system to a restructuring-based model. It allows distressed firms to obtain a temporary moratorium on creditor action while negotiating repayment plans, offering a potential lifeline for struggling businesses.
However, SME stakeholders argue that the practical realities may differ significantly from the intended outcomes. One major concern is how the new framework will interact with existing recovery mechanisms such as parate execution, which allows banks to seize assets quickly in the event of default. In some cases, enforcement action can begin within as little as 60 days far shorter than the time many SMEs need to recover cash flow.
This mismatch creates uncertainty about whether the proposed restructuring window will provide sufficient protection. Smaller firms, which often operate with tighter margins and longer cash conversion cycles, could find themselves under increased pressure rather than gaining relief.
Participants in the review process also highlighted an imbalance in how financial distress is currently handled. Larger corporate exposures tend to remain on bank balance sheets for extended periods without resolution, while smaller borrowers face rapid enforcement. Without careful calibration, the new law could reinforce these disparities instead of correcting them.
Tax treatment is another unresolved issue. Experts warn that restructuring activities could trigger additional tax burdens, complicating recovery efforts for SMEs already struggling with liquidity constraints. Without clear guidelines, businesses may hesitate to engage in restructuring processes altogether.
Institutional capacity adds another layer of concern. Effective implementation will require trained professionals, efficient courts, and strong regulatory oversight areas where gaps currently exist. Stakeholders question whether the system can handle the complexity and volume of cases that a time-bound insolvency regime would generate.
Despite these challenges, the Bill does offer potential benefits. By consolidating outdated laws and introducing a single framework for insolvency, it creates the foundation for a more predictable and transparent system. The inclusion of provisions for new financing during restructuring could also support viable business turnarounds.
Hitherto, with limited scope for major revisions before parliamentary debate, many of these concerns may only be addressed through future regulations and practical implementation.
For SMEs, the stakes are high. While the reform aims to create a more efficient and investor-friendly environment, its real impact will depend on whether it can balance creditor rights with the need to give struggling businesses a genuine chance to recover.
By a Special Correspondent