Sri Lanka’s investment landscape could undergo a significant transformation with the introduction of a comprehensive insolvency framework designed to improve investor confidence, facilitate corporate restructuring and address longstanding challenges associated with exiting unsuccessful business investments.
Standard Chartered Bank Sri Lanka Chief Executive Officer Bingumal Thewarathanthri believes the new legislation could create opportunities for private equity investment, an area of financing that has remained relatively underdeveloped in the country’s corporate sector.
Speaking at the THINC Sri Lanka & Maldives 2026 conference at Hilton Colombo, Thewarathanthri, who also serves as Vice Chairman of the Ceylon Chamber of Commerce, highlighted the potential economic benefits of establishing a more predictable and internationally aligned insolvency system.
He explained that Sri Lanka has considerable opportunities to attract private equity capital, but structural limitations and traditional business practices have historically discouraged certain categories of investors.
Among the challenges identified were the reluctance of some locally owned businesses to accommodate external investors in corporate decision-making and the absence of sufficiently developed mechanisms for investors to recover or restructure their investments when businesses encounter financial difficulties.
According to Thewarathanthri, these circumstances have created obstacles both for investors seeking to enter Sri Lankan businesses and for those wishing to withdraw from investments that no longer meet their commercial objectives.
The new insolvency legislation is expected to address some of these concerns by providing a more structured legal framework for dealing with financially distressed enterprises.
A major change in Sri Lanka’s insolvency framework
The Rescue, Rehabilitation and Insolvency (Corporate and Personal) Act, No. 12 of 2026, represents a substantial modernisation of the country’s legal approach to financial distress, business rehabilitation and debt recovery.
The legislation received parliamentary approval following a debate on May 6, 2026, and was formally certified by Speaker Dr. Jagath Wickramaratne on June 17, 2026.
It replaces the Insolvency Ordinance of 1853, introducing a more comprehensive system intended to facilitate corporate restructuring, protect legitimate creditor interests and provide opportunities for financially troubled but commercially viable businesses to recover.
The previous legal framework had remained in place for more than 170 years, despite substantial changes in global financial markets, corporate structures and investment practices.
Under the new legislation, the emphasis extends beyond liquidating the assets of struggling businesses to include procedures aimed at preserving business value and supporting rehabilitation where recovery remains commercially feasible.
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The reform reflects an international movement towards insolvency systems that distinguish between enterprises capable of returning to profitability and those that require an orderly closure.
Rather than automatically treating financial distress as the end of a business, the updated framework creates opportunities to evaluate restructuring arrangements and negotiate solutions involving creditors and other stakeholders.
For investors, lenders and company owners, such mechanisms could provide greater clarity when determining how to respond to businesses experiencing financial difficulties.
Thewarathanthri described the legislation as closely resembling the United Kingdom’s approach to insolvency and corporate restructuring.
He also expressed the opinion that certain features of Sri Lanka’s new framework compare favourably with India’s Insolvency and Bankruptcy Code, introduced in 2016.
However, his assessment concerned the design of the legislation rather than demonstrated operational results, as Sri Lanka’s system has not yet been tested through a substantial body of cases.
Private equity investment could gain momentum
A central argument presented by Thewarathanthri was that an effective insolvency system could make Sri Lanka more attractive to private equity investors.
Private equity typically involves investment in privately held companies, often with the intention of supporting business development, improving performance and eventually realising returns through a sale, restructuring or another exit arrangement.
Unlike conventional bank lending, private equity participation can provide companies with capital while allowing investors to become shareholders and participate in strategic decision-making.
Such investments may be particularly valuable for businesses seeking to expand operations, introduce new technologies, pursue acquisitions or enter international markets.
However, private equity investors generally require a clear understanding of how they can eventually recover their capital and realise potential returns.
Where established exit options are limited, investors may become reluctant to commit funds, regardless of the commercial potential of the underlying business.
Thewarathanthri highlighted this concern as one of the factors affecting Sri Lanka’s ability to attract greater private equity participation.
He also observed that some Sri Lankan businesses, particularly those with longstanding ownership structures, remain hesitant to introduce outside shareholders into their management and governance arrangements.
This reluctance can limit access to alternative sources of capital and reduce opportunities for business expansion through strategic investment partnerships.
The availability of more effective restructuring and insolvency procedures could improve investor confidence by making the legal consequences of financial distress more predictable.
Nevertheless, insolvency reform does not automatically guarantee that investors can exit investments quickly or recover their original capital.
The outcomes will depend on the financial position of individual businesses, applicable creditor rights, court decisions and the effectiveness of the procedures established under the new law.
A new approach to rescuing financially distressed businesses
An important feature of the legislation is the introduction of mechanisms intended to support businesses that encounter financial difficulties but retain the potential to operate successfully.
Under appropriate circumstances, qualified insolvency administrators may be appointed to manage distressed companies and examine possible restructuring arrangements.
These professionals can assess the financial condition of businesses, engage with creditors and consider measures that could preserve commercial operations.
Certain procedures also provide for temporary restrictions on creditor enforcement, creating an opportunity to evaluate restructuring options without immediate pressure from individual recovery actions.
Such protections are designed to support an organised process in which the interests of different stakeholders can be considered.
For example, a company experiencing temporary cash-flow difficulties may possess valuable assets, established customers and commercially viable operations.
Without an effective restructuring mechanism, financial pressure could force the business into closure even when a negotiated repayment arrangement or operational reorganisation might preserve greater value.
A formal administration process can provide a framework for evaluating these alternatives.
Where rehabilitation is not commercially feasible, insolvency procedures can instead support a more orderly distribution of available assets in accordance with applicable legal priorities.
The legislation also addresses personal insolvency, receivership and cross-border financial distress, recognising the increasingly complex nature of modern commercial relationships.
These provisions are particularly relevant to businesses operating across multiple jurisdictions or maintaining financial relationships with international lenders and investors.
Sri Lanka’s new framework therefore seeks to provide a more comprehensive legal environment for managing insolvency-related matters involving both individuals and corporate entities.
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Establishing an independent regulatory structure
The legislation provides for the creation of an Insolvency Regulatory Authority responsible for overseeing the professional and institutional framework associated with insolvency proceedings.
Its responsibilities include regulating practitioners, maintaining professional standards and contributing to the proper administration of the insolvency system.
Such regulatory oversight is important because insolvency proceedings frequently involve competing financial interests, complex legal obligations and decisions affecting the future of businesses.
Qualified professionals must be capable of evaluating financial records, managing distressed enterprises and applying relevant legal procedures.
Appropriate regulation can also help strengthen confidence among creditors, investors and business owners who rely on the integrity of insolvency proceedings.
However, Thewarathanthri acknowledged that Sri Lanka faces practical challenges in establishing the expertise and institutional capacity required to implement the new framework.
He observed that the country’s existing professional community has had limited exposure to the comprehensive insolvency procedures contemplated under the legislation.
Consequently, foreign expertise may be required during the initial stages to support complex restructuring and recovery cases.
International practitioners with experience in comparable legal systems could potentially contribute to professional development, training and knowledge transfer.
Over time, building a domestic community of qualified insolvency specialists will be important to ensuring the system operates efficiently and sustainably.
The establishment and effective functioning of the regulatory authority will also be essential to translating the legislation’s objectives into practical outcomes.
Implementation remains an important challenge
Although the new law has generated expectations of improved investor confidence, its practical effectiveness remains uncertain until the relevant procedures become operational and are tested.
During his remarks, Thewarathanthri referred to December 1, 2026, as the anticipated commencement date.
However, the enacted legislation contains a different statutory commencement provision.
Section 1 of the Act took effect upon certification on June 17, while the remaining provisions are scheduled to commence six months after certification, placing the statutory commencement date at December 17, 2026, unless subsequently extended by a Gazette Order issued under the Act.
The legislation permits the responsible Minister to extend commencement within the specified legal limits.
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This distinction is important for companies, financial institutions and legal professionals preparing to use the new mechanisms.
The implementation process will require coordination among the judiciary, regulatory authorities, insolvency practitioners and financial institutions.
Thewarathanthri acknowledged that Sri Lanka has not yet accumulated practical experience in operating the new system, making the initial cases particularly important.
These early proceedings may provide insights into how efficiently restructuring arrangements can be implemented and how effectively the legislation balances competing stakeholder interests.
Questions have also been raised regarding the relationship between the new insolvency framework and existing creditor enforcement mechanisms.
Sri Lanka’s parate execution system, which permits certain financial institutions to recover secured debts through specified procedures, has been identified as an area requiring careful consideration.
The interaction between different debt recovery mechanisms could influence how businesses and creditors approach restructuring negotiations.
The effectiveness of the new system will also depend on the ability of courts to handle proceedings efficiently.
Delays in resolving insolvency matters can reduce the value of business assets, increase financial costs and create uncertainty for investors.
Developing qualified insolvency professionals and efficient judicial processes will therefore be important to achieving the legislation’s intended objectives.
Learning from international insolvency systems
Sri Lanka’s reforms have been developed against the background of international efforts to modernise bankruptcy and corporate recovery legislation.
During parliamentary discussions, Justice and National Integration Minister Harshana Nanayakkara highlighted the importance of establishing a framework consistent with recognised international practices.
India’s Insolvency and Bankruptcy Code of 2016 was among the systems considered in discussions about improving corporate restructuring and creditor recovery.
India introduced its legislation with the objective of creating a more coordinated framework for resolving financial distress and improving the management of insolvency proceedings.
Thewarathanthri suggested that Sri Lanka’s new legal framework contains features that could compare favourably with the Indian system.
Nevertheless, meaningful comparisons of practical performance will require evidence from actual cases, including recovery outcomes, resolution periods and administrative efficiency.
A well-designed legal framework can establish the foundation for effective insolvency management, but institutional capacity and implementation will determine whether the expected benefits are realised.
For Sri Lanka, establishing an efficient insolvency system could strengthen confidence in commercial transactions and encourage investors to evaluate opportunities that previously appeared difficult to exit.
Overseas Sri Lankan investors offer another financing opportunity
Beyond insolvency reform, Thewarathanthri identified Sri Lankan family offices operating internationally as another potential source of investment capital.
Family offices generally manage the financial assets and investments of wealthy individuals or families, often participating in a range of asset classes and private business opportunities.
According to Thewarathanthri, overseas Sri Lankan investors may be interested in supporting domestic enterprises through private placements, co-investment arrangements and other structured transactions.
These arrangements can allow businesses to secure investment without necessarily relying on conventional public fundraising.
For companies seeking expansion capital, such partnerships may offer access to financial resources as well as business networks, commercial experience and international market knowledge.
Thewarathanthri suggested that businesses looking for investment partners should consider these alternative sources of capital alongside traditional financing facilities.
Private placements and co-investments can be particularly relevant where investors seek negotiated ownership structures and a direct relationship with the companies receiving funds.
However, such arrangements require careful consideration of governance, investor rights, financial transparency and future exit options.
An improved insolvency framework could help address certain risks associated with these transactions, although it would not eliminate the commercial uncertainties inherent in private investment.
Local partnerships can support international investment
Thewarathanthri also offered practical guidance to international businesses considering entering Sri Lanka.
He encouraged prospective investors to engage reputable local advisers and work with financial institutions that already possess experience in the country’s banking and regulatory environment.
Local consultancy firms can help foreign businesses understand commercial practices, investment requirements and administrative procedures.
Established banking relationships may also assist companies in structuring financing arrangements and managing cross-border financial transactions.
Thewarathanthri referred to the possibility of arranging funding through international financial centres such as Singapore or Mauritius, particularly where a foreign investor’s parent company maintains its financial resources.
Such structures may be appropriate for certain international investments, depending on legal, regulatory, taxation and commercial requirements.
He also emphasised the value of working with reliable Sri Lankan business partners who understand local market conditions.
Local partnerships can provide operational knowledge, commercial connections and support in navigating domestic business practices.
For foreign companies entering unfamiliar markets, these relationships may help reduce uncertainty and facilitate more effective business development.
However, successful investment partnerships depend on appropriate due diligence, clear contractual arrangements and mutual understanding of commercial objectives.
Banks have a role beyond traditional lending
Thewarathanthri highlighted the broader responsibility of financial institutions in supporting investment and economic development.
While banks traditionally provide lending, payment services and other financial products, they can also help connect businesses with investors and identify opportunities for commercially viable transactions.
In markets where private capital remains underutilised, financial institutions may play an important role in improving awareness of available investment opportunities.
This can involve facilitating introductions, supporting transaction structuring and helping investors better understand the financial environment.
Thewarathanthri indicated that Sri Lanka’s investment potential needs to be communicated more effectively to international audiences.
The availability of investment capital alone does not guarantee that funds will enter a particular market.
Investors must be able to identify businesses, projects and commercial opportunities capable of generating acceptable returns.
Consequently, strengthening the investment environment requires cooperation between businesses, financial institutions, professional advisers and policymakers.
The new insolvency framework could contribute to this process by addressing legal uncertainties associated with financially distressed investments.
At the same time, improvements in corporate governance, financial reporting and business transparency will remain important in attracting long-term investment.
Potential implications for Sri Lanka’s corporate sector
The introduction of modern insolvency legislation comes as Sri Lanka seeks to strengthen economic growth and attract investment following a period of significant financial instability.
Businesses seeking to expand may require capital for equipment, infrastructure, technology, workforce development and international market entry.
Although bank financing remains important, alternative investment channels can provide additional flexibility in funding corporate development.
Private equity investors may be willing to support companies with strong commercial potential, particularly where opportunities exist to improve productivity, expand operations or develop new products.
However, investors also evaluate the legal and financial risks associated with entering and exiting a market.
A clearer framework for corporate rehabilitation and insolvency could therefore contribute to a more predictable investment environment.
For lenders, the legislation may provide additional procedures for addressing distressed loans and participating in restructuring arrangements.
For business owners, it could create opportunities to negotiate solutions when enterprises experience financial difficulties.
For employees and suppliers, effective business rescue procedures may help preserve viable commercial operations that might otherwise face closure.
Nevertheless, the distribution of benefits will depend on the circumstances of each case and the effectiveness of the legal mechanisms applied.
The legislation does not guarantee that financially troubled businesses will survive or that creditors and investors will recover their full investments.
Rather, its significance lies in establishing structured procedures intended to improve how financial distress is managed.
A potential turning point for investor confidence
Thewarathanthri’s remarks at THINC Sri Lanka & Maldives 2026 highlighted the relationship between legal certainty and investment decisions.
For private equity investors, confidence depends not only on the potential profitability of a business but also on the availability of reliable mechanisms for managing unexpected financial difficulties.
Sri Lanka’s previous insolvency framework had long been considered outdated in relation to modern corporate financing and restructuring practices.
The Rescue, Rehabilitation and Insolvency Act seeks to address this gap by introducing a more comprehensive approach to business recovery, debt restructuring and creditor protection.
However, the legislation’s introduction represents only the beginning of the reform process.
Building the necessary regulatory institutions, developing professional expertise and ensuring efficient judicial administration will be essential to its effectiveness.
Early implementation experiences are likely to influence how domestic and international investors assess the system.
If the framework operates predictably and efficiently, it could improve the environment for private equity investment and other forms of long-term business financing.
The availability of overseas Sri Lankan capital, international financial partnerships and local advisory expertise could further support investment opportunities.
Thewarathanthri expressed confidence that Sri Lanka possesses commercial potential capable of attracting greater private investment, provided businesses and financial institutions can identify and develop suitable opportunities.
His assessment suggests that the country’s investment prospects will depend on a combination of legal reform, institutional development and the ability to connect capital with commercially viable enterprises.
As Sri Lanka prepares to implement its modern insolvency framework, attention will increasingly turn towards whether the new system can deliver greater certainty, facilitate effective restructuring and support a more dynamic private investment environment.
The legislation has the potential to change how companies, creditors and investors approach financial distress, but its long-term impact will ultimately be determined by practical outcomes rather than the legal framework alone.
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