Tuesday, November 15, 2011

Colombo Hilton now vested with the Government?

Hotel Developers (Lanka) PLC, the listed company that owns the Hilton property in Colombo made a very strange announcement yesterday.

The announcement states that consequent the enactment of the Revival of Underperforming enterprises act the assets of the company are vested with the Government and all the shareholdings of the company are now held by the Secretary to the Treasury.

This has left many people in the stock market utterly confused, although the announcement may seem innocuous to the uninitiated. This is a public, listed company with many shareholders, all of who are unaware as to how the shares have been transferred.

How were the shares transferred? There is no record of any shares trading on the exchange, indeed the share has been suspended following the announcement of the bill. Were the shares traded privately, off the market?

If shares are traded off the market, the stock exchange has a share transfer form that needs to be signed by the buyer and the seller. No existing shareholder signed anything. They have not even been informed, they only read about the announcement in the news.

They have not been paid compensation, which is stipulated under the act. The electronic registry run by the stock exchange still lists the shares under the names of the original owners.

Are we to take it that the registry is no longer valid? Or that procedures necessary to transfer shares are no longer required, that a directive from the state will suffice to change ownership? Will this apply to the land listed for acquisition under the Act, with the requirements for land registry entries being dispensed with?

The Act itself left many unanswered questions, most pertinently on the status of mortgages on the properties to be acquired, the status of the winding up procedures that were being followed and the claims of the various other creditors. All norms and processes seem to have been thrown out of the window.

These seemingly mundane procedures are all part of the legal framework of the country on which business is conducted and which is taken for granted.

Now it suddenly seems to have given way, hence the confusion as to how businessmen should operate in the future.


shammi said...

Were Hotel Developers looking to protect themselves form any liabilities the govt. might incur on behalf of the company, when they made the announcement?

Jack Point said...

Don't think so Shammi.

Under the law the company is recognised as a person and is different from its shareholders.

The company may incur liabilities but that does not affect the shareholders.

The liability of shareholders is limited to the capital that they subscribe when they buy shares. This is why they are called limited liability companies.

Partnerships or sole traders, the other common forms of business do not enjoy the benefits of limited liability. The sole trader or partners bear full responsibility for the debts of the business and can be called upon to meet them from their private property/income.

Shareholders in limited liability companies do not carry this risk, therefore there is no need to try and protect the shareholders per se.

A possible explanation is that certain members of the management may have tried to 'score marks' with the powers that be, hoping to show that they are with the GoSL.

If the instructions to issue this statement came from above, then the it is very troubling indeed. It shows either complete ignorance or disregard of laws and procedures.