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by a special correspondent

Power sector reforms have been claimed to be under way for a long time. It is hoped that the Minister of Power will ensure the completion of this exercise within his promised 180 days. In the meantime a common man has done some homework on the issue of reforms and he would like to share his findings with the public since the reformers have opted to keep all such common people in the dark. It is hoped that the reformers would also read this and thus begin a public discussion.

It is obvious that to vest any existing State establishment in another requires a statute to enable to do two things, namely to create a new establishment and vest the existing one in it. For instance, The Ceylon Electricity Board Act No. 17 of 1969 not only enabled to create the Ceylon Electricity Board but also enabled to vest the Department of Government Electrical Undertakings in it. Since then a more widely applicable statute has come into force.

This is the Conversion of Public Corporations or Government Owned Business Undertakings into Public Companies Act No. 23 of 987, an enactment in which common sense sees some serious shortcomings.

Act 23 of 1987

Act 23 empowers the Cabinet of Ministers to vest any existing State establishment or part of it in another for a specific purpose. It also empowers the Minister in charge to create the new establishment as a public company under the existing Companies Act notwithstanding any other provisions of the Companies Act! The relevant sections of this Act are quoted here.

2 (1) Where the Cabinet of Ministers considers it necessary that a company should be incorporated for the purpose of taking over the functions of any public corporation or part thereof the Minister may, in consultation with the Minister in change of Finance, forward a Memorandum and Articles of Association to the Registrar of Companies, together with a direction to him to register such public corporation or part thereof, as a public company under the Companies Act No. 17 of 1982.

2 (2) Notwithstandings any other provisions of the Companies Act, No. 17 of 1982, on receipt of a direction under subsection (1) the Registrar of Companies shall- (i) issue certificate of incorporation under section 5 (1) of the Companies Act in the name referred to in the direction under subsection (1) and (ii) publish an order in the Gazette declaring that a public company is incorporated in the name specified in the Order to takeover the functions of the public corporation or part thereof specified in the Order

2) (3) Upon the publication of the Order referred to in subsection (2) in the Gazette, the Registrar of Companies shall allot all the shares into which the share capital of the company is divided into the Secretary to the Treasury, (in his official capacity) for an on behalf of the State.

3 (1) With effect from the date of publication of the Order under subsection (2) in the Gazette the corporation or part thereof, to which the Order relates shall vest absolutely in the company referred to in that Order.

The Companies Act

No. 17 of 1982

It is natural to ask what a public company is. Act 23 does not give an interpretation of the words "public company" as sued in it. However, the phrase "a public company under the Companies Act" as used in Act 23 has a very specific meaning in the Companies Act.

Section 2 (1) of the Companies Act says: Any seven or more persons, or where the company to be formed is to be a private company, any two or more persons, or where the company to be formed is a people's company, any fifiy or more persons, associated for any lawful purpose may, be subscribing their names to a memorandum of association (which shall be printed) and complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability. The reader may note that.

a. This Act defines the meaning of the words "private company" so precisely that they cannot have any other interpretation. A private company is a company that must have at least two persons as members and it prohibits the public to subscribe for any shares in it by Section 30.

However, it can be called upon by any person, including the reader and the Registrar of Companies, to offer a portion of its shares to the public in the national interest or in the interest of the national economy under Part VI of the Act in which case if the private company refuses to become a public company the District Court will adjudicate whether or not the private company should become a public company.

The Act does not stipulate that a Private Company should be privately owned. So private company can be State owned like LECO. By the way, many Statutes that do not apply to a privately owned private company apply to a State owned private company so as to ensure it accountability to the State. However, many people are made to believe mistakenly that LECO is a privately owned company in the private sector.

Thus the ownership of a private company can be by private individuals or other corporate bodies such as State Corporations if the statutes under which they are formed allow them to be so incorporated but never the members of the public but the public can request the private company to be made into a public company.

b. The Act also defines the meaning of the words "public company" so precisely that they cannot have any other interpretation. A public company is a company that must have at least seven persons as members (Sections 33 and 240) and whose shares are traded freely on the stock exchange.

Act 23 and common sense

a. Act 23 and the Companies Act

As mentioned earlier Act 23 does not give an interpretation of the words "public company" as used in it. It also does not say who should subscribe their names to the memorandum of association of whatever it means by a public company. If no person or at least one person subscribes his name to a memorandum it is obviously not a memorandum of association and the question then is whether such a memorandum which is not a memorandum of association, can be registered under the Companies Act and a certificate of incorporation issued by the Registrar as required by Sections 14 and 15.

On the other hand, as the reader knows, the Companies Act requires at least two persons to incorporate into a company, naturally because that is what incorporate means. If there are at least two persons they can be incorporated only into a private limited company by the Companies Act and not to public company, which requires at least seven persons and then the public company is required to offer its shares to the public.

Thus the words "a public company" used in Act 23 do not seem to be used in the sense used in the Companies act. On the other hand Act 23 seems to say "to hell with what incorporate means, what a company means, what a public company means and the Companies Act itself, the Registrar shall register the corporation as a public company and issue a certificate of incorporation under Section 15 (1) of the Companies Act! Also, under the Companies Act the registrar does not allot shares but under Act 23, he shall!! Common sense sees something farcical in Act 23.

b. Act 23 and CEB

CEB has been created under the CEB Act. 23 enables CEB to be fragmented but it does not repeal any other statute. What enactment would repeal the CEB Act? If the CEB Act is repealed then the Electricity Act also needs to be amended or repealed because it makes reference to the CEB. What enactment would repeal the Electricity Act? Has such an Act been drafted to be presented to the Parliament? When will that be done?

c. Act 23, CEB and LECO

Act 23 does not apply to LECO because it is not a public corporation (for the interpretation of public corporation see Chapter XXII of the Constitution).

LECO has been created as a private limited liability company under the Companies Act by incorporating CEB and the UDA. Quite apart from whether the CEB Act and Act No. 41 of 1978 allowed the CEB and the UDA respectively to be so incorporated, how will the CEB shares in LECO, amounting to at least 51%, be disposed of when CEB Act is repealed and the CEB no longer exists? Will the CEB shares be transferred to the Treasury or the UDA in violation of LECO Article 16 which guarantees this minimum quantum of share to CEB? When CEB no longer exists LECO will still have two members, Treasury and the UDA, and LECO can still survive as a private company.

Will it be allowed to survive? In case the CEB and the UDA shares are transferred to the Treasury LECO will have only one member, the Treasury, and therefore LECO will not qualify to remain as a private limited company or any company under the Companies Act. The question then is whether to wind up LECO under Part IX of the Companies Act and LECO Article 152 and vest its assets in the Treasury and then set up another establishment called a public company whatever that means in Act 23.

Other requirements

Presuming that some establishments (that are not companies under the Companies Act) are created under the Companies Act, their operating areas need to be demarcated fairly so that the performance of these establishments can be compared. On what criteria would this demarcation be done?A purely geographic basis would not be suitable.

Some other factors would be: the present assets; revenue, assuming uniform purchase and sales tariffs, which depends on the present energy demand and hence the population density and the types of consumers; the expected investment which depends on the expected load growth, the degree of electrification and the condition of the present distribution system; the present level of the reliability of supply so that the consumers everywhere are treated equally. Another important issue would be whether there would be uniform tariff structure for all the establishments.

Governance of the establishments

Since all the establishments are State owned they will necessarily be answerable to the State finally, and perhaps to the Minister specifically. Will these bodies be governed by a Board of Directors and within what framework will they operate? Who will appoint these Directors? If they are appointed by the Minister how will political interference be avoided? Will all the Statutes and Circulars that apply to State owned establishments apply or only some of them? These are some of the questions that have to be answered.

Act 23 refers to a memorandum and articles of association. If this document is the framework for governance, it is of uttermost importance that it be carefully drafted. It should, among other things, stipulate the qualifications, the permissible number of terms in office and the age of retirement of the directors.

It should also stipulate that the directors be nominated by a politically independent body composed of the relevant managerial, technical, financial and legal experts, that the Minister appoints on the basis of its recommendations, that the directors will come under its immediate supervision.

Further, it should fix the age of retirement of the employees including the directors at 60 years and in case a director has to be retained after the age of 60 years, provision should be made as in Section 181 of the Companies Act. Most importantly, it should attach a schedule of Statutes and Circulars applicable to these establishments but not to privately owned private companies or public companies formed under the Companies Act. For instance, Articles 17, 54 (1), (2) and (7) of the Constitution, Bribery (Amendment) Act No. 20 of 1994, the Public Enterprises Reform Commission Act No. 1 of 1996, the Circulars No. 122 and 134 of the Department of Public Enterprises of the Ministry of Finance etc.

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