SLIC deal: SC shocked by ‘behaviour’ of public officials

(June 04, Colombo, Sri Lanka Guardian) The Supreme Court on Thursday ruled that the share sale and purchase agreement in the 2003 privatization of Sri Lanka Insurance Corporation (SLIC) was illegal, null and void and 'ab initio'.

Furthermore, the sale of SLIC to Milford Holdings (Pvt) Ltd and Greenfield Pacific EM Holdings Ltd was also declared null and void. The bench headed by Chief Justice Sarath N. Silva and Justices P. Sripavan and G. Amaratunga (who delivered the judgment), said a primary factor in privatizing SLIC was the need to conform to conditions for loans from the International Monetary Fund (IMF) and the Asian Development Bank (ADB).

The fundamental rights petition was filed in 2007 by politician cum public rights activist Vasudeva Nanayakkara who asked the Court to probe the 2003 SLIC privatization transaction and to consider annulling the same, due to several irregularities in the process which caused massive losses to the government and the public. Around 38 respondents were cited in the case including Harry Jayawardena whose companies, Milford Holdings (Pvt) Ltd, Greenfield Pacific EM Holdings Ltd, Distilleries Company of Sri Lanka (DCSL) and Aitken Spence Insurance (Private) Ltd, entered into an agreement on the sale and purchase of the entire issued share capital of SLIC on April 11, 2003.

As stated in the judgment, Milford Holdings Ltd headed by businessman Harry Jayawardene, part of the consortium of companies that bought the 90% stake in SLIC, will be repaid the Rs.6.050 billion it shelled out through treasury bonds to be issued in the by the Treasury Secretary with a maturity period of five years. The 90% of SLIC shares will go back to the Treasury.

Furthermore, the judgment stated that the Treasury Secretary will have to submit recommendations to the Court the names for a new Board of Directors of SLIC in two weeks. Until a new Board of Directors has been appointed, the Treasury Secretary will oversee the administrative and executive functions of SLIC. The case will be mentioned on June 18.

The Court stated that its conscience has been shocked by the behaviour of senior public officials. Those mentioned in the petition include former PERC Chairman and former Treasury Secretary P.B. Jayasundera, former Treasury Secretary Charitha Ratwatte, former Minister of Economic Reform Milinda Moragoda and former Deputy Secretaries to the Treasury Faiz Mohideen and N. Pathmanathan.

The Court further stated that it had overruled all objections by the respondents to the petitioners and that it was the respondents who had failed to submit facts.

Steering Committee The judgment noted that the Steering Committee which was appointed to facilitate the privatization acted with executive authority it did not have by appointing a technical evaluation committee (TEC) and a tender board (TB) without cabinet approval. The Steering Committee comprised SLIC Chairman Chrishantha Perera, then PERC Chairman P.B. Jayasundera, SLIC General Manageer N. Kandasamy, Partner at PricewaterhouseCoopers (PwC) Devasiri Rodrigo, Additional DG at the Department of Public Finance V. Kanagasabapathy, Executive Vice President DFCC Marina Tharmaratnam, DG of the Insurance Board of Sri Lanka Dayanath Jayasuriya, Assistant Governor of the Central Bank Rani Jayamaha and Director PERC Aneela de Soysa.. Mrs. Tharmaratnam resigned in July 2002 due to a conflict of interest. According to the judgment, the Steering Committee, at its first meeting, prepared a time table for the completion of the privatization without any cabinet approval for the sale of SLIC.

The Court stated the tender board, which short listed five audit firms to act as auditors for the government of Sri Lanka, had not been properly appointed and acted without jurisdiction and no legal authority. In fact, the former Deputy Secretary to the Treasury N. Pathmanathan had appointed himself as Chairman of the tender board and could not justify the other nominations and himself as Chairman. Moreover, the court said former Minister of Economic Reform Milinda Moragoda had submitted to Cabinet that the tender board had been ‘assigned’ when the members should have been appointed by Cabinet.

Auditors PricewaterhouseCoopers (PwC), the auditors for the government who were paid approximately US$1.6 million after being appointed by the tender board, had undervalued SLIC, according to the judgment.

Furthermore, Ernst & Young (E&Y) who were the auditors for SLIC, have been removed as per the judgment. The Court said EY were ‘serving two masters’, first the government of Sri Lanka and subsequently, the consortium of companies which purchased the 90% stake in SLIC.

The judgment stated that the sale of SLIC had been based on unaudited accounts provided by E&Y and that the auditors had not certified that the financial statements submitted were prepared according to international accounting standards. By not clearly identifying the current assets and current liabilities and the non-current assets and non-current liabilities, the government was unable to properly calculate the net working capital of SLIC.

'Strange' Companies Milford Holdings and Greenfield Pacific EM Holdings, two of the companies in the consortium, were never given cabinet approval as buyers and were in fact ‘strangers.’ Milford Holdings was a special purpose vehicle to purchase the SLIC shares while Greenfield had been incorporated in Gibraltar on 28 March 2003, one day after a cabinet memorandum which had given approval for the sale.

It was DCSL, Aitken Spence & Co. Ltd. and Aitken Spence Insurance (Pvt) Ltd. which signed the share sale and purchase agreement on April 11, 2003 as guarantors, guaranteeing the payment of the purchase consideration to the government by the two purchasers, Milford Holdings and Greenfield. It was Mr. Jayawardene who signed on behalf of the two purchasers and the three guarantors.

The Court said senior public officials and the TEC should not have allowed the government to enter into contracts with unknown institutions or foreign parties.

-Sri Lanka Guardian