In any company, trust among directors is vital. But what happens when a trusted co-director misuses their position, sells company goods privately, and withholds the revenue from the company?
This scenario isn’t just unethical — it’s illegal under Sri Lankan company law.
In this blog, we explore a real-world issue where a shareholder who is also a director appointed a co-director to handle sales. The problem arose when that director began selling goods outside the company and kept the income for personal use. Here’s how you can respond — legally and strategically.
📌 Scenario: A Co-Director Goes Rogue
You’re a shareholder and director of a Sri Lankan company. You import goods using company resources. Your co-director — a friend — is supposed to sell those goods and deposit the money into the company account.
But instead, he:
- Sells the goods independently
- Does not report the sales
- Keeps the cash
- Fails to deposit funds into the company’s bank account
This is a serious breach of fiduciary duty and a direct violation of the Companies Act No. 7 of 2007.
⚖️ Legal Steps You Can Take
1. Document and Preserve Evidence
First, gather all relevant documentation:
- Import invoices and customs records
- Bank account statements showing lack of cash inflow
- Proof or suspicion of external sales (messages, receipts, witness accounts)
Create a digital backup and keep everything organized in case you need to take legal action.
2. Call a Board Meeting
Use your right as a director to request a formal board meeting. At the meeting:
- Present your concerns
- Ask for full disclosure of sales
- Insist on accountability
Record everything in the meeting minutes.
3. Pass a Resolution (If You Have Control)
If you have majority shareholder power or support from other directors, pass a resolution to:
- Restrict or revoke the director’s power
- Appoint an external accountant or auditor to review the sales and accounts
- Prepare the company to initiate legal action, if necessary
4. Notify the Registrar of Companies (ROC)
If the misconduct continues, file a complaint with the Department of the Registrar of Companies (DRC).
You may also file Form 20 to remove the director, depending on your company’s Articles of Association and shareholding structure.
Sections you may invoke:
- Section 210–212: Removal of director due to misconduct or breach of duty
- Section 187–189: Fiduciary responsibilities of directors
5. File a Civil or Criminal Case
You can file a:
- Civil suit to recover funds or losses caused by the director
- Criminal complaint for:
- Misappropriation of funds
- Breach of trust (under the Sri Lankan Penal Code)
- Theft or fraud
In some cases, you can apply for a court injunction or freeze assets if there’s evidence of fraud.
6. Appoint a Forensic Auditor
Hire an independent auditor to:
- Trace the goods and money trail
- Prepare forensic reports
- Serve as evidence in court or during official investigations
This adds weight to your case and demonstrates transparency in your actions.
🚫 What Not to Do
- Don’t confront your co-director aggressively — it could escalate and backfire.
- Don’t delay action — this can weaken your legal position.
- Don’t make verbal agreements — document everything formally.
🔒 Preventing Future Misconduct
Once you resolve the current issue, strengthen your company governance:
- Amend your Articles of Association to add clear duties and consequences for directors
- Implement dual authorizations for sales and revenue collection
- Sign director agreements detailing roles, responsibilities, and penalties
🧾 Final Word
Director misconduct is not just a personal betrayal — it’s a legal offense. Sri Lankan company law gives you the tools to act decisively. Whether you take the matter to the boardroom or the courtroom, remember: the company’s interests come first.
If you’re facing a similar issue, consult a corporate lawyer in Sri Lanka and act fast — justice delays are justice denied.
