A reported Commercial High Court rejection of a shareholder derivative action involving National Development Bank must be distinguished from the underlying questions surrounding the bank’s Rs. 13.6 billion internal fraud. Whatever the procedural
outcome of the litigation, the findings concerning financial controls, governance and oversight remain matters of substantial public interest.
The legal proceedings arising from the massive internal fraud at National Development Bank have brought into focus an important distinction between the ability of shareholders to pursue litigation and the responsibility of a bank’s directors, management and auditors to maintain effective systems of financial control.
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A minority shareholder, M. Thiyagarajah, instituted derivative-action proceedings in the Commercial High Court against NDB, members of its board and its external auditors, Ernst & Young, following disclosures concerning the bank’s internal fraud.
The proceedings sought to address alleged failures of oversight and the responsibilities of those entrusted with supervising the institution.
The court’s latest decision has been described as a rejection of the derivative action. The precise terms and grounds of that ruling require confirmation from the written order, particularly whether the decision concerns the maintainability of the proceedings, the shareholder’s entitlement to pursue them or the substantive allegations themselves.
These are not interchangeable outcomes.
A derivative action is an important mechanism of corporate accountability. It permits a shareholder, subject to the applicable legal requirements, to pursue proceedings concerning alleged wrongdoing against a company when those ordinarily responsible for acting on its behalf have not done so.
The mechanism is especially significant where allegations concern directors or others exercising substantial influence over corporate decision-making.
But derivative proceedings are subject to legal conditions. Courts must determine whether those conditions have been satisfied before allowing such litigation to proceed.
A refusal to permit an action on procedural or jurisdictional grounds would not, by itself, establish that the underlying governance allegations were unfounded.
Nor would the existence of a derivative action establish that directors or auditors had committed wrongdoing.
Both distinctions deserve emphasis.
The financial facts surrounding NDB’s fraud are sufficiently serious to require continued scrutiny regardless of the outcome of one shareholder proceeding.
The bank’s final forensic audit identified a financial impact of approximately Rs. 13.64 billion.
The losses were spread across several accounting periods, including approximately Rs. 1.5 billion before January 2025, Rs. 9.6 billion during 2025 and Rs. 2.5 billion during the first quarter of 2026.
The audit also identified weaknesses involving transaction processing, access controls, user credentials, monitoring, reconciliation, internal audit and operational risk management.
These are not peripheral administrative matters.
They concern the systems through which a financial institution safeguards its operations and identifies irregularities.
The scale of the losses raises the question of how substantial discrepancies could accumulate without being detected and addressed earlier.
Parliament’s Committee on Public Finance has examined the matter, including the responsibilities of the bank’s board, senior management and auditors.
Central Bank Governor Dr. Nandalal Weerasinghe has drawn attention to the fact that financial statements and associated oversight processes failed to identify the fraud before its eventual discovery.
The banking regulator has also maintained that the incident was contained within the institution and did not compromise customer deposits or the stability of the wider financial system.
That assurance is important and should be acknowledged.
Nevertheless, financial stability and corporate accountability are different questions.
A bank may remain solvent and capable of meeting its obligations while serious deficiencies in its internal systems are being investigated.
The public is entitled to expect both financial stability and effective governance.
There is also a distinction between responsibility for committing fraud and responsibility for detecting or preventing it.
The individual or individuals who perpetrated the alleged fraud must be dealt with through the criminal justice system, subject to the evidence and applicable law.
The responsibilities of directors, auditors and senior managers must be assessed separately against their statutory, professional and contractual obligations.
A failure of controls does not automatically establish criminal liability. Equally, the absence of criminal charges does not necessarily establish that all governance obligations were satisfactorily discharged.
That is why the continuing regulatory and professional examinations are important.
The Sri Lanka Accounting and Auditing Standards Monitoring Board is expected to examine issues relating to the auditors, while the Central Bank and other relevant authorities retain responsibilities concerning banking supervision.
The findings of those processes should be made public to the fullest extent permitted by law.
NDB is an important financial institution. Its depositors, shareholders, employees and customers have a legitimate interest in the bank’s continued stability and reputation.
That interest is not served by speculation or premature accusations.
Neither is it served by treating the outcome of a single court application as the final answer to every question raised by the fraud.
The appropriate response is to distinguish clearly between what has been established, what remains under investigation and what has been determined by the courts.
Sri Lanka’s banking sector depends upon public confidence, and confidence is strengthened by transparency rather than silence.
The derivative action may have encountered a legal obstacle.
The underlying responsibility to explain how Rs. 13.6 billion was lost, what controls failed and what corrective measures have been implemented remains.
