About TADDESE LENCHO (profile is at the time this article written)

Currently a Lecturer, formerly the Associate Dean and Acting Dean of the Faculty of Law, Addis Ababa University; he holds LL.B (AAU), LL.M(University of Michigan Law School) r am grateful to all the assessors who kindly went through the draft version of this article and pointed to errors of one sort or 8Ilmher. Responsibility for al1 the errors that remain is all mine

DOWNLOAD Ethiopian Bankruptcy Law A Commentary (Part I) pdf



December, 2008


The bankruptcies came to us from Italy, bancorotto, bancarotta, gambarotta e la giustizia non impicar _. Every merchant had his bellch C banco..J in the place of exchange; and when he had conducted his business badly, declared himself Jallito  and abandoned his property to his creditors with the proviso thai he retain a good part of it for himself, be free and reputed a very upright man. There was nothing to be said to him, his bench was broken, banco rotlo, banca rotla ; he could even, in certain towns, keep all his property and baulk his creditors, provided he seated himself bare-bottomed on a stone in the presence of all the merchants. This was a mild derivation of the old Roman proverb solvere aut in aere aut in cute-, to pay either with one’s money or one’s skill. But this custom no longer exists; creditors have preferred their money to a bankrupt’s hinder parts.

Voltaire, Philosophical Dictionary, ‘Bankruptcy’


It is no exaggeration to state that Ethiopian Bankruptcy Law (tucked away in the last Book of the Commercial Code) is the least known and hence the least practiced in Ethiopia. Since the coming into force of the Commercial Code in 1960, cases having to do with bankruptcy have been few and far in between.’ Why might this be? Is the defect in the law or in the economic environment? Is Ethiopian business environment immune from the natural laws of bankruptcy or has it always gone bankrupt without ever being noticed by the public or mediated by the law?’ The Economist magazine recently quipped that imagining capitalism (business enterprises) without bankruptcy is like imagining Christianity without hell. 3 Perhaps, that is what happened in Ethiopia.

The questions of why bankruptcy laws have become dormant are troubling questions. However, as troubling they are, they cannot be answered in categorical terms. An answer to these questions would require an extensive empirical study of the business environment and the historical factors that might have kept the bankruptcy laws of Ethiopia from having to see the light of the courts.

There is no shortage of theories as to why bankruptcy cases are not as common as the failure of businesses would suggest. One theory puts the blame on the freezing of commerce in the aftermath of the 1974 Ethiopian Revolution, tying the (mis)fortunes of the bankruptcy provisions to the Commercial Code in general.4 The problem with this theory is that it only explains why bankruptcy fell into disuse between 1974 and 1991. It does not explain the situation after 1991 when the economy of Ethiopia was more or less liberalized (seventeen years and counting!).

Another theory is lack of familiarity (of the legal community) with the provisions of bankruptcy in the Commercial Code. Lawyers are a critical piece in the application of the law. If lawyers do not know or understand the law, it is unlikely that the law will ever come to courts even if it were included in the Code. It is what Emperor Haile Sellassie J was emphasizing in his speech on the inauguration of the Journal of Ethiopian Law:

… We have observed that Ethiopia’s rapid progress demands the services of a large number of legal experts … capable of insuring the effective application of the laws

In a recent report commissioned by the USAID, this matter has been aptly emphasized:

There is little demand for change from the debtor side because so little is known about bankruptcy protection. The possibility of reorganization or’ protection arises not only from law, but from knowledge of the law, and that is quite limited.

The third theory points to the foreclosure laws and practices of Ethiopia as probable reasons for the eclipse of bankruptcy. According to the USAJD Commissioned report:

 lenders are using foreclosure law and practice instead of bankruptcy. Secured lenders can institute accelerated proceedings to repossess and liquidate security and do not need to start a bankruptcy action. Frequently, borrowers are’ captive to a single lender, with few other commercial obligations than their bank loan, so that foreclosure effectively deals with most of the debtor’s liabilities, although it does not permit rehabilitation or reorganization and often results in liquidation. 7

Foreclosure powers were granted to banks and selected other creditors only in the last decade and could not entirely explain why bankruptcy practices are not so common.8 It is perhaps nearer to the truth to conclude that multiple factors were conspiring to keep bankruptcy out of the limelight of the practice.

Although cases of bankruptcy have rarely been taken to courts, there are several reasons why one should write about Ethiopian bankruptcy law. First, it is barely known even among the otherwise savvy and seasoned lawyers of Ethiopia. Second, it has now been offered as an independent course for the last five or so years without any reference material. And lack of reference material is always a legitimate inspiration for writing (even if it were just an article). Third, since 1991, Ethiopia has taken on an economic policy whose driving engine is the participation of the private sector, and the private sector needs laws not just for its formation but also for its orderly winding up and possibly for its rehabilitation after bankruptcy.’ It is not that Ethiopia lacks these laws but they are unknown even among those who earn a living from their knowledge of the law.

This commentary is divided into two parts. In the first part, I intend to treat subjects like the background of Ethiopian bankruptcy law, its organization and structure, scope and meaning, and the tests for commencement of bankruptcy under Ethiopian bankruptcy law. In the second part, I intend to throw light on some of the other basic features of Ethiopian bankruptcy law and related subjects of composition and schemes of arrangement.

At the end of each part, I will provide some concluding remarks on what I think would be striking features of Ethiopian bankruptcy law. For these commentaries, I have relied upon as wide a range of literature on the subject of bankruptcy as I could get my hands on. But as repeated quotes and references in the footnotes show, I am indebted primarily to the 2005 UNCITRAL Legislative Guide on Insolvency Law of 2005 (hereinafter simply ‘UNCITRAL’ Guide’).l0 As far as I am concerned, ‘UNCITRAL Guide’ offers the latest and most comprehensive reference on the subject of bankruptcy. The ‘UNCITRAL Guide’ also provides alternative approaches on controversial points of bankruptcy, something one can rarely find in many other sources. .

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