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. .

Definition of Bankruptcy under the Ethiopian Commercial Code

 Taken from Bankruptcy Law Teaching Materia

Developed By:

  1. Mitiku Mada

  2. Alemayehu Tilahun

Sponsored by the Justice and Legal System Research Institute

Definition of Bankruptcy under the Ethiopian Commercial Code 

Book V of the Commercial Code under Article 969 and 970 defines, as to what bankruptcy is, in two different ways. As a principle, under Article 970 (1) the Code states that bankruptcy shall not result from mere suspension of payments, unless a judgment in bankruptcy is given or factual conditions are fulfilled in the way the law requires. The two situations provided to define bankruptcy are stated as follows: First, “Any trader who has suspended payments and has been declared bankrupt shall be deemed to be bankrupt.” Second, a sentence passed by a criminal court in respect of bankruptcy or any offence connected with bankruptcy not withstanding that suspension of payments has not been established by a judgment in bankruptcy shall be deemed to be bankruptcy of fact (emphasis added Article 970 (2) of the Commercial Code).

The first definitional provision indicates declaration of bankruptcy through judgment by competent court after investigation. To declare someone as bankrupt the main test is suspension of payments. This can be called judicial bankruptcy or legal bankruptcy. The second definition envisages the factual bankruptcy. In this case criminal court may pass sentence on the debtor even though suspension of payment is not proved by court as alleged by interested party. The offence under which the debtor is sentenced shall be connected with bankruptcy or in respect of bankruptcy

What kind of offences are connected with bankruptcy or, in respect of bankruptcy, would be point of discussion to make the second definition more understandable? In this regard it is proper to refer to the Penal Code of Ethiopian. The 1957 Penal Code of Ethiopia provides ten provisions under Book VI Title II Chapter II. of The heading of this chapter reads “Offences Relating to Proceedings of Debt, Execution and Bankruptcy”. For instance, if we see Article 683 within the same chapter; “a debtor subject to proceedings by way of execution against whom a declaration of default has been delivered, and whowith intent to prejudice his creditors has reduced his assets, whether materially or fictitiously, is punishable with a simple imprisonment or in grave cases, with rigorous imprisonment not exceeding five years.” Also as provided under Article 684, if a debtor misappropriates or destructs property subject to pledge or lien to obtain profit or to procure a benefit to third party, or to cause damage to his creditors he will be punished. Hence, as exemplified, any debtor found guilty of related offences and sentenced, even though there is no proof of suspension of payment, the person is deemed to be under factual bankruptcy. The rationale behind this definitional provision could be to save the creditors from further damage and to secure their rights on the immediately existing properties.