Taken from Bankruptcy Law Teaching Materia
Developed By:
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Mitiku Mada
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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.