Insolvency Law at Ethiopia
In Ethiopia, insolvency law is primarily governed by the Commercial Code of Ethiopia (1960), particularly under Part Four of the code, which deals with bankruptcy, liquidation, and reorganization. In addition to the Commercial Code, there are various other regulations and procedures that complement the insolvency framework in the country.
Key Aspects of Insolvency Law in Ethiopia:
1. Types of Insolvency Procedures:
Liquidation (Winding-up): A process where a company’s assets are sold to pay off its debts. If the company is no longer viable and cannot continue its operations, liquidation is initiated.
Reorganization: This procedure allows a company facing financial distress to restructure its debts, renegotiate with creditors, and continue its business activities.
Composition (Debt Settlement): A form of voluntary arrangement that allows the debtor to reach an agreement with creditors to pay part or all of its debts over time, avoiding liquidation.
2. Insolvency Triggers:
A business or individual may be considered insolvent if:
Inability to Pay Debts: When a debtor cannot meet its financial obligations as they come due.
Excessive Liabilities: When the liabilities exceed the assets of a company or individual.
Court-Ordered Insolvency: A court may declare a debtor insolvent if creditors petition and prove insolvency.
3. Who Can File for Insolvency?
Debtors: A debtor may voluntarily file for insolvency if they are unable to pay debts.
Creditors: Creditors can petition the court to initiate insolvency proceedings if a debtor fails to settle debts.
The Court: In some cases, the court may initiate insolvency proceedings if it is in the public interest or to protect creditors.
4. Insolvency Process:
Filing for Insolvency:
Insolvency proceedings may be initiated by the debtor or creditors, who must submit a petition to the court.
The court assesses the financial situation of the debtor and may appoint a liquidator or administrator to manage the insolvency process.
Liquidation Procedure:
In the case of liquidation, the assets of the company or individual are sold, and the proceeds are used to pay creditors.
The process is overseen by a liquidator, who is appointed by the court or the creditors.
Reorganization Procedure:
The company may propose a reorganization plan to restructure its debts and continue operating.
Creditors vote on the plan, and if it is accepted, the company is allowed to reorganize its business and financial affairs under the court’s supervision.
Composition Agreement:
A debtor may propose a settlement agreement with creditors, often paying a reduced amount of the debt over a specified period, subject to creditors' approval and court authorization.
5. Priority of Claims in Liquidation:
The Commercial Code establishes a priority order for claims during liquidation:
Secured creditors: Creditors with a legal claim over specific assets (such as mortgages or liens).
Preferential creditors: These include employee wages and salaries.
Unsecured creditors: General creditors without secured claims.
Shareholders: Shareholders are paid last, only after all creditors have been settled.
6. Role of the Liquidator:
A liquidator is appointed by the court or the creditors and is responsible for managing the liquidation process.
The liquidator oversees the sale of assets, distribution of proceeds, and ensures that all steps comply with the law.
The liquidator also prepares reports on the financial condition of the debtor.
7. Rehabilitation (Reorganization):
Companies facing temporary financial distress but with the potential for recovery may file for reorganization.
A reorganization plan is submitted, which may involve debt restructuring, cost-cutting, or other measures to make the business viable again.
The reorganization plan must be approved by creditors and the court.
8. Personal Insolvency:
Personal insolvency cases are less common in Ethiopia, but individuals who are unable to meet their debts may seek a form of debt settlement or bankruptcy.
The process for personal bankruptcy is similar to corporate insolvency, involving the appointment of a trustee to manage the liquidation or settlement of the individual’s assets.
9. Bankruptcy and Discharge of Debts:
In Ethiopia, bankruptcy or liquidation does not typically result in the discharge of personal debts, especially for business debts. The process mainly focuses on liquidating assets to settle liabilities.
However, debtors may negotiate settlements or restructuring through the reorganization procedure to avoid liquidation.
10. Effects of Insolvency:
Once a company is declared insolvent, its management may be taken over by the court-appointed liquidator or administrator.
In cases of liquidation, the business may be shut down, and operations cease. In contrast, reorganization allows the business to continue its operations under a new financial plan.
For individuals, personal assets may be liquidated to repay creditors, and debt settlements or payment plans may be negotiated.
11. Corporate Governance During Insolvency:
During insolvency proceedings, the powers of the company’s directors may be suspended, and the control of the company is transferred to the insolvency administrator.
Directors are required to cooperate with the insolvency administrator and provide full disclosure of the company’s financial position.
Summary of Insolvency Procedures in Ethiopia:
Insolvency Filing: Debtor or creditors file a petition with the court.
Court’s Assessment: Court assesses the financial situation of the debtor.
Liquidation/Reorganization: Based on the assessment, either liquidation or reorganization is initiated.
Appointment of a Liquidator: A liquidator is appointed to manage the liquidation of assets or a reorganization plan is developed.
Creditor Claims: Creditors submit their claims, and distribution is made according to legal priority.
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