The House of People’s Representatives recently unanimously approved the revised Commercial Code of Ethiopia, replacing the 61-year-old document which was in place since 1960. The revision sought to amend 825 sections of trade-related issues and is expected to serve intact for 30 years as up-to-date technological advancements have been considered, according to the government.
The amendment introduced two new organizational arrangements for a company’s establishment while excluding ordinary partnership. It is now permitted to establish a one-person private limited company as well as a limited liability partnership. EBR’s Ashenafi Endale assesses the new commercial code.
A new version of the 61-year-old Commercial Code was finally ratified by the Ethiopian House of People’s Representatives on March 25, 2021. Taking into account that efforts to revise the old set of laws started 34 years ago, the amendment and ratification of the Commercial Code is good news for the country, yet one long overdue and expected.
Five years ago, the amendment almost reached the final stages but was never presented to the Council of Ministers for approval. But when Prime Minister Abiy Ahmed (PhD) came to power in 2018, the revisionary work recommenced to align with political and economic reforms underway in the nation.
“The amendment is necessitated to prompt innovation and nurture enterprises, essential in our aspirations to build a prosperous society.” said Abiy after the Council of Ministers endorsed the draft to be sent for parliamentary approval back in June 2020.
A commercial code is a legal framework governing the rights, relations, and conducts of businesses and organizations engaged in trade. To this day, Ethiopia has been using a commercial code introduced in 1960. However, the nature of commerce and flow of capital has changed significantly in the ensuing six decades. As a result, the old Commercial Code, consisting of five books, became inadequate to govern the economic activities conducted in Ethiopia today.
The new law only repeals the provisions of books one, two, and five of the previous proclamation. Books three and four of the code will remain intact pending the expected separate issuance of the Financial Code. Yet, experts similarize revising the Commercial Code alone to surfing without a compass, as Ethiopia does not have a trade policy.
The new set of laws for business activities is a collection of modifications, reductions, and additions. According to the old code, only six formalities were permitted for the establishment of a company. This has now been changed by excluding ordinary partnership from the list and adding limited liability partnership and one-person private limited company. A trader can now convert his enterprise from a sole proprietorship into a one-person PLC. The trader shall, however, remain jointly and severally liable with the company for all debts incurred prior to the formation of the one-person PLC through conversion.
A limited liability partnership is a business arrangement which allows partners to limit their liabilities to the amount which they have contributed to the business. Thus, if the partnership fails, creditors cannot claim on the partners’ personal assets or income. This type of partnership is a preferred and common business arrangement in professional service-givers such as law, accounting, consulting, and investment management firms.
In Ethiopia, law professionals have been calling on the government to allow such a business arrangement for years. Previously, there was no law allowing and governing law firms established by two or more lawyers.
“The amendment will have a significant impact in promoting business and ensuring fair trade,” said Meseret Abate, Chairperson of the Trade and Industry Affairs Standing Committee of Parliament, after the bill was passed.
The other new organizational arrangement is the one-person private limited company, i.e., a business organization incorporated by the unilateral declaration of a single person. By removing the requirement obliging multiple members for the establishment of a private limited company, the revised Commercial Code now allows a single person to form a company on her/ his own.
“The rationale behind the previous requirement was the protection of third-party interests,” explains Belayneh Yirga, Director General of the Legal Studies Drafting and Consolidation Directorate at the Office of Attorney General. “But now, there are other ways to protect these third parties.”
“This is very good because many people do not want to establish a company together with other people because there is high risk
involved in this arrangement,” says a pioneer businessman. “A one-person private limited company is easy to manage and regulate.”
Apart from methods of establishment, the new code exempts people engaged in small business, handicraft, agriculture, forestry, and animal rearing from provisions such as registration as a business and account keeping, applicable to other traders. professionals like Mahlet Fitsum, Consultant and Attorney at Law that argue that the new Commercial Code carries little change in terms of formalizing the informal economy. She claims that “capital requirements are still high, and this is pushing businesses from the formal sector. Since they have little or no capital, women are forced to engage in the grey sector.”
Concerning the commencement of a business entity, preparing and publishing articles of association in newspapers is no longer required to establish a non-partnership company and a memorandum of association will suffice for the purpose. Further, share companies are no longer required to publish establishment documents in newspapers. This posting requirement has been moved onto the company’s website. But memorandum of association is required when a business contributed to formation of new business.
Websites have been given recognition as it is now obligatory for a share company to have one. It shall contain the memorandum of association, notices regarding meetings, and any other information required to be made public. This requirement is only for share companies and arises for the fact that shareholders don’t know each other like in other companies. So, there is a need to protect the rights of shareholders and third parties whose interests can be affected by the share company.
Regarding the board of directors of share companies, the new Commercial Code removes the existing requirement that they all be shareholders, paving the way for independent directors in line with global best practices. It also allows companies to conduct shareholder meetings via video conference or other means of telecommunication.
Additionally, the new law permits previously disallowed holding companies through two modalities. In the first modality, a holding company can be formed as an entity that does not itself conduct operations to produce goods or render service but holds shares in other business organizations. In the second mode, a holding company is allowed to directly manufacture and provide goods and services.
Foreign companies and their operations have also been addressed. It was previously difficult for them to come to Ethiopia and open branches because of confusing procedures. But the new code allows foreign business organizations or an entity incorporated abroad to operate via an Ethiopian branch.
The new Commercial Code recognizes a branch opened by a foreign firm as a new business entity. Thus far, they have just been opening offices in Ethiopia. This is difficult for tax issues. But now, they are considered a company the minute they are present in Ethiopia, meaning they have a legal personality.
Besides simplifying the commencement of businesses, the revised code incorporates new and additional provisions related to bankruptcy and insolvency procedures. This includes preventive restructuring proceedings, reorganization proceedings, and simplified reorganization proceedings to revive companies in distress. It also permits simplified bankruptcy proceedings for small and medium enterprises (SMEs). SMEs with assets less than ETB20 million and annual sales lower than ETB5 million can now use the law to declare bankruptcy as per simplified bankruptcy proceedings which are to be proven and closed within one year. This culminates with the discharging of all persons from debt, and the cancelling of the registered business, but only if debtor is not dishonest. Other businesses, including SOEs, are to follow the preventive restructuring, reorganization, and bankruptcy laws, before winding up a business’ life. EBR
9th Year • Apr 16 – May 15 2021 • No. 97