02 March 2012 Written by  Mitiku Mada and Alemayehu Tilahun

The Scope of law of Bankruptcy in Ethiopian Legal System

As we have discussed earlier in the part dealing with the historical background of bankruptcy, in the earlier times bankruptcy applies to persons who involved in commercial activities. That is to say, it is only persons who involved in commerce that can be the subjects of bankruptcy. But later, because of the influence of Spanish law, persons who did not engage in non-commercial activities were made the subjects of bankruptcy proceedings.

Do you agree that the bankruptcy proceeding applies to all citizens of the country who failed to pay debts to their creditors? I hope your answer would be “No”. If you answered so, that is great. Assume that one of the distance learners of the Alpha University College (Ato Messay) borrowed 50,000 Birr from you. He has never carried out commercial activity. After you made repeated requests to get the loan paid, he refused because of different reasons. In this case, do you think that you can apply to the court demanding the student to be declared bankrupt? Did you answer “No”? If so you are correct. As far as the scope of application of bankruptcy proceeding in our country is concerned, Ato Messay would not be declared bankrupt. Then, the question remains as to who is the subject of the bankruptcy law.

Assume that in the above given hypothetical case, Ato Messay is a businessman who carries on one or more of the activities enumerated under Article 5 of the Commercial Code. Do you agree that Messay should be declared bankrupt in case he is not in a position to pay the debt he owes to you? I am sure that your answer will be “Yes”. If you answered so, you are correct. Being a trader, within the meaning of Article 5 of the Commercial Code, Ato Messay would be declared bankrupt. What then follows is that one of the subjects of the bankruptcy proceeding is a trader. It has, however, to be noted that the person should carry on one or more of those activities professionally and for the purpose of earning profit out of such activity to be taken as a trader.

Do you agree that business organizations are also the subjects of the bankruptcy proceeding? If you answered “No”, it is not correct. All commercial business organizations, except joint ventures, are the subjects of bankruptcy. The commercial business organizations are defined in different ways as per the provisions of the Commercial Code. Article 10 of the said Code defines based on the objectives and nature of the business organization. Based on the objective, every business organization established with the objective of carrying out one or more of the activities enumerated under Article 5 of the same Code are commercial business organizations. Based on the nature, a share company is always a commercial business organization. A share company, even if it is formed to carry out an activity different from those enumerated under Article 5, shall always be commercial business organization and therefore is the subject of bankruptcy proceedings.

On the other hand, Article 213 of the Commercial Code recognizes all business organizations, except ordinary partnerships, to be commercial business organizations. In spite of that, Article 968 makes all commercial business organizations, except joint ventures, the subjects of bankruptcy proceeding. The notion of commercial business organization is as it is defined by the provisions of Article 10 of the Commercial Code and not otherwise. Therefore, it follows that even if an ordinary partnership is not a commercial business organization within the meaning of Article 213 of the Commercial Code, it is the subject of bankruptcy proceeding as per the provisions of Article 968 of the Commercial Code.

From the discussion made above, it is clear that the scope of bankruptcy applies to any trader, within the meaning of Article 5, and any commercial business organization within the meaning of Article 10, with the exception of joint venture. This can be understood from the provisions of Article 968 of the Commercial Code, which reads as follows:

Art. 968- Scope of application

(1)   The provisions of this Book shall apply to any trader within the meaning of Art 5 of this Code and to any commercial business organization within the meaning of Art. 10 of this Code with the exception of joint ventures.

(2)   Without prejudice to such provisions as are applicable to physical persons only or to the provisions of Title VI applicable to business organizations only, the provisions of Titles I, II, and V of this Book shall apply to traders and commercial business organizations.

Do you agree that the state as a legal person could be declared bankrupt? I am sure that your answer will be “No”. If you answered otherwise, that is wrong. As you know, the state acts in two different capacities. It acts in both public and private capacities. In its public capacity the state represents the public at large and discharges different functions. It is expected to defend the country against foreign aggression, maintain peace and order of the society, and provide public goods and services. In this capacity, it is not for the purpose of earning profit out of its activities but only to serve the interests of the society. But in its private capacity the state can involve in any kind of business that can bring about profit like any individual businessman.

One of the points of difference between the public finance and private finance is that while the government can stay for a long period of time with a deficit financing, the private cannot do so. The fact that there is deficit financing should not lead us to conclude that the state should be declared bankrupt if it is found that it could not pay all its debts in a given year. Normally, it would not be proper to think about bankruptcy of the state in its public capacity. This is mainly because its function is different from commercial activities and the state by its nature is eternal (even if governments may change from time to time, the state exists forever so long as there is society). Since it is not a trader or business organization, we cannot think of bankruptcy of the state.

As regards the private capacity of the state, it can carry out one or more of the activities under Article 5 of the Commercial Code. In that case, the state is to be bound by the laws and regulations governing the different private entities that have legal personality. Just like any trader or business organization, the firm that belongs to the state could be declared bankrupt and therefore be made the subject of bankruptcy. As they have distinct personality and different objectives, bankruptcy of a given state-owned enterprise or company does not amount to bankruptcy of the state in its public capacity.  For example, the Commercial Bank of Ethiopia is a share company owned by the state. Here the state acts in its private capacity. In case the bank could not pay its debts to the creditors, it could be declared bankrupt and made the subject of the bankruptcy proceeding. In that case, we could not say that the state went bankrupt.

Another important issue that needs to be addressed as regards the scope of bankruptcy is as to what aspects of a person could be basis for the declaration of bankruptcy. In other words, can declaration of bankruptcy arise from all matters of a given person?  The trader can have matters falling outside his commercial activities. While he keeps books of account as regards matters falling within his commercial activities, he does not keep book of account for other matters that do not relate to the former. In case, he fails to pay debts related to matters other than his commercial activity. Do you think that he should be declared bankrupt? I hope your answer will be “No”. If that is so, you are correct. The ground for declaration of bankruptcy should be failure to pay debts related to the commercial activities of the debtor. You can read the last phrase of Article 971 of the Commercial Code, which reads as:

Art. 971- Facts constituting suspension of payments

Suspension of payments shall result from any fact, act or document showing that the debtor is no longer able to meet the commitments related to his commercial activities. (Emphasis added)

Last modified on Wednesday, 02 May 2012 13:05