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An Overview of the Major Changes under the New Commercial Code of  Ethiopia.

Avatar: Abdulahi Abdulkadir
Abdulahi AbdulkadirApril 2, 2021
EconomyFeatured
An Overview of the Major Changes under the New Commercial Code of  Ethiopia.

On March 25, 2021 the House of People’s Representatives unanimously approved the draft Commercial Code of Ethiopia which has been in place for the last 62 years. The task of amending the old Commercial Code of Ethiopia that has existed for more than five decades started many years back though it has failed  to get the approval of the House of Peoples representative. After years of attempts,  the era of the archaic Commercial Code that the Country had for more than five decades came to an end following the ratification of the last draft of the Commercial Code by the legislature. 

Considering the role Commercial law plays in regulating the practice of the economic community and thereby  ensuring the existence of the smooth, stable and fair Commercial practice, the revision of the old Commercial Code is an encouraging legal development that will hopefully bring a positive impact in the Commercial arena. In this regard,  it may not be difficult to imagine the factors that have induced the revision of the old Commercial Code as there have been significant changes over the last five to six decades as to the types and manner of conducting business. Technological advancement, globalization, the emergence of the new commercial activists that have not been under the umbrella of Commercial activities, for one or another reasons, can be some of the reasons that have necessitated the revision of the 1960 Commercial Code  of Ethiopia.   

While appreciating the revision of the Code, there are important questions worth raising in connection with the revision of the former Commercial Code. The questions that can be raised in this regard are; what are the newly introduced rules into the new commercial code of the Country and what contributions will that  have on the commercial society and the Economy of the country as a whole. With regards to this, putting, aside the other very minor technical changes in the code, according to Haile Bayisa Daba, Lecturer of Law at Wolkite University School of Law, the code came up with major and very important changes that will have the capacity to ease the way of doing business and boosting the regulatory aspects of the businesses and thereby enhance the economic development of the Country. 

   According to Haile Bayisa, the major changes made in the new Commercial Code starts with the structure of the Code since the part of the old Commercial Code that deals with Banking, Insurance and negotiable instruments were taken out of the new Commercial code.  Formerly, the laws that regulate Banking Business, Insurance and negotiable instruments existed in a dispersed manner with some aspects of these businesses being regulated under the Commercial Code while other aspects were regulated by proclamations. Beyond structural changes, the new Code also came up with major alterations that can potentially play vital roles in modernizing the Commercial environment of the Country. According to Haile Bayisa, in addition to removing the part of the old Commercial Code that regulates Banking, Insurance and negotiable instruments, the major changes made to the 1960 Commercial Code  of Ethiopia can be summarized as follows;

There is a change in the way the term ‘trader’ is defined for the former Commercial Code  provides an exhaustive list of the activities that ‘someone’ or a ‘business organization’ need to be engaged in professionally and for gain to be qualified as a trader. Under Article 5 of the 1960 Commercial Code of Ethiopia, there are 19 exhaustive lists of activists that an individual or a Business Organization need to be engaged in professionally and for gain so as to be called a trader and thereby  be under the coverage of commercial code. Under the former Code, it is only those individuals or Business Organizations that have conducted one or more of the activities listed under Article 5 professionally and for gain that can qualify the term ‘trader’ and are regulated by the Commercial Code.  

The term ‘professionally’ under article 5 of the Code does not mean that every trader needs to have an academic certificate but implies the level of continuity of the activity. According to this article, a person should engage in one or more of the activities listed under the article  with some level of continuity to be qualified as a trader. The new Commercial Code, however, comes up with a different way of defining the term ‘trader’. Under  Article 5 , the lists under the article are not exhaustive as opposed to the former one. Additionally, it has a long list by adding the activities  that were not recognized as a trader activities in the former Commercial Code. The important point to note here is the fact that, under the new Commercial Code, it is possible to add new activities into the lists of commercial activities provided under Article 5 of the Code for the list is open. This is perhaps the fundamental shift from the former approach  under the 1960 Commercial Code of exhaustive lists to an open list with possibility of adding new activities into the lists of trading activities provided under article 5 of the code. Therefore, as opposed to the former Code, under the new Commercial Code an individual or a Business Organization can be a trader without even engaging into one or more of the trading activities provided under article 5 of the Code but some other one or more activities similar to the activities provided under article 5 of the new Commercial Code.      

The other introduction to the new Commercial  Code relates to form and number of Business Organizations. The former Code recognizes six Business Organizations with three Partnerships( Ordinary Partnership, General Partnership and Limited partnership), two Companies (private limited Company and Share Company) and joint ventures while the new Code recognizes seven Business Organizations; three Companies by introducing one Company, and, three Partnerships. The new has also removed the controversial Ordinary Partnership while it introduced Limited Liability Partnership(LLP) and One Man Company . In relation to Business Organizations, the most important introduction is the recognition of ‘One man Company’ and Limited Liability Partnership.’ Under the former  Commercial Code for a Business Organization to exist there must be at least two members, but under the new Commercial Code it is possible to have a Company with only one member with limited liability. The other is the introduction of  Limited Liability Partnership in which partners can enjoy the benefit of limited liability.  In explaining the benefits of introducing Limited Liability Partnership, Haile Bayisa said, ‘’ the introduction of LLP has an important role in facilitating to bring professionals together and thereby enable them to join their professional expertise together and render professional service with higher quality than at the time it is done individually.``   

The other new introduction into the new Commercial Code is the adoption of a two tier Board of Directors structure of a Share Company by introducing ’Management Board’ and Supervisory Board. The 1960 Commercial Code of the Empire of Ethiopia has recognized only the Management Board of Directors of Share Company  in which only shareholders of the Company can be a member while the new law recognized two levels of Board of Directors by recognizing both Management Board of Directors and Supervisory Board of Directors. In doing so, the new law has  adopted both ‘stockholders’ approach in which case only shareholders of a Company can be a member of the Board of Directors and ‘Stakeholder approach’ in which case a non-shareholder stakeholder can be a member of Board of Directors. In explaining the advantages of adopting a two tier board of directors, Haile said, the introduction of supervisory Board of Directors in Share Company is an important new development for it enables stakeholders to have a say on what Companies do without the need to be a shareholder of the Company.He also added, this supervisory Board of Directors mainly works for big mining Companies whose economic activities have  huge impacts on the environment and health of the community of the area they operates. This is due to the fact that the adoption of supervisory Board of Directors enables representatives from the Community to be a member of board of Directors of the Company and oversight activities of the Company in relation to its impact on the Community.  Haile also added that,  “good Corporate governance is a key in the success of a Company and the introduction of a robust Corporate Governance scheme under the new Commercial Code is a positive step forward in advancing the Corporate  Governance of the Companies”. In addition to introducing two tier Board of Directors, the new law has also introduced non- shareholder members of the Board of Directors as opposed to the former Code that requires being a share- holder to be a member of a Board of Director. In relation to  different kinds of meetings of Share Companies, the new law recognized electronic meetings.  According to Haile Bayisa, this is a good effort in modernizing the trade environment in line with technological advancement and this also goes against the global pandemic that requires people not to come together in person. The new law also requires Share Company to have a website. 

The new Code also has detailed provisions on the Bankruptcy issue in line with international standards as opposed to the former Code that contained only scanty  provisions. Though the applicability of the provisions on Bankruptcy is very rare in Ethiopia so far for there have not been many bankruptcy cases, having a bankruptcy law that goes with international standards is pivotal.  In addition to this, the new Commercial code has come up with a detailed provision on Holding Company and its relationship with affiliate companies and subsidiary Companies as opposed to the former one. According to Haile, the new Commercial Code of the Federal democratic Republic of Ethiopia comes up with major and very important changes that can potentially heal the normative problems that Commercial Communities have been facing owing to the gaps in the former Commercial Code of the Country. This will also have a huge impact  over the economic activities of the Country and beyond, among others, for the introduction of a holistic and updated commercial laws that will ease the way of doing business and thereby attract investors

                                           

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A PIECE BYAbdulahi Abdulkadir

LLM Candidate, Addis Ababa University and Afan Oromo fact checker in Addis Zeybe