Bankruptcy Cases Bankrupt Judiciary

After two decades of experimenting with capitalism,Ethiopia is experiencing both the pros and the cons. Measured from the perspectives of their success, businesses are at polar extremes.

Some are at the climax of their glory, whilst others are staggering with overdue bills. The remaining few are shrugging with massive debts collected from creditors.

The ones sliding down the hill are going through bankruptcy proceedings. A case in point is Holland Car Plc, a car assembler that was judicially declared bankrupt on March 13, 2013.

It is only recently that the Ethiopian legal regime on bankruptcy is gaining considerable attention from legal practitioners, although the legal rules enshrined in the Commercial Code were issued back in 1960. Even then, the number of petitions pending in the judiciary is very limited. Nevertheless, the size of the businesses undergoing bankruptcy proceedings coupled with their multiple impacts is bringing the legal regime to the limelight.

UnlikeEthiopia, inUnited States, there were 1.1 million bankruptcy filings in 2008. The largest bankruptcy inUShistory occurred on September 15, 2008, when Lehman Brothers Holdings Inc. filed for protection with more than 639 billion dollars in assets.

The primary goal of bankruptcy laws is to offer debtors a “fresh start” from financial burdens. It gives to the honest but unfortunate debtor a new opportunity in life and a clear field for future effort, unhampered by the pressure of pre-existing debts.

Holland Car suspended payments, disclosed its incapability to meet the commitments related to its commercial activities and was declared bankrupt based on a petition submitted by a creditor at the fifth division of the Federal First Instance Court, Lideta Branch.

As a bankrupt company, Holland Car cannot not administer or dispose of its property even those acquired from the day after it is declared bankrupt, until it is discharged. Consequently, after adjudication, all legal proceedings and all applications for execution will be both instituted and made by or against trustees appointed for this purpose.

From the day of the judgment of bankruptcy, all creditors whose claims are not secured by a special privilege, a pledge or a mortgage, must bring their claims altogether in the universality of creditors in bankruptcy. Therefore, Holland Car’s bankruptcy judgment prevents any creditor from bringing an individual suit as every debt is included in the universality of claims. From the day of the judgment, creditor may not attach the debtor’s property, whether movable or immovable.

The law says creditors who appear on the balance sheet and who have not produced proofs within fifteen days from the adjudication must be ordered by the trustees to produce their proofs. Contested debts will be referred by the registrar to the first hearing to be decided upon the report of the commissioner.

However, during the court proceeding and even after the Holland Car’s bankruptcy, some creditors were erroneously pressing court actions. In my opinion, let alone in the wake of the declaration of bankruptcy, even prior to it, as long as there had been a probability of suspension of payment, a creditor must await the outcome. This is because the principle of universality of creditors demands the equal treatment of creditors once the debtor is declared bankrupt.

When a debtor presses a suit against the failing debtor, their effort does not yield any special benefit except wasting judicial resources and spending unnecessary expenses and costs proceedings entail. The law provides a way out to a creditor whose claim is rejected by the trustee. In this case, the creditor can present the grievance to the court that supervises the bankruptcy proceeding. Therefore, it is regrettable that the Ethiopian legal system is wasting too many resources of the judiciary in such a way.

I believe this waste of resources should never be repeated by creditors in future bankruptcy proceedings. As long as there is a good reason to suspect that a debtor is suspending payments, it seems, investigating its financial status to examine the probability to be declared bankrupt must precede before taking a court action that will not place the creditor in a better position than those that refrained from pressing civil suits and saved unnecessary expenses that are highly improbable to be reimbursed.

Another irregularity I have observed in connection to the bankruptcy proceeding of Holland Car is the move taken by secured creditors to single handily realize collaterals. A judgment in bankruptcy includes an appointment of a commissioner and one or more trustees.

A commissioner has already been appointed in Holland Car’s bankruptcy proceeding. The commissioner’s power includes supervising and dealing with all matters concerning the bankrupt’s estate, whilst the trustee is responsible for the administration of the estate and representing the universality of creditors in relation to third parties.

A secured creditor has no any legal mandate to proceed by theirselves; though its preferential privileges are intact as long as the estate falls short of satisfying creditors with priority privileges. Besides the move defeats the very purpose of bankruptcy proceedings as one major goal of bankruptcy is to ensure orderly and reasonable management of debt.

In some cases, the assets of the estate are insufficient to pay all priority and unsecured creditors in full. Therefore, unless specifics with in the financial status of Holland Car are known and priority claims are settled, the extra bankruptcy proceeding acts of preferred creditors in the absence of the authorisation of the organs of protection of the estate must be banned.

Last but not least, bankruptcy cases can be either voluntary where a debtor himself files the bankruptcy or involuntary where one or more creditors; the public prosecutor; or the court itself, petitions the case. Therefore, I recommend the public prosecutor examine the financial status of debtors that are drawing too much fear for suspension of payment or the creditors must act collectively for the same purpose before taking uninformed futile exercises in the course of reclaiming the staggering sums of money they claim to have paid.

By Tagel Getahun
Tagel Getahun is an advocate in law. He can be reached at

Published on May 05,2013 [ Vol 13 ,No 679]



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