Why Was the Code Updated?

The 1960 Commercial Code became outdated, with provisions that no longer aligned with modern business and economic needs. This outdated structure hindered Ethiopia's economic competitiveness and posed barriers for foreign investors. The Ethiopian government thus sought to revise the Code to:

• Reflect global business practices and technological advances.
• Provide clearer rules on business organization and restructuring.
• Enhance protections for investors and creditors.
• Encourage ease of doing business and create a modernized legal framework.

These updates align the Code with current business needs while helping Ethiopia become a more attractive destination for both local and foreign investments.

Key Updates in Each Book

1. Book I: Traders and Businesses

• Expanded Definition of Traders: The new Code broadens the definition of who qualifies as a “trader.” While the previous Code listed specific activities, the new Code adds a more comprehensive list to reflect modern trade practices.
• Introduction of Holding Companies: The Code now includes holding companies as legitimate business entities, allowing them to exist primarily as investment-focused entities rather than only operational companies.
• Modern Bookkeeping Requirements: The Code introduces modern bookkeeping practices, exempting smaller or “petty traders” and allowing for the use of digital records. This update simplifies compliance, especially for smaller businesses, while promoting transparency in larger entities.
• Streamlined Registration: The new Code introduces a two-tiered registration system at both the federal and regional levels, allowing for an accessible, online registration system for businesses. This modern approach is designed to make business registration simpler and more transparent.

2. Book II: Business Organizations

• Introduction of New Business Forms: The new Code introduces Limited Liability Partnerships (LLPs) and One-Person Companies (OPCs). These forms allow individuals, especially professionals in fields like law, accounting, or architecture, to operate under a structure that limits their liability based on their investment.
• Group Companies and Subsidiaries: The Code now clearly defines group companies, subsidiaries, and branches, establishing specific rules for their governance. These definitions clarify relationships within corporate structures, helping companies navigate mergers, acquisitions, and growth strategies.
• Updated Merger and Division Regulations: The Code introduces new standards for mergers and divisions, requiring transparency and a clear plan. An independent review of such plans is mandatory, supporting Ethiopia’s goal to align business law with international standards.

3. Book V: Bankruptcy and Restructuring

• Focus on Business Rehabilitation: Unlike the previous Code, which focused more on bankruptcy liquidation, the new Code emphasizes business rescue and restructuring options. This shift allows businesses in financial distress to seek preventive restructuring or reorganization before facing bankruptcy.
• Clear Priority Rules for Creditors: The new Code establishes detailed rules on the priority of creditors during bankruptcy and restructuring proceedings. This change ensures that creditors have a clear understanding of their rights and priorities.
• Court Jurisdiction and International Recognition: Ethiopia’s Federal High Court has jurisdiction over bankruptcy cases under the new Code, which also recognizes certain foreign bankruptcy judgments. This development makes Ethiopia’s legal system more compatible with international business operations and investments.

Overall Implications of the New Commercial Code

The New Commercial Code brings Ethiopian business law in line with modern economic practices. Its updated regulations provide clarity on company structures, support for struggling businesses, and protections for investors and creditors. With these changes, Ethiopia aims to foster a more favorable business environment, increase foreign investment, and support long-term economic growth.