Note of trade and business law

This note is provided by Getu Asnakew Atalay

Please read it carefully.

Major objectives of business law:

1. Creating A comprehensive and systematic sets of rules and institutions which enable
the business organizations to navigate their relation in such way that in the end to
enable to make profit.

2. Safeguarding or protecting the legitimate of interest of all actors that is coming into
contact with the firms against this business firm. The relation of the business firm with
others business firm is the main or the most important subject that will be dealt by this
course. It also focuses on the relationship between the creditor and the business firm,
the investors and business firm, agent and business firm, its suppliers and business firm.

A business firm could be formed one of two major ways sole proprietorship and
business organization.
1. Sole proprietorship: means going it alone. One may decide to start producing
soap all alone by him. The owner the business firm is one person. There is no
much difference between the owner and the business firm. They have one
and same patrimony.
Patrimony is totality of rights and obligations that pertains by persons. One
person doesn’t have more than one a set of patrimony right and obligation. So,
the firm doesn’t have its own patrimony rather the firm is just part of patrimony
of the owner.

2. Business organization: There is an option to people who want to have

business other than sole proprietorship

A business organization is an entity in which two or more people have invested various
resources as co-owner and investor. An organization generally has legal personality. All
six type of organization which is recognized by commercial code other than joint
venture have legal personality. This means business organizations have their own
separate legal personality and patrimony from the owner. So, owners do not shoulder
the liability of the firm. Because the liabilities of this firm is covered by the firm itself.

There are 2 broad categories of business organizations recognized under the

commercial code. One broad category is called partnership. The other one is called
company. In Ethiopia there are four types of partnerships. 1. Ordinary partnership. 2.
Joint venture. 3. General partnership. 4. Limited partnership. And there are two types of
companies. 1. Shared company 2. A private and limited company. There are six options
to do business together with other people. So, the seventh option is sole proprietorship.
Laws are categorized broadly into 2. These are public and private law. Public law is an
area of law which regulates the relationship between state and individual and the
relationship among the organs of the state. For instance, the constitution regulates the
relationship between individual and state and among different organs of states. Private
law is a law that regulates the relationship between individuals sometimes and between
individuals and state when state actually behaves in the private capacity. For instance, if
there is a dispute between Mr. B and Mr. A regarding the quality and price of goods at
the time of buying Mr. B. State make transaction private like for instance, if education
minster and a company of construction sign a contract to build a school, this
relationship is regulated by private law.

Commercial code falls under the private law. There are 2 views regarding systematic
classification of laws with in private law. These are unitary [monist] approach to private
law and dualist approach to private law.

Unitary [monist] approach:

In some countries there is no systematic classification with in private law. When they
classify those into civil code and commercial code, they are not really based on major
legal prenciples or ideas. Rather they are simply classifying laws into civil and
commercial code for the sake of convenience to make rules in this certain area easily
accessible. There fore, according the unitary approach the classification of private law
into civil code and commercial code which is 2 major courses is not really systematic
classification of principle ways rather it is for purpose of making easy. So, in countries
which follow unitary approach to private law, there is no distinction between civil and
commercial code. They simply have private law compiled on bases of the area in refers
to. Many countries which follow common law or Anglo-Saxons are unitary approach to
private.

In contrast some countries follow dualist approach to private. In this approach private
law is divided into 2. And this is not ease of access. There are some principles which
revilvate which run in civil code which are none followed in commercial code. So,
commercial codes are different things why not only because they deal with different
areas laws or human. Behavior but some there are rules of law or some principles of law
or interpretations rules ETC. the dualist countries are followed continental or civil law
countries.

The Duelist by itself can be divided into 2 on the bases of commercial code and what
commercial code regulates. Subjective approach to commercial law and objective
approach to commercial law. Dualist writers and countries which follow this
understanding or commercial code, subjective approach to commercial code say that
the objective of commercial law is to define the different members of society. A certain
group called traders or merchants and then regulates the relationship between
merchants.
In contrast, objective approach to commercial law is countries and peoples who follow
the objective to commercial to law say commercial law is actually does not single out a
certain group of people rather it actually the commercial code applies whosoever
engages in a certain economic activities which are deemed be commercial and singles
out a certain economical activities which are commercial from the entire sector of
economy. And then regulates the behavior of anybody who somehow engages in those
economic activities are deemed to be commercial.

Art 5 defines and seems a subjective to commercial law. It is a class law.

In art 5 traders are defined and to be a trader the following 3 elements must be fulfilled.
1 A person who professionally. 2. He has to engage in activities which are listed in art 5.
3. He must to do for gain. Professionally means some level of continuity not about
educational background or qualification or certification or time. For gain means in the
commercial code doing activities only to get money or profit. It is concerned on the
positive personal material enrichment. Political benefit, religious benefit psychological
benefit is not included in for gain. The purpose of defining traders is to accord traders
certain rights and impose on them certain obligations. The 21 activities which are listed
in art 5 are exhaustive. When we say exhaustive it does not mean any activities which
are not listed in art 5 is illegal. Illegal activities are prevented by law clearly. So, the
presumption should be anything which is not clearly prohibited is permitted. The only
consequence is a person who engages activities which are not listed down under art 5
will not be a trader.

But, for a person to be regarded as trader, he need not be acting on the own behalf. For
instance, commercial agents and commission agent’s art 60/2, art 44/3. Although he is
acting for other person, he is a trader. Because, while acting for some other r person
actually he fulfills all the three elements which are used to define traders under art 5.

The other point is there is a condition that he will not be regarded as a trader if a person
fulfills the three elements. The followings are examples.

1. Employee: where employment exists, the employee will not be regarded as a

trader despite fulfilling the 3 elements. Because, these activities are doing only
as an employee art 28/2, 37/3 and 38/3. So, fulfilling the definition of traders
does not automatically and necessarily translating to a person being a trader.

2. Bodies corporate under public law: art 4 and 27 bodies corporate under public
law are not to be regarded as traders despite they fulfill the 3 elements. Bodies
corporate under public law are essentially divided into 2 broad categories. 1.
Different government territorial units: examples, regional states, municipality’s
ministries and ETC which have legal personality emanating from public law. 2.
Ethiopian Orthodox Church which is regarded as body corporate under public
and therefore monasteries and others are included. So, if they fulfill the 3
elements, they will not be regarded as trader and they not have the rights and
obligations of the traders until in future the law dealing with how engaging trade
 as stated under art 27. For instance, the ministry education has a big hall in its
compound and gets money by renting this hall for many years. But it is not
trader because of art 4.

3. Art 6 to art 9: agricultural entrepreneurs are exempted from being traders since
they are using the main resource of the land to do the activities of agriculture art
6. Despite fulfilling the 3 elements, the commercial code excluded them from
being traders by the following reasons. 1. Registration: if they are considered as
traders they have to register. 2. Book keeping: if they are considered as the
traders, they are supposed to have accounting books. They should keep their
daily activities in record. So, it is impossible to illiterate person. The intentions of
this art 6 are only the small holders of Ethiopia not the commercial of agrarian.
The main purpose of the law is to exempt people who engaging in agriculture in
the traditional sense. So, if the farmer sells his products yearly, he is not a trader.

Art 9 artisan or handicraftsmen: 1. they rely on the manual work. 2. They don’t
employ more than 3 people. 3. They don’t keep stock. Mean they cannot buy to
store but for immediate use. And they are treated like agricultural entrepreneur
though they fulfill the 3 elements. Handicraftsmen may use mechanical power.

4. Business organization: traders and commercial business organization have the

same rights and obligations. If the entity engages in economic activity is a
business organization not sole proprietorship, it will be regarded similarly like a
trader if one of 3 things are fulfilled. 1. Art 10/1 if it engages in activities under
art 5 in realities in point of fact or 2. Even where it doesn’t engage in activities
under art 5 in point of fact but the memorandum of association state that the
entity will be engaged in an activity under art 5 that is entity is regarded as a
commercial business organization. It means it will be treated like trader. 3. Art
10/2 says that if a business organization is either private company or a shared
company irrespective of the memorandum of association says irrespective of
the what is a in point of fact does, it is always a commercial business
organization. So, for business organization they are treated like traders.

Art 968 says that the law bankruptcy would be applied on any traders which are
defined.

The Purpose of keeping books and accounts are the followings:

1. Supervision of business by owners especially where management and owners

are divorced.

2. For evidential purpose in favor him. Under 2016 what you write by yourself will
not be evidence in your support. What you write can be evidence against you.
 So, art 71 of commercial code is an exception to art 2016 of civil code. Art 71 a
special right which is given to traders only.

3. To know how it has been performing.

4. For the purpose of Protection of creditors of business.

5. To access and facilitates credit for the traders.

6. for purpose of enforcement of tax law.

This code provides detail accounting rules. These rules are not involving with
new technology in order to insure that the accounting rules are good enough to
indicate exactly the asset of certain person or liability; they have to develop as
development and business. In reality these rules are not being following by
accounting professionals because these rules are considered as obsolete.

Registration

Art. 100. — Persons to be registered.

(1) Any Ethiopian or foreign person or business organization carrying out

commercial activities within the Empire of Ethiopia shall be registered.

(2) The provisions of sub-art. (1) Shall apply in particular:

(a) To any Ethiopian or foreign person who is a trader within the meaning of Art. 5
of this Code;

(b) To any Ethiopian or foreign business organization which is a commercial business

organization within the meaning of Art. 10 of this Code;

(C) To any foreign public undertaking carrying out commercial activities and to any
commercial representatives or agents of foreign States, public institutions or
undertakings.

(3) Special regulations applicable to undertakings under sub-art. (2), (c) shall be
prescribed.
One of the obligations that law imposes on traders is registration in commercial register
as it is clearly expressed under art 100 persons to be registered. Registration could have
constitutive effect. Specific rights and obligation which are peculiar to traders are come
in to effect where they are registered. Art 118 says that if you don’t register as traders,
you will not have the right of traders. But you will be subject to the obligation of traders.
So, registration for sole traders doesn’t have constitutive effect. Rather for business
organization registration will have constitutive effect art 223. Without registration they
are not persons. They are not subject to rights and obligation.

The purpose of registration:

There are 2 types of categories of reasons private purpose and public purpose.

1. Private purpose: Registration attains some private goals. 1. To have the privileges or
special rights to traders [constitutive effect]. 2. Protection of parties or persons who
deal with traders. For example you will be able to establish the identity of the e traders
before you transact with traders depending on the type of transaction you are
contemplating art 105. Knowing the nature of enterprise you transact with is important
to know the maximum liability of enterprise and to safeguard your right art 119/2/b to
121.

2. Public purpose: 1. it has statical role. Knowing about the numbers of traders, their
capital and type of business are very important to make decision and policy based on
the information they have. 2. It is important for supervisory measures against traders or
enterprise.

So, in order to make sure that the intended objectives of the commercial register are
attain, the law tries to ensure that the information and the commercial register
dependable information and completive. There are verities of ways in which the law
attempt or ensure veracity of information in the commercial register.

1. By vesting power of inquiry in the person who administers the commercial

register. Where a person applies to be registered as traders, the officials shall
ascertain whether the applicant fulfills the legal requirement for caring on the
trade irrespective of which registration so art 97.

2. By imposing legal liability on the person in charge of commercial register art 91.
So, if there is damage not only the firm is liable but also the official of
commercial registers liable personally. The purpose of imposing liability on the
official of commercial register personally is that to verify all information he
registered to be genuine.

3. The person who supplies the information will be accountable art 120/1.

Business

Art. 124. — Definition.

4.

A business is an incorporeal movable consisting of all movable property brought

together and organized for the purpose of carrying out any of the commercial
activities specified in Art. 5 of this Code.

A business man assembled a certain things enable to attracting customers for

the business. These things could be corporeal [physical existence] or none
corporeal. These assembled things are united only one thing that is in purpose to
attract and keep customers. They have unity of purpose. The law wants to keep
these things as one unit or entity though they consist of several corporeal and
none corporeal things. And it gives them the name business. Therefore, they can
to be subject to legal transaction together as group. So, if a businessman wants
to sell his business, he sells all things in that place together. It makes more sense
for him to sell all things together than item by item. That means if generally
make part of any legal transaction together, the law also wants treat them as
one entity. The law wants to correspond the reality which it calls business.

So, the concept of business is things that have been assembled for the purpose
of attracting and keeping customers for specific trading activities under article 5,
as one unit, and making them regulating transaction in; that particular sum is for
the purpose. But, the specific element of the set could be different depending on
the nature of business, engaged in by the trader.

The set, consisting of corporeal and none corporeal are is by legal fiction
considered as an incorporeal. And also a business is considered to be movable
thing not immovable thing. So, a business is an incorporeal movable. Consisting
of all movable properties. So, a building is not a part of business.

Incorporeal Element of business art 127.

1. Good will: the most important element of business is good will. In some
jurisdictions good will is treated equal with business whereas in France
and some jurisdiction whose legal tradition is inspired by France, good
will is one element of business. Good will is defined under art 130 as
follow. The goodwill results from the creation and operation of a business
and is of a value which may vary according to the probable or possible
relations between a trader and third parties who may require from him
goods or services. So, good will is reputation which you develop as result
of providing the service to the customers. And it starts from day one and
become higher and higher. After some time it may be stagnant or
decrease. When a business is sold the buyer concern more on the good
will. Because, the buyer will automatically have more customers. So, the
business which has a good will brought higher and higher price since it
has an economic value. A business which has a good will can rent his
name for others which fulfills the certain standard of needed.
 2. Trade name: the name under which the business activities carried out is
and incorporeal element of business. Trade is defined under art 135/1 as
follow. A trade-name is the name under which a person operates his
business and which clearly designates the business. So, the name itself is
part of business. Trade name is important not only for third parties but
also for the benefit of the firm itself. Because, if it has a good will the
people can identify easily it. The name itself is a requirement for
registration under the proclamation of registration.

3. Special designation: it is defined under art 140/1 that A distinguishing

mark is the name, designation, sign or emblem •Bad OS the premises
where the trade is carried on and which clearly designates the business.
Some businesses on top of having trade name designation symbolizing
the particular business to tell customers what business is. But it is not
required by law art 140/2. For instance, there is a picture of lion on the
building of Sheraton as designation. If a business has a special
designation those designations is part of the business. This means it has
economic value.

4. The right to lease the premises in which the trade is carried on: not every
business person owns building in which the business activities is carried
out. Many businesses are actually leasies. That means under the contract
there is a right to use the place which is leased for the purpose of specific
business. So, the lease right which is contract is part of the business. All
business elements necessarily will not exist in a business. For instance, in
many businesses there is no special designation. But name is mandatory.
If a person owns a building this business has not a lease right. A lease
right is not an element or part of business in such circumstance. You can
use the international names unless they are registered in Ethiopia. The
contract is canceled when the minimum standards are not met.

5. Patents or copyrights: it is a right an exclusivity right that is given by law

to an inventor. A person who produces something new, novel inventing
steps not anticipated by prior act is given a patent right. Because he
spent his money, time and mind. So, nobody will be able to manufacture
and sell this product without his consent. He has an exclusivity right
granted to him by law for inventing and for sharing the knowledge or the
information with public authority is called patent. So, patent itself is a
part of business. Copyright is similar to patent but it is different in sense
because it is not invention. But it is for art like music, literature, ETC. it is
a right given to the creator by law. So, copyright is also a part of business.

Art 128 talks about corporeal things.

The corporeal elements are different depending on generally the specific type of
business run by person. These corporeal elements are also part of business.

Art 129 is talking about things do not form part of business. A business does not include
normally the debts and assets of the business person. For instance, if a business man
borrowed money from a bank for the purpose of the business and he pays money in
advance, these debt and paid money in advance are not part of business. So, if he sells
his business, he himself pays the debt. Because this business is parcel and parts of
patrimony of the business man or owner. So, debt and credit are not transferred with
business. Simply art 129 emphasizing or clarifying the fact that a business does not have
its own patrimony. There are 3 exceptions for this.

1. The Exception of art 129 is art 2959 of the civil code. If a trader happens to be
running his business, in the premise that has leased, that lease right is an
element of that business. When he sells the business, the buyer of business will
have the right to use the same premises. Therefore, The lease right goes along
with the business itself when the business is transferred. This is emphasized
under art 145 Notwithstanding that the provisions of Art 2959 of the Civil Code,
any provision in the contract of lease which prevents the lessee from assigning
the contract of lease or from sub-letting the premises to the person who buys his
business, or which makes such assignment or sublease dependent on the lessor's
consent, shall be of no effect. Suppose you are not a trader. You have rented a
house to live in. can you transfer your right to your friend? If you see civil code it
does not allow you this right. But, a trader is given a special right as we
remember that one the purpose of the law defining traders is to give them a
special right which other people do not have. Art 145 is telling us
notwithstanding art the provision art 2959 of the civil code that if you are a
trader and you have a leased place in order to carrying out trading activities in
building, you have the automatic right to transfer that right to the buyer of your
business. The law gives special protection to a trader. Unless he can sell his
leasor transfer the right to use the same premises under which the business run,
the purchaser willing to pay become bad. Rat 2959 applies to everybody. This
provision says that a contract of lease may prohibit the sub-lease of
the immovable or make such sub-lease conditional on the
acceptance of the sub-lessee by the lessor.

2. The other exception is art 2587of civil code. This says that where the
employer transfers his undertaking, the contracts of employment
made by him shall continue between his employees and the
purchaser of the undertaking. For example, Asmenech kitfo bet
is sold to abebe. Asamenech kitfo bet had employees a contract
with asamenech. So, when asamenech sells her kitfo bet, these
employees will have right against the purcherzer ato abebe of
the business. Though in principle if we want to follow art 129,
the purcherzer will not be affected by whatever agreements. The
 employees had with asamenech as a matter of exception to art
129 actually the purcherzer of business will have to owner
contractual rights of employees that the employees with
asamenech a different person. Art 2587/3 also says that The
purchaser shall be jointly liable with the transferor to pay all
sums which are due to an employee at the time of the transfer in
connection with his work, including sums due by reason of the
termination of the contract by the transferor, on condition that
the purchaser has been informed at the time of the transfer that
these sums were due, or that they are shown to be due to the
employee in
the books of the undertaking or his work-book. When
asamenech still own this kitfo place she should have paid some
money to employee’s salary entitlement. This money was not
paid when the business was transferred to ato abebe. So, ato
abebe will be liable to pay the salaries of employees which
accord before he got the business. This is a special protection
which is given to employees.

3. The third exception is art 158 and art 159 of the commercial
code. Art 158 says that during five years from the sale, the seller shall
refrain from doing any act of competition likely to injure the buyer. He may not
carry on, in the vicinity of the business he sold, a trade similar to the trade
carried on by the buyer. This means asamench cannot open a kitfo bet near the
asamenech kitfo bet of abebe. Because his customers can follow her. And he the
business with good will. So, she prohibited from engaging in unfair computation
particularly in the vicinity of business. Vicinity has to be taken in the context of
preserving the good will the person bought. So, vicinity will depend on among
other things on the type of business. For instance, if the business is garage the
vicinity become wider than kitfo because of the nature of business. She cannot
also open similar like tibs bet. Because there can be a cross elasticity of
customers from kitfo to tibs.

Art 159 says that a prohibition under Art 158 shall be deemed to be an element of the
business and may be enforced by the buyer and his heirs and by any subsequent buyer.
The right under art 158 to be free from computation by the previous owner of business
is an element of business. Now suppose abebe sells the kitfo be to asmarech. Asmarech
also has the right to be free from competition by abebe and by asamenech.
Asmarech has the right to be free from competition by asamenech for 4 years and by
abebe for 5 years. So, this is an exception to art 129. In principle, the debts and assets
rights and duties of a trader are not part of business. They don’t follow the business.
But, this right under art 158 is part of business. It follows the business. It doesn’t remain
with the trader who sold the business.

Business organizations
Business organizations are defined by the following articles. Art. 210. — Business
organization defined.

(1) A business organization is any association arising out of a partnership

agreement.

(2) Any business organization other than a joint venture shall be deemed to be a
legal person.
Art. 211. — Partnership agreement.

A partnership agreement is a contract whereby two or more persona who intend to join
together and to cooperate undertake to bring together contributions for the purpose of
carrying out activities of an economic nature and of participating in the profits and
losses arising out thereof, if any.

To understand what business organization is one has to understand what partnership

agreement is. Because, the law defines the business organization one be able to
understand what business organization is only if he understands what a partnership
agreement is. Partnership is defined under art 211. All six business organization lies on
partnership agreements.

The 4 characteristics of partnership agreements: 1. it is a contract. 2. It presupposes

cooperation. 3. Every body contributes something. 4. And there is a business purpose
carried out activities economic nature. So, these are the four characteristics of a
partnership agreements and they are also of the for characteristics of business
organizations. A business organization is defined in terms of partnership agreements.

1. Contract:

A partnership agreement which characterize every business organization is a contract.

But it is an onerous contract.

A. Onerous contract: is a contract in which every party expects some benefit under
the contract. It is different from a donation contract. Donation is a contract
which the donor is obliging himself to give something to the donee. Donation is
not an onerous. Therefore every members of business organization expect some
benefit or some entitlement under the partnership agreements. .

B. None sygnalimatic contract: is when the obligation a party is contingent on the

other party carrying out his obligation under the contract. Example, A, B and C
have concluded a certain contract. All these 3 persons each of them have some
obligations. Now suppose A doesn’t carry out what he undertook carry out? He
defaults his contractual obligation. So, if B legally says since A didn’t carry out his
part of the due, I am not bound to carry out my part the due. If this is possible
legitimately under the law that contract said to be sygnalimatic contract. In
other words in this contract every member obligation is conditional upon every
other member carrying out his part of debt. Where as if B and C are bound by
the contract despite A’s performance, that contract is none synallagmatic
contract. Because, B’s and B’s obligation remain intact despite A’s faillure to
carry out what he do. In other words B’s and C’s obligation is not conditional
upon A’s performance.

Under the partnership agreement, forming this partnership, they agreed: A giving
service for 48 hours per week in this garage, B some machineries, and C 5 million birr.
But, C didn’t give one birr. This business organization will continue its business despite
lucking 1 birr which promised. So, it will be synallagmatic only under 2 conditions. 1. If
the promise contribution which is not made is essential to the attainment of the
purpose of the business organization. 2. If the parties are only 2 peoples.

Suppose A doesn’t want to carry out his obligation. His skill is not found in market.
Therefore, where A is not giving service, there is no point B and C to continue to be
bound by the obligation. Even if they make the require contribution, the objective of
business organization will not attain without A’s contribution. In other words A’s
contribution is very essential to the attainment of objective of business organization.
The contribution of B and C don’t make any difference. So, where the contribution is
not made any difference, this skill is essential to the attainment of objective of business,
the business organization or the partnership agreement is synallagmatic. Under the law
A is not forced to give service. Because, such kind of contract affects personal freedom.
So, not necessarily mean sometime it is synallagmatic and sometime it is none
synallagmatic.

The Second conditional circumstance in which a partnership agreement becomes a

synallagmatic is when there are 2 parties. Even where the contribution was promised is
not essential, the other party can say no. Example, A and B agreed to a business
organization by contributing 5 million birr and machinery respectively. A paid all birr
except 1 birr. He doesn’t want to pay. So, B can refuse. This obligation under the
contract is conditional on a carrying out his part of debt. In this case the contract is
synallagmatic. So, generally in principle a partnership agreement is none synallagmatic.
But, in these 2 circumstances is a partnership agreement is synallagmatic.

C. Convergence of interest of the parties:

Members of a business organization gain together and loose together. It is not like as
normal contract where one gains at the expense of another [divergence]. Their interest
are aligning that they gain together and loose together. A partnership is a contract
particularly it is a contract characterize by convergence of interest of the parties.

Actually a business organization is more than a mare contract it is also an institution. So,
we shouldn’t equate a business organization to a contract though it is essentially based
on a contract.

2. Business purpose:

Participation in economic activities with a view to share the benefit that is made as
result of participation of these people in economic activities. This is called business
purpose. These characteristics of partnership and business organization. An asosation
which is out of business purpose it is not a business organization. Rather it may be
political, religious, and others.

What do you mean participation in the benefit?

A, B and C are signing a partnership agreement. Under their agreement the enterprise
to produce furniture. A supplier of good that is needed to make furniture. When A and
B are forming a business organization C heard and asking to join them. C is an
enterprise. And he says I will guarantee to sell you wood that you will make profit. By
this transaction I will make money. So, when the furniture firm makes profit he doesn’t
share any money. He benefits by supplying more. So, they should share in the outcome
of the economic activities of firm together dictly speaking, so C is not really signing a
partnership agreement. Art 215 says that any provision giving all the profits to one
partner shall be of no effect. This means every member must share from the benefit.
Otherwise the business purpose which is one of characteristics business organization is
not fulfilled.

3. Cooperation:

Every member must cooperate. When there is convergence of interest you expect
cooperation. Cooperation presupposes working together in good faith and fiduciary
relationship if it has not spelt in our commercial code. This means nobody should take
unfair advantage of other members of the business organization.

Example A, B and C are partners by contributing 5 million birr 1 million birr and 10 birr
respectively. When you make decisions in the context of PLC, your votes carries the
weight of your contribution. More contribution more vote. So, in every meeting A
decides effectively. A has a building out side of city and he pushes them to lease this
building by bring their business from the center of city. But this diminishes the profit of
this business. They decide to lease this building. Is this lawful? Though formality was
perfect what A did, but there was not good faith. He was actually making use of his vote
to make money at the expense of the other. He violates his obligation of fiduciary duty.

4. Making contribution:

Every business organization requires that a member contribute something. You will see
that this need making contributions has been stated and restated at different places like
under art 229 and the following, art 519, 315, 342 and ETC. there is not dispute the
need for making contributions but sometimes there is a dispute as to what constitute
varied contributions. In the context of partnership agreement Contribution can be as
follow as it is defined under art 229 and the following. and amount.

Art 229/1 Each partner shall make a contribution, which may be in money debts, other
property or skill.

So, contribution can be in 3 forms of money and debts, property and skill.

a. Property: Property can be contributed in one of 2 ways as it is expressed under

art 229-2. 1. Property itself. 2. And use of property. Sometimes, a member may
offer to contribute property itself. Means when he contributes property itself, he
 is relinquishing his ownership of thing. The contributing member will no longer
be an owner of thing of contributed. Where as, when say use of property, the
contributing member remains to be the owner of the property but he is only
contributing use of property. So, if A has a house, he has 2 options for
contributing this house. He may contribute the house itself. Meaning after the
contribution the house owned by the partnership. The other option is he may
contribute use of house. A says I will allow our business organization to make use
of my house rent free for coming 10 years. So, the business organization has a
right to use the house for ten years rent free.

Whenever somebody makes the contributions, there are warranties that he gives.

Art 229/3 Unless otherwise agreed, contributions shall be equal and of the nature and
extent required for carrying out the purposes of the partnership.

contributions shall be equal: art 229/3 is putting forward the principle that governs the
making of contribution which is valid. Normally, if there is no specified agreement as to
who should how much contribute, the principle is every body contributes equally. But, it
is not a requirement. Members at liberty agree otherwise. For example, they can
contribute, A 1 million birr, B 10 birr and C his house. What would be the consequence if
everybody ware requires to make equal contribution by law? It would defeat the
purpose of the people organizing themselves to form a business organization people are
forming business organization because they want to mobilize as much resorce as
possible and engaging in business.

Nature: the contribution should be of the nature that it helps in attaining the purpose of
parties. Suppose A, B and C are agreed to establish a restaurant. And they contribute
sword, 1 million birr and building respectively. Is a sword a valid contribution? To
answer this question you have to see, when this sword some how assist does it in how
to be directly but will this sword somehow assist this enterprise in attaining its purpose.
Somehow this sword may help the enterprise to get profit. For example it can be
belonged the famous guy and customers may be attracted by this sword. So, it can be
acceptable contribution the restaurants have customers. So, the nature of contribution
may be acceptable or not under circumstance.

Extent: the extent should be enough for the attainment of the purpose of the
enterprise. But it doesn’t mean the enterprise shouldn’t borrow or the enterprise
should rely entirely on money or resources raised by contribution by the members. The
law doesn’t want enterprises to be established and fell. The law wants to guarantee that
enterprise that are established become successful. So, one of the ways in which you
insure your enterprise successful is by making available enough resources for the
enterprise. So, contribution should be of extent that is enough for the enterprise to be
successful. When study financing of business, there are 2 major ways of financing
business. 1. equity financing that is financing a business by contributions of members. 2.
Debt financing that financing a business by borrowing money.
Art. 230. — Guarantee.

(1) Where property is contributed, the contributing partner shall carry out the
duties of a seller.

(2) Where the use of property is contributed, the contributing partner shall carry
out the duties of a lessor.

(3) Where a partner contributes a debt, he guarantees only the existence of the
debt and not the solvency of the debtor, unless otherwise agreed.

A member, who makes a contribution to a business organization or to partnership, has

some duties visavis the business organization. He has to guarantee certain things to the
business organization. When the property itself is contributed, the contributing member
is to provide the kind guarantee a seller give to a buyer. The organization will be in
position similar to that of a buyer and the contributing member shall be in a position
similar to that of seller. The guarantees that the seller gives to the buyer are provided by
the following provisions. Art 2273/1/2, art 2281, art 2287, art 2289. When somebody
sells you something, he guarantees that a thing exists. A thing must be for normal use.
Example, if you buy a car from somebody the seller guarantee you the car is at list
something that can be used for transportation purpose. If the car has not motor for
example, it is not good enough for its normal use. The seller guarantees you an sellable
right over thing sold. A right which is free from legal challenge over a thing he sold. So,
when a person contributes itself to partnership, similar guarantees are applied.

Art 230/2 use of property: example if A contributes use of a car, he undertook to make a
car available to business organization. But contributing member retains the ownership
of the car. The business organization is only entitled to make use this car.

The duty or guarantee of contributing member is similar to that of leaser whereas

partnership is similar to a leasy. Example, the house leased is burnt to the ground not by
fault you or leaser. You have right. The leaser guarantees that you will be able to use the
house for an agreed period. So, if the leaser has another house he will provide you. If
doesn’t have he should somehow make it easy for you to find another house. The
guarantee that seller gives to leasy is provided under art 2904 and the following. In the
context of business of organization if use of property is contributed, and this has a fault
or defect, and if it is not suitable for intended use, the contributing member has
obligation to fix the problem toward the partnership. Regarding how much value this
property is determined by the agreement of the partnership themselves. If they are not
agreed they use independent assessor. This rule is also work at the time of contribution
property itself.

B. Art 230/3 contribution of debt: example A lent 1 million birr to B. A wants to join in a
partnership together with C and D. A can contribute by saying collect 1 million birr from
B after year. Means the business organization will have a right to collect the one million
birr which is due to A from B. when A makes this kind of contribution to partnership; A
normally guarantees only the existence of the debt in principle unless otherwise agreed.
After if B doesn’t pay this birr, A has obligation to make new contribution. Because, he
guarantees the existence of debt. In principle A doesn’t guarantee that B is in position
to pay the money. If there is agreement to the contrary, a also guarantees B is not only
indebted but B is also in the position to pay the money. B is solvent.

A can also say I pay my contribution after a year from any source, if they C and D agreed.

C service or skill: suppose A, B and C is forming a partnership engaging in garage

business. A is a very accomplished mechanic and he offer to provide service of mechanic
in garage for 48 hours per week. A should give the kind of guarantee a person who is
hired to render service gives the person who is hiring it. For this look at art 2633/1, art
2523 and art 2533. Something who is hiring to render service has the obligation to
provide a service personally. A shouldn’t render service to computing firm. If he is a
dentist and works for 9 hours in the evening, he should refrain if this render seems
incapable to render the quality of service expected.

Art. 231. — Risks.

(1) Where property is contributed, the risks shall pass to the partnership in
accordance with the provisions relating to sale. (2) Where the use of property is
contributed, the risks shall remain with the contributing partner. When the
property itself contributed, suppose A contributes a house the property itself to
partnership. After year the house is burnt to the ground. So, the risk lies on
partnership. Because, it is owner starting from the delivery. It is like in the case
of transaction of sell.

Where the use of property contributed in contrast, the risk remains with contributing
partner. Suppose A is a member of a partnership with B and C by contributing use of his
car for 4 years. After 1 year the car is lost without fault of A and partnership. The
contributing member A has obligation to supply another car.

Art. 232. — Interest.

Where money is contributed, the contributing partner shall be liable to the partnership
for interest thereon where payment is made after the due date.

Suppose A said I will contribute 1 million birr next march. But he did not make the
payment as agreed upon March. He actually delivers or transfers the money 6 months
after. He has to pay interest on the money Because of delay.

Ordinary partnership
An ordinary partnership is not a joint ownership. The difference of an ordinary and joint
ownership is as follow:

1. An ordinary partnership is necessarily the result of a contract. Whereas Joint

ownership is not necessarily the result of contract. Rather Joint ownership can
result from circumstances. To understand more what joint ownership is read art
1257 and the following of civil code. For instance, suppose ato asifaw dies and
his survived by his 3 children. Head had a house. In his will, this to be owned by
the 3 children for a period of 4 years. The When youngster child finishes high
school, this house is not to be partitioned. Now this child is grade 9. So, for the
next 4 years these 3 children become jointly owner of this house without any
contract. Rather their father left this by his will.

2. An ordinary partnership necessarily involves working for profit because of it is a

business organization under art 210. Whereas joint ownership not necessarily
involves making profit. In this house they used to live.

3. In an ordinary partnership transferring ownership or membership right is

impossible without the willingness of the other members of the partnership art
250. Whereas in joint ownership the members have no such kind of right art
1261 of civil code. For example, of the 3 children of ato asifaw, if one of them
wants leave being a joint owner, he can freely transfer his right as joint owner to
somebody or third parties. The other children cannot say anything the
newcomer. But they have primitive right. One of children of atom asifaw can
introduce a third person let say woyzro X to be joint owner with 2 other 2
children. Remaining children can force woyzero X to them the right she acquired
from their brother who left the joint ownership.

So, the law under art 227 is not defined ordinary partnership. It is simply telling us it is
something different from other business organizations. Under Art 228 an ordinary
partnership is different from joint ownership.

An ordinary partnership is a basic form of partnerships or business organizations.

Meaning, it is under this type of business organization that we see the most necessarily
form of basic principles of partnership law. If you look at the other 3 types of
partnerships, the law is very brief and use only cross reference to provisions of ordinary
partnership. Because, the law of ordinary partnership actually apply to the other types
of partnerships but not companies.

When we read art 213/2, art 5 and art 10, an ordinary partnership is always a none
commercial business organization. Commercial business organization fulfills the
following 3 criteria as it is defined under art 10. 1. If the memorandum indicates that the
particular business organization participates in activities which are listed under art 5. 2.
even though doesn’t say anything about, if particular business organization participates
in activities which are listed under art 5 in reality. 3. When the business organization is
either a share company or a private company.
Art. 213. — Commercial business organizations.

(1) Any business organization other than an ordinary partnership may be a

commercial business organization within the meaning of Art. 10 (1) of this Code.

(2) Where a commercial business organization is created in the form of an ordinary

partnership or where the form of the organization is not specified, the commercial
business organisation shall be deemed to be a general partnership.

A, B and C want to form an ordinary partnership and their memorandum indicates that
they will be engaged in activities which are listed under art 5. So, by the oppression of art
213 this A, B and C’s become a general partnership. Because, an ordinary partnership is
not a commercial business organization.
Why does the law define some as commercial and some not as none commercial? If a
business organization is commercial, there will be some unique obligations and rights
that will apply to it. For instance, 1. Commercial business organization is subject to
bankruptcy law under art 968 and art 971. 2. Commercial business organization is singled
out for those purposes of book keeping and accounts art 63 and 73. One of The objective
of bankruptcy law is fair distribution of whatever assets a bankrupt person may have
among creditors if all assets of the enterprise are less than due liability. None commercial
business organization is not subject to for bankruptcy law and book keepings.
Management of an ordinary partnership
From the view point of how managerial decisions are taken, we can divide the affairs of
ordinary partnership in to 2 special act and acts of management. Acts of management are
those acts that are carried out by managers. Whereas special acts those acts that are not
carried out by managers rather by the members of the organization. An act is a special act
if that act is beyond normal partnerships practices. Normal partnership practice is a
certain thing a normal partnership of practice if it is something which occurs on routine
bases or on day to day bases. Something that happens rarely which doesn’t take place in
the normal cores of things in those particular partnerships that act is acorse special act.
Suppose A, B and C form a restaurant. The work of this restaurant is providing food to
his customers. So, it buys necessary inputs for this service. In the normal course of things,
it sells food. So, the management of the restoring capable of selling food and buying
necessary inputs for the e preparation of the e food is day to day activities. So, this is
called an act of management. If this manager sells the building of the restaurant, this act
is beyond the power he entitled. Therefore, it is a special act. To sell this building there
must be the consent of the partners of the partnership.
What is a special act in one organization May b an act of management in another
organization and vice versa. Because, we define the normal partnership practice with
reference to that particular business organization does on day to day bases. So, for
instance if A, B and C partners form a real state, the manager can sell and buildings in
routine bases. Because, this is a normal partnership practice for this firm unlike for A, B
and C restaurant.
Acts of management is carried out by managers. In civil code under art 2004 and art 2005
used this term Acts of management in relation to agency. But acts of management as used
under art 235 and the following and acts of management as used under art 2004 and art
2005 in civil code are not necessarily the same. In civil code what is an act of
management and what is a special act management is defined not looking at context one
normal partnership practices is but rather, as if applying to every person who is given a
general power of attorney. Simply a person who gives power of attorney in general sense,
the person who is given power of attorney is carried out only acts of management. In the
context of civil code act of management are urgent things. For example, your cosin leaves
Ethiopia and gives you a power of attorney. The power of attorney says that to do
whatever I should have done if I ware here. This very general attorney. So, in the context
of civil code the law wants to interpret power of attorney given in general way in a very
restrictive manner. Therefore, for instance you cannot sell the house of your cousin. But
if this cousin is trader if he has perishable things like fruits, you can sell it. This will go
bad and it cannot wait as a principal.
In the context of civil code selling a house is always a special act. The agent should have
specific authorization to sell a house. Because, civil code lists selling an immovable is as
special act.
There are 3 types of management in ordinary partnership.
1. Statutory: when somebody indicated in partnership agreement as manager. A partner
appointed as manager under the partnership agreement is called statutory manager art
239. If a partner is as a manager, he has a special power and he can discard the opinion of
the other partners in carrying out act of management in the absence of fraud. Because,
being a manager is a contractual right. When joining the partnership, this person a partner
and manager can be on condition that is appointed as manager. Appointed under Art. 239
may not be revoked or his powers restricted by the other partners, save for good cause art 240.
What good cause is? Art 240/2 Where there is good cause, the appointment may be revoked
notwithstanding any provision to the contrary in the partnership agreement. 240/3 Gross breach of
duty or unfitness to exercise powers of management shall constitute good cause under this
Articlewhat is unfitness? If a manager manages this partnership loss after loss for long period of
time because of sickness or by poor business jugement, this manager is unfit even if he is a hard
worker.
2. Management, manager appointed by members subsequent to adoption of the
partnership agreement: manager appointed by the partnership not by partnership
agreement but thereafter. This person is not indicated as manager by the partnership
agreement rather a decision was taken to appoint somebody as manager.
3. managers by default: where there is no manager appointed in the partnership
agreement, every partner actually is regarded as manager by default.
A partnership may have more than one manager by the following ways. 1. If the
partnership agreement indicate 2 managers. 2. If managers appointed by decision of
annual meetings of partners and the partners may decides 2 or more peoples being
managers. 3. If nothing has said as to who is a manager of the partnership, automatically
every member is a manager of the partnership.
When the partnership has several managers there are various possibilities in which
several managers can carry out their duties. 1. Caring out jointly. They act together. 2.
These managers may have given specific duties. For instance, one can be a manager of
human resource, one can be the manger of marketing and the other can be a manager of
research and development. 3. If none of 2 these have taken place that is if they are not
told to carry out jointly nor they have not given specific duty, each of them may act
independently. For instance, A appoints abebe. B appoints abbebech. C appoints abebaw.
When there is such kind of problem art 237/2/3 answers this. A can object B and C not to
appoint others. If they cannot agree themselves the objection shall be decided by majority
vote of all partners.
Duties of members of ordinary partnership
1. Contribution: one basic duty is the essential obligation to make contribution with the
attendant warranties. As we recall from previous discussions, art 210, art 211 and
229 and the following, in every business organization there is a partnership
agreement. One of the features of partnership is the need of making of contribution.
In any event one basic none derrogable duty is to make contributions with warranties
or guaranties that attached to the particular type of contribution. .
2. To share in loss and to pay debt due: another essential obligation is sharing in loss
that may be sustained by the partnership. If a partnership incurs or sustains losses,
every members of the partnership has a none derogable duty to share in those loss
and to pay debt due by the partnership under art 215/2 and art 254. Art 215 applies
to every business organization. Because, it is in a section of which deals with general
provision that are applicable to all business organization. Art 254 talks about an
exceptional circumstance. That is if there is an ordinary partnership who has
contributed service or skill, that particular member may be exempted from sharing in
losses if partnership agreement indicates this.
3. Use of diligence and skill in conducting the affairs of the partnership: In conducting
the affairs of partnership, a partner should use the diligence and skill he shows or
uses in conducting his own private affairs art 243. Suppose A, B and C formed
partnership. C is a mechanic. So, C has to manifests diligence and skill; he should
discharge his obligation as mechanic and as a member of partnership like he does in
his private affairs. What does private affair is? Is a subjective standard or objective
standard? Private affair should be seen from view point of reasonable not anybody or
abebe or abebech. C is in the habit of sitting idle or missing many deadlines like he
didn’t eat his diner several times the prepared food. Doesn’t mean that is entitled in
that way. He is supposed to behave in such way that he meets the standard of a
reasonable person in conducting his private affair. We don’t look at every single
person and make standard lower or higher depending on. If we take his real personal
affair the result would be we allowed C to be lazy to sit around to have tea or coffee
and not work during even work hours while we would blame A for eating his lunch.
Because he doesn’t do this normally. That is not fair. Because, even it is not
workable from view point of judge.
Suppose there is a dispute. When there is a dispute between this firm and A or C, the
case will be brought before a judge. This firm complained A and C regarding
diligence required from them. Should judge ask witnesses to testify about how lazy C
is? Or that he is held to the standard of a lazy man. And how diligent man A is so
that he is held the standard of an ultra? No the judge will look at this. He will look at
the standard of diligence and care that a reasonable person shows in conducting his
personal affair. So, the standard is an objective standard of a reasonable person. That
makes the standard 1. Fair 2. Also workable. Therefore, every partner is expecting to
manifest the diligence and care that can reason person manifest in conducting his
 private affair. There is another higher standard of a bones patterns familias. The law
says that if a paid agent who delegate to do in be half of others, this agent has expect
to do by the standard as a bone pater familias or as good father shows in discharging
the affairs of his families. If the agent is not paid he is suppose to work as hard as he
does in his personal affairs.
If C fails to meet this standard of diligence and care and as a result the partnership
sustain in loss or incurs some kind of damage, C is suppose to make all the damage
and compensen the partnership art 243/2. The diligence and industry he showed in
the past cannot be a defense for this person when he fails to meet this standard of
diligence and care. Whether he procured extra benefit in the past for the partnership
by manifesting care and diligence which beyond what is expected from him or not, it
doesn’t matter.
4. To abstain or refrain from any act which would be predijucial to the interest of
partners art 244.: a partner has this obligation to refrain from engaging in any
behavior in business which would compromise the interest of the partnership in
which a member. For instance, C is a mechanic in which he is a member of A,B and
C garage. He is rendering service to this partnership. He is accomplished mechanic
and attracts customers for this firm. So,C should not work in another garage near by
in his free time. So, he should refrain from such kind of behavior.
5. Duty to share in expenses art 246: in some case, extra expenses may be incurred to
preserve the property belonging to a partnership. In such cases every partner has the
obligation to share in those expenses.
Rights of partners in ordinary partnership
In partnership there are certain rights. The most of basic which being every partner
has right of the following.
1. To share in profits: positive material enrichment is of every member is a purpose
of partnership agreement or business organization. Therefore, an essential right
every member has right to share in profits.
How do they share in profit? Actually art 252 and art 253 the law provides the
mechanisms on which sharing of profit is taken place.
Mechanism A. if there is agreement regarding the proportion in which the profit has to be
shared That agreement is to be followed so long as that agreement doesn’t exclude
anybody among partners from getting any thing in the partnership of it. The only
condition being the agreement cannot exclude any member form taking part in the
distribution of the profit. Other than that the agreement will be onward.
Mechanism B. there may be an agreement to the effect that a third person is appointed to
distribute the profit made by the partnership among partners the way he sees fit or
reasonable. Because, there is an agreement entitling him or entrusting with him this duty
to distribute profit.
Mechanism C. in the absence of any agreement, profits will be distributed equally among
partners irrespective of their contribution.
Mechanism D. if there is an agreement as regards the sharing of losses, but nothing is
said about the sharing profit, that proportion will apply to share the profit. If there is an
agreement stating that A will shoulder 50 % of the loss, B will shoulder 30 % of the loss
and C will shoulder 20 % of the loss. But nothing is said about sharing of profit that
proportion which is applicable as regards sharing of loss will apply to the sharing profit.
Means, A will get 50 %, B will get 30 % and C will get 20 % of the profit.
A contributes 5 million birr, B contributes 1 birr and C contributes a house. If there is not
an agreement regarding how to share their profit and loss, they will share the profit
equally irrespectively their contribution. So, if their partnership gets 3 million birr profit,
a will 1 million birr will get 1 million birr and C will get 1 million birr. Why the law
saying this?
Because,
Reason 1. Art 255 says that members of partnership are not beneficiaries of limited
liability. Or their liability is not limited to they contributed. If this partnership incurs
liabilities the partners pay the liability next to the partnership. They may be liable beyond
their contribution for debt incurred by the partnership. If A, B and C partnership borrow
50 million birr from a bank, and if this partnership cannot pay this debt from its assets,
the bank can take this birr from personal property of A, B and C. B who contributed 1
birr in point fact may end pay 50 million birr to the bank if this guy is the richest and the
other nothing else. That means, what you contribute is not the measure of the risk that
you take in a partnership. In company what you contribute is what you expose to risk.
Reason 2. This partnership may get more customers because of the membership of B. if B
is a bilinear, people are not hesitant to do with this firm because they know that in the end
any way they will be paid, from the personal property of B. B’s presence as a member
despite his meager contribution, is enhancing the credit worthiness of this firm. B also
has well business connection with others which helps for the profit of this partnership.
Partnership also has one option regarding distribution of profit. They may appoint one of
the partners or a third person an outsider to distribute among partners the profit that the
partnership make in manner of which he believes to be reasonable. That distribution
made by a third person will be challenged only if it is inequitable. If a distribution is
inequitable, a challenge can be amounted against such a distribution. It could be equitable
only where given the totality of the circumstances, if it is extremely an fair. But the
totality of circumstances of must support the claimant. But this claimant must claim with
in 3 months from the starting point of time that he knows. The otherwise law assumes
that the distribution is fair the fact that the claimant may subject this modality of
distribution of profit and in fact naming suggested a third person for the purpose of
distribution, should not be counted against him or preventing from challenging the
distribution. The law says execution not suggested this mechanism.
2. In principle every member of the partnership has the right to administer and
represent the partnership art 236.: unless there is another agreement, to manage
or administer the partnership.
3. The right to control the administration and participate in decisions which go
beyond normal partnership practice or special act.: this is a right among the none
derogable and very essential rights. You can read art 233, art 235, and art 248.
4. Use of partnership property art 245: every partner has a right to use partnership
property in manner that doesn’t prejudice the interest of the partnership and also
in manner that doesn’t prevent the other partners from making use of that
property in a fair manner. This means he use the property of the partnership for
personal purpose. In companies there is not such kind of right. Why does the law
permit use of partnership property for personal use? Because, there is personal
liability in partnership agreement unlike for company. . In partnership creditors
relying on 1. On the asset of partnership. 2. on the personal property of members.
But in companies the creditors rely on the company liability of the company
only.
When you use the property of the partnership, there are 2 conditions. 1. It
shouldn’t be in manner that compromises the interest of the partnership. 2. He
should also take in account to use this property by others. When a partner use this
property he is liable, if it is damaged by his fault.
Relationship of The partnership with third parties:
What is the liability of the partners for debts due by the partnership? Are there
cases in which members of partnership may be liable for debts due by the
partnership? If yes, what are those cases of situations? Except of joint venture, all
have legal personality. That they have Legal personality means they have their
own patrimony. Meaning, they have their own assets and liabilities. If an
ordinary partnership has its patrimony, it makes sense for creditors of the
partnerships who claims from the assets belonging to partnership. So, creditors of
ordinary partnerships can claim from the assets of partnership. Though an
ordinary partnership has its own assets and liabilities, there is also another option
available open for creditors of ordinary partnership that is they can also claim
from the personal property of members.
If you recall the discussion about partnership, we said in partnership at list one
partner is liable for debts due by the partnership. So, art 255/2 is the
manifestation of this principle in law partnership. Here in an ordinary
partnership, not only one partner who will be personally liable but every partner
is personally liable for debts due by the ordinary partnership. But, the partners
will have similar right that a simple guarantor has in relation to the creditors.
That is they have the benefit of discussion.
If A is a guarantor of B when the creditor C demands payment of money from a
guarantor A, A has the benefit of discussion as under art 1934 of civil code.
Meaning A can require the creditor first take all assets of the debtor and if it is
not enough to cover debt, then A will be liable.
Similarly, in an ordinary partnership, though partners are personally liable for
debts due by the partnership, they have the benefit of discussion as art 255/2.
In principle, partners are jointly and severally liable unless otherwise agreed
as among themselves. Not with the partnership itself but among
themselves. Unless otherwise agree means, all partners are liable for debts due by
the partnership. But, the partners have a burden of showing that the creditors was
aware of the agreement between the partnership which excludes joint and several
liability art 255/3. Art 120/2 is a general rule whereas; art 255 is a special rule in
the context of ordinary partnership. Generally, the point is 1. Creditors can claim
from the assets of the partnership. 2. Creditors can also claim from personal
property of all members. 3. Though all members are personally liable for debts
due by the partnership, all partners have also the benefit of discussion. 4. Once
the creditors have distained the asset of partnership, in principle the creditors can
claim from all members jointly and severally. 5. The right of creditors to proceed
against members jointly and severally may be excluded by agreement. 6. The
agreement must be either between the creditor himself and partnership in the
contract of credit or it must be shown that the creditor somehow knew that
members had an agreement excluding jointly and severallly liability.
Dissolution of ordinary partnership
Dissolution is an act may be a decision of members or a decision of court that
brings to an end a partnership as regard new oppression. There are some valid
and possible grounds for dissolution of partnership. We may classify the possible
grounds in to 3 broad categories.
1. Those resulting from the application of general rules of contracts: in contract
law, there are general principles that are pertain or relevant as regards
dissolution of a partnership. Any partnership or business organization
member is the result of partnership agreement. A partnership is a contract.
These rules may sometimes be the ground of dissolution of partnership. Look
at article 217/c. it is in a general part which is applicable to all business
organizations. Art 217 dissolution under the law or by agreement and
Art 217/C says that where the term for which the business organisation was formed
expires, unless the partners agree to continue the business organization. Meaning,
any business organization will come to end when the term for which particular
business organization was established expires,. Example in a partnership agreement,
when A, B and C formed a partnership and they may have stipulated that this
partnership lasted for 10 years. Upon the expiry of 10 years, this partnership can be
dissolved. Because, the contractual term for which was established has now been
already over. This a simple and logical application of general rules of contract.
Art 217/b where the partners agree to dissolution prior to the expiry of the
term for which the business organization was formed. Any contract can be
modified by the agreement of parties. Let say A and B conclude an
agreement for B surrender service and A pays certain some of money. If the
2 agree, their agreement can be modified. If this partnership is established
to stay for 10 years, after 5 years somehow they lost interest and everybody
want to abandon this business. If they agree to dissolve the partnership
prior the expiry of the term for which was established, it is okey. This is a
simple and general contract.

2.
Art 217/a where its purpose has been achieved or cannot be achieved.
Example, A, B and C are concluding a partnership agreement with the
purpose of extracting gold from Afinchober area. This their purpose. If A, B
and c partnership extracts all the available gold from that place. At that
pointing time, there is a good ground for dissolving the partnership while the
purpose was achieved. A principle of contract also come to an end once
performed, the contract is not there anymore.
Another element is that when the objective cannot be attained, but there is not
more than 10 gram. They spend more than the worth of gold. To extract 10
grams 1 million birr. Should this partnership continue? B and C have the
opinion to dissolve the partnership that the objective is not attainable. A says
 “no” by saying that there is 10 grams of gold which proved by scince. Who is
right from the 2 groups? B and are right because a business organization is
formed for the purpose of participating in economic activities for making
profit which will be eventually dealt out or devided or distributed among
members. If the business purpose cannot be attained in a large sense, three is
a ground to dissolve this partnership. Some time some people tempt to loose
hope easily when they see some difficulties. It is not like that. It has to be
that the impossibility has to be either absolute or prolonged the attainment
the objective of the business. But any problem is not to be regarded
impossibility.

Art. 258/1 Where a partnership is entered into for an undefined period or for the life of
one of the partners, or where the power to dissolve on notice is provided in the
agreement, every partner may bring about its dissolution by giving six months notice.
Example, if A, B and C make agreement let us do a business together so long as MR. A
alive. This is a which is considered undefined. So, where a partnership doesn’t stipulate
a specific period for which it is to last, for example where it is nothing said about the
period for which the partnership is in business, it is undefined period. In this kind
situation, the law gives an opportunity to bring an end to the partnership by giving a
notice.

Art 258/2 Notice to dissolve shall be given in good faith and not be unseasonable for an
undefined period, every member has the right to bring to an end the partnership by
giving a notice. This provision is actually an application of a principle of contract which is
universally acknowledging that. Concluding a contract doesn’t mean you should be
bound by this kind of contract for intire of life. Example, A concluded a contract of
employ with TT restaurant for undefined period. Can the owner of the restaurant say
you cannot any where his employee? Is it fair? This is not an acceptable contract. If he
concluded for a specified period he has a right to recovery his liberty. It is a different
thing. Example in the context of partnership, A, B and C partnership established for
undefined period and A was a person who contributed a service as a mechanic. This
person has a right to somehow bring this contract to an end. B also invested lot of
money. He may want to take back his resource. They have a right not be bound for
entire of life. The law recognizes this people to liberty to an end the risk of personal
property or the right to recovery. The person who wants to an end his partnership by
giving a notice, he has following requirement. 1. Giving notice 6 months in advance. 2.
The notice he must be in good faith. 3. The notice must not be unseasonable. Example
of notice in good faith, A contributed service as mechanic and gave his service for 4
years. Now this garage becomes improved and it required reputation. And a big
business opportunity is coming its way to this garage. This business can change more
this garage. Then after taking his distribution, A says I have enough capital to establish
my owned garage without jointing with anybody. And He asked to dissolve this
partnership to compute. Is this notice in good faith? It is not in good faith.
Art 258/3 Notice to dissolve shall be (seemed to be unseasonable where the situation is
not determined and the dissolution of the partnership should be postponed.
Unseasonable or opportunely made notice is notice given at wrong time. When is a
wrong time? Example, suppose A who has given has not interest of snutching the
business opportunity coming way the enterprise. He is not given in bad faith. Is this
notice is given at wrong time? B and C said please understand this big opportunity and
stay some more time. This business changes our life dramatically. But, A said it is your
business. If A says my mother is sick and I want to attend her. In such kind case the
judge must in balancing. The judge have to balance the interest on the one hand B and C
on the other hand A. and where it seems, it is reasonable demand that A stay under
circumstance for more e year, judge will say this notice was given at wrong time. But, If
A’s interest generally out way the interest of others, then this notice is given at right
time.

2. Emanate from the loss of fiduciary relationship or disruption and other good causes: a
partnership will come to an end or be dissolved that is expected does not exist or when
there is good faith. Art. 218 Dissolution by the court.

Art 218/1 Notwithstanding any provision to the contrary, a business organization may
be dissolved for good cause by the court on the application of • partner.

Any partner can apply to court the cause of dissolution of partnership or business
organization so long as to show to the judge. Good cause why is demanding that this
partnership or business organization be dissolved. 218/2 gives us clues what good cause
means as follow. There shall be good cause in particular where a partner seriously fails
in his duties or becomes through infirmity or permanent illness or for any other reason
incapable of carrying out his duties or where serious disagreement exists between the
partners.

There shall be good cause in particular where a partner seriously fails his duties. Where
does a partner fail seriously his duties? Suppose there are 3 partners A, B and C in a
partnership. Let say A is applying to cause dissolution of this partnership. His allegation
is C has failed seriously his duty to pay 1 birr from 1 million. So A wants the judge to
cause the dissolution of the partnership to decide. Is this a serious duty? Because, any
failure of duty doesn’t qualify as good cause for dissolving a partnership. It must be
serious. Let say another guy B wants to cause the court the partnership by alleging that
he is sick permanent illness. Infirmity and permanent illness are good faith. For good
cause to exist for the purpose of dissolution of partnership to exist, a partner need not
be at fault. Sometime it is because of illness nobody is at fault.

When does disagreement be serious? Let say between A and B there is a very serious
disagreement about religious disagreement. This disagreement has become standing
the way that the attainment of the enterprise purpose. So, when we talk about serious
disagreement, we look at it from stand point of whether or not their disagreement
compromise or affects the attainment of the business of partnership. The root cause
may be anything so long as the disagreement affects or compromise the attainment of
the objective of the partnership, it is a serious one.

3. Grounds resulting from personal nature of partnership: as we remember

business organization are divided in to 2 broad categories 2 types of
companies and 4 types of partnership. In companies the relationship of
members to each other is very minimum. When you join a company, you are
not counting much on the identity of the other. But, when you join a
partnership, you consider the identity of other partners very much. So, as
result of this, a company is called an association of capital. Partnerships are
called association of persons. An enterprise in which the identity, quality and
qualification of each member is very important is a partnership. When you
join the partnership, you look at who are the other partners; are they diligent
people? Are they the people of the integrity? Are they people who are well
connected? Are they the people who have e lots of personal property?
Because partnership is a personal business organization. In A, B and C
partnership, C want to leave the partnership and wants to give his share to X.
this is not possible unless A and B accept this new guy. If A and B believe
that X is a more diligent, rich, qualified and quality person, they will accept
this new guy normally. But, if X is poor, unqualified, no personal property,
they will not accept him. Why? The qualities and qualifications of every
member are very important in partnership. As we remember in last discussion
under art 255, in partnership there is personal liability for every member of
partners. So, if X negligent, the person who doesn’t take his duty seriously,
and cheat, they are exposing themselves in to risk.
In the context of partnership, there are some grounds for the dissolution of partnership
which emanates from this nature of partnership. For example let us look at art 260 on
Death, incapacity or bankruptcy.

Art 260/1 A partnership shall be dissolved where one of the partners dies or is no longer
able, under the law, to be a partner. For example, in A, B and C partnership, if C dies, A
and B or one of them can apply for dissolution of partnership. The judge can accept their
question because the death of C may have an impact on this partnership. In the context
of Share Company, the death of a member has not impact on the business of company.
Members of share company don not join a share company counting on the life and
death of every member. They do not attach much significance to the other share holder.

No longer able to under the law to be a partner: for varieties reasons a person is not
able to act as a partner. Then there is possibility of dissolution.

Art 260/2 A partnership shall be dissolved where a partner is declared bankrupt or

where one of his personal creditors causes his share to be disposed of under Art. 256
(3). If one of the partners is declared a bankrupt, personal debt. In A, B and C
partnership, business has gone very well. The enterprise is making profit. While the
enterprise making more profit, B may have lots of personal debts. And he could not pay
back. He is declared bankrupt. In that case the bankruptcy of a member is a ground for
the dissolution the partnership unlike Share Company. Why does B the case? Even
where a member is not declared bankrupt, the creditors may cause his share in the
partnership to be sold. In this event the partnership may be dissolved. But The
partnership may by agreement continue as between the remaining partners, or with the
heirs or representatives of the deceased, incapable or bankrupt partner Art 260/1.

Winding up of ordinary partnership

Let say court decide a partnership to be dissolved, will the partnership be disappeared
or not immediately? There are certain things that need to be done after dissolution
called winding up process.

1. The partnership may have business or project that is being carried out. This
oppression or project is caring out must be winded up or finalized.

2. Creditors of enterprise must be paid. If the partnership has money with others or
the partnership claims against others, those claims must be collected.

Who is in charge of winding process?

A person who is called liquidator who will be appointed by the partners or by the
decision court will take care of this. In this winding process, the issues are following.
What ever due is the partnership has to be paid and collected; whatever is due to
creditors should be paid of course to do this to pay the creditors, all the assets of the
partnership must be sold or liquidated. Meaning when a decision is taken to dissolve
a partnership, all the properties belonging to that partnership is changed to cash.
But, property whose uses of contributed will not be sold. Because, the owner is the
person who contributed. Every debt which is due to the partnership will be
collected. Then creditors of the partnership will be paid. What if there are members
who happened creditors of the partnership, who is paid first out sider of the
creditors or insider of the creditors? Out sider of the creditor is paid first in view of
art 255 the liability of members. .

The next step is the liquidator return to members what they contributed to the
partnership in cash not in kind. Because, every thing which was contributed already
sold. Example a person who contributed a house he takes the cash by the value of
the house during at the time of contribution. If the price of the house at the time
contribution is 1 million birr, and now the price of the house is 2 million birr, this
contributor takes only 1 million birr. Because, may be the price of the house
appreciated because of some development or increase.

The person who contributed his service should be given estimating the worth of his
service to the enterprise at the labor market

Then if some money is left, that residual asset is distributed to the partners. Finally
the liquidator must cause the partnership to be canceled from commercial register.
The partnership doesn’t exist legally.
Joint venture

Joint venture is the second type of partnership recognized under art 212. Essential
Features of joint venture which distinguished from others partnership. Are the
following.

1. It is an internal business organization: means it is a secret business organization

which exists only as between members of particulars business organization. It
doesn’t exist for third parties. It is not public or unknown to third parties; it is not
registered in commercial registery; it doesn’t have legal personality. So, it is not
subject to rights and obligation. There are 2 types of partners in joint venture. 1.
Sleeping partners or invisible partners. 2. Managing partners or visible partners.
So, you have somebody is known and the other not known. Suppose A, B and C is
the members of joint venture. This enterprise doesn’t have legal personality. It is
existence is limited to members. A will be managing partner. So, A transacts with
third parties in his own name pretending that there is nobody behind him. He is
acting for himself alone. A will concluded transaction with third parties as though
he ware acting for himself alone. And third parties who transacts with A, relies
on credit worthiness and they will be claimed against him. So, once A makes
profit as far as internal agreement between A, B and C, B and C will be claiming
whatever is due to the share or profit made by A. of course, since joint venture
doesn’t have legal personality, the contributions that are to be made B and C
cannot be owned by joint venture. So, both B and C are see with remain owners
the contribution they make or they may give to A or they may be joint owners.

If A in dealing with third parties discloses that actually he represents an enterprise, that
enterprise joint venture ceases to be a joint venture. And art 213 would apply and will
become an actual partnership which arguely means, a general partnership.

Why do people make form of joint venture?

There are 6 choices to do business other than joint venture. We have said there are
visible and invisible partners. The visible partners will have a set of motives and a set of
benefits and sleeping partners will have a set of motives or benefits which he gets from
joining joint venture.

Sleeping partner: why does one go for being sleeping partners in a joint venture?

1. The sleeping partner is not liable to third parties. The consequence is he has not
liability except to visible partner to extent they agreed. If himself to visible
partner in the internal secret agreement that he will be contributing to the
liability to the maximum 50 thousand birr, the sleeping will be liable to visible to
the extent maximum 50 thousand bir. This means the sleeping partner liability is
limited because their internal agreement his liability is limited.
 2. Sleeping partner is somebody who is doing business with anonymity. Anonymity
means without being known. People may hide themselves for varieties of
reasons engaging business. If you join other type of business organization other
than joint venture, the partners have to sign a partnership agreement or
memorandum and this is deposited in the commercial registry. That means
members of every business organization are known because who members of a
business organization are made known public through instrumentality of the
commercial rgistery. People may hide themselves because of political, religious,
cultural or personal family reasons.

Visible partner:

1. He gets the opportunity to raise resources from sleeping partners. He is a

person who doesn’t care about exposure and getting limited liability. But who
may want to raise funds or resources necessary. So, the visible partners get the
opportunity to raise capital or resource for certain business. For engaging in
business he comes upon with the people who have the resource but who don’t
want to be visible.

2. He gets the possibility to run the business. He is a manager partner. The visible
partner will be a manager of the firm.

It is very easy to set up joint venture. Because: 1. There is no requirement of

registration, assessment of the contributions and written agreement. 2. An organization
which allows maximum flexibility for the members to design their internal relationship.
And therefore, these are benefits for both sleeping and visible partners. So, the law
setting this type of business organization to provide the needs of the people who have
these met of interest.

The internal agreement of the joint venture may be unwritten. The law doesn’t require
joint ventures to make their internal agreement in writing. This doesn’t mean that the
people are prohibited from reducing their agreement in writing. Actually well advised to
have in writing. Because dispute may arise and proofs of rights and duties of every
members may be difficult. Otherwise they can use type of proofs like witnesses.

Example, A,B and C in joint venture. A is visible partner and he is negotiating transaction
with X. but, X has doubt regarding A’s capability to carry out what he will be doing. X in
doubt now whether to conclude this agreement or not. Then A told that there are other
peoples behind him. Now X become demanding this agreement because X starting to
count on credit worthiness of C and B. X’s expectation is different and conclude the
agreement. The law is telling under art 272/4, because, this kind of expectation was
raised in X’s mind, the law gives him the benefit of relying on B and C. so, joint venture
becomes an actual partnership is for the benefit of only X or for the benefit of creditors
who relying on the existence of joint venture and this partnership becomes actual
partnership for the benefit of creditors. . General partnership is the most favorable of
creditors.
There is confusion about joint venture this type of business organization. Because there
is another type agreement with the same name joint venture. So, the word joint
venture is used in 2 different senses. The first one is a business organization which is
about under art 271 and the following. The second one is in sense of public known
temporally arrangement between 2 or more enterprises to engage to specific project.

Let say there is A, B and C joint venture. A is visible partner and he negotiate a deal with
Y. A and Y concluded a contract of certain transaction. At this time A did not disclose
that actual B and C are working with him. So, Y did not know the existence of any
arrangement behind A. subsequently, after this A also start to negotiate with X. X did
not give much in belief A’s capability. Then A disclose that there B and C behind him. X
concluded a contract with A. but latter Y heard that there are C and B behind A. Y did
not expect that there are people behind a. should Y be given the benefit of treating the
whole enterprise actual partnership? I think the purpose is to benefit the people who
rely on the e credit worthiness of the other joint ventures on top of the visible partner.
But if everybody knows that there is joint venture for example M who heard this come s
to concluded transaction nothing with discus. But M knows that there peoples behind a.
this joint venture should be treated actual partnership for the benefit of M.

Art 271 joint venture is an agreement between partners on they agreed and subject to
general principle of the law relating to the law of partnership. So, when you find gap
under the provisions of joint venture, you can go to ordinary partnership to feel the gap
by analogy.

General partnership

It is a business organization whose existence is known to third parties at large. A general

partnership is actual also a form of a business organization which exploit the members
of the partnership to the maximum of liability. For the creditors it is the most
convenience type of business organization to claim whatever is due to the partnership.

Art. 280. — Nature of general partnership.

(1) A general partnership consists of partners who are personally, jointly, severally
and fully liable as between themselves and to the partnership for the partnership firm's
undertakings. Any provision to the contrary in the partnership agreement shall be of no
effect with regard to third parties.

(2) Where the partnership is a commercial partnership, each partner shall have the
status of a trader.

(3) The partnership shall have a firm-name.

 (4) The provisions of Aft. 282 shall apply where partnership shares are assigned or
transferred.

Please compare art 280, 255, 272, 296, 304 to know more regarding liability. The
members of the companies have not personal liability. The members of ordinary
partnership have personal liability with the benefit of discussion with creditors. In joint
venture visible partners are personal liable but not sleeping partners.

Art. 294. — Liability of partners.

No action may be taken against individual partners for debts due by the partnership
until after payment has been demanded from the partnership: Provided that an action
for the repayment of fictitious dividends may be brought directly against individual
partners.

A partner in general partnership will not be required whatever due by the partnership
until after payment has been demanded of the partnership. But the Amharic version
doesn’t demand this trend the asset of the partnership. The creditors must give notice.
It only requires creditors of the general partnership to put the partnership in default
hire to proceeding to asset of individual members of partnership. In general partnership,
partners have not the benefit of discussion. The partners only have a right to require the
creditors of the partnership to first give default notice to the partnership. Once the
creditors have given a default notice to the partnership and if the partnership has not
paid immediately, the creditors have the right to leave aside the partnership and sue the
partner. That means once the creditor has put in default the general partnership, has
the right to proceed against members and the partnership jointly and severally.

The type of business organization that people form is a choice made by the persons
concerned. Why do people choose this partnership which exposes for maximum
liability? Because it enhances the credit worthiness of firm at the time of having
minimum capital. So, you may such a choice when in opinion your capital is minimum
and you are afraid.

Limited partnership

A limited partnership is a partnership in which there are 2 types of partners that are
general partners and limited partners. The general partners are liable for debts due by
the partnership just like partners in a general partnership. Meaning the provisions 280
that we just saw to apply to general partnership. Example, A, B, C and D are in limited
partnership. A and B are general partner s while B and C are limited partners. It means
to general partners 280 applies. So, A and B have: 1. Unlimited liability to the creditors.
2. They don’t have the benefit of discussion. In contrast, limited partners in limited
partnership have the benefit of limited liability. They are not liable beyond the extent of
their promise of contribution.

The second point is the general partners only will be the managers of the firm. Limited
partners in limited partnership have not the right to exercise managerial authority. They
cannot represent the firm even incapacity of ordinary agent. The limited partners are
more or less like sleeping partners in joint ventures. The difference is limited partners
are known. They become liable beyond their promise contribution only when they break
the rule against the prohibition representing partnership.

Should the limited partners contribute service?

Companies

Fundamental differences between companies and partnership

1. Companies are association of capital whereas partnerships are association of

persons. When we say partnerships are association of persons, we are saying
that in partnerships the qualities and qualifications of a member is extremely
important. In partnership, a partner counts on capabilities, integrity, connection,
wealth and ETC of every other persons is very important. Whereas in the context
of share companies, what is emphasized is every share holder is that the
contribution made by the particular. So, because of these basic differences,
there are also other distinctions.

2. Because partnership is association of persons, transfer of shares to an outsider

is strictly regulated. A partner cannot dispose of his share freely without the
permission of other partners. Whereas In companies particularly in a share
company, shares are freely transferable. A shareholder in a share company can
transfer his shares to whoever wants to in principle. Of course, plc is not really
something which falls in bothassociations. It has the attributes of both
associations. So, as association of capital a plc share is transferable freely to
outsiders. Because, it has some aspects of partnerships. A member of limited
company can transfer his share to outsider but there a need of approval of
shareholders representing 3 quarter of the capital of the plc. The point is plc
somehow is in between the 2 though as a company probably we can categorize it
as closer in Share Company.

3. Association of capital particularly share company can issue shares which are
transferable securities. Whereas partnerships and plc cannot issue transferable
securities. A transferable security is a negotiable instrument. Negotiable
instrument are defined under art 715. Art. 715. — Definitions.
 (1) A negotiable instrument is any document incorporating a right to an entitlement
in such manner that it be not possible to enforce or transfer the right separately from
the instrument.

(2) The law recognizes in particular as negotiable instruments commercial

instruments, transferable securities, documents of title to goods.

Transferable of securities are negotiable instrument as you can infer from under art
715/2. Negotiable instrument are documents embodying rights or entitlements in such
manner that those rights can nither transfer nor enforce separate from the document
itself. Transferable securities are actually documents that are issued by companies
incorporate rights in such manner that those rights neither can enforce nor transfer
from person to person separate document itself. Membership right of member’s nither
can enforce nor transfer from person to person separate document itself. Negotiable
instrumental are divided in to 3 families commercial instrument, transferable securities
and documents to titles to goods. If you look at art 732 commercial instrument are
documents embodying the rights of a specified some of money in such manner that the
right to claim that money nither can enforce nor transfer separate document itself. A
bank check is an example of commercial instrument. So, it is also a negotiable
instrument. But it not transferable securities. So, when we say neither nither plc nor
partnership can issue transferable securities we should not mix up transferable
securities with every other negotiable instrument. Membership right inside of in plc and
partnership and Share Company is different. Those in Share Company a share is a
transferable securities while a share in plc and in partnership is evidence of
membership.

4. In companies both share company and plc contribution is the measure of the
right. Whereas in the context of partnership contribution is not very necessarily
the measure of right. In every respect whenever claim any right with decision
making, voting, or distribution of profit in the context of Share Company and plc
the right you will get would be proportion to your contribution to worth the
capital of the company concerned. Whereas membership right in context
partnership is in principle equal because of the personal liability. .

5. Every member of companies enjoys a benefit of limited liability. Meaning in

association capital there is not liability beyond contribution. Whereas in
partnership at list one member will be personally liable beyond contribution.
Association of capital particularly share company

The definition of Share Company reads, Art. 304. — Definition of share company.

(1) A share company is a company whose capital is fixed in advance and divided into
shares and whose liabilities are met only by the assets of the company.

(2) The members shall be liable only to the extent of their share holding.

In order to understand this definition, we have to have some idea about capital and
asset. Because the share company has been defined in terms of assets and capital. To
know what capital mean look at art 73 and 80/1. When art 73/1 says the provision of
this chapter shall apply to commercial business organizations, it means the provision to
this chapter apply to share company. Because Share Company is a commercial business
organization as we saw under art 10. Art 80/1 defines capital the capital is the original
value of the elements put as disposer of the undertaking by the owner or partners by
the way of contributions in cash or in kind. When we talk about capital we are referring
to contribution of members. Every share holder in any business organization has to
make contributions. Those contributions form the capital. 1. But when we talk about
capital, particularly we are not talking about the item contributed. Let say A contributed
a car. So, when we talk about capital, we are not talking about this car rather about the
value of this car. 2. We are not talking about the value of this contribution at any
pointing time rather we are talking about the original value unless officially the capital of
the company is either increase or decreased making changes in the memorandum of
association. . Meaning, the value that was attached to all particular contribution made
by members at the time of contributions. The price of this car may appreciate or
depreciate through time. After 10 years, the value of car in normal circumstances will be
going down. But in Ethiopia that is not normal and it goes up because reasons. . So,
capital is the sum total of the values attached to all contributions at the time of
contribution.

In contrast, when we talk about assets, we are talking about the value of every thing
that the company owns at any given pointing time. We are not limited to contributions.
The assets of company are conditional. It may increase when there is profit year after
year but not capital. The asset consists of the capital and the wealth the company made
and which isn’t distributed to share holders. The capital may be less at the time of profit
and also at the time of loss the asset may be less than the capital. Most of time in
normal circumstance, the asset would be more than the capital.

In the context of Share Company, capital is value of resources that have specially
protected for the benefit of creditors of the company. The people who transacts with
the company are relying on the capital of the company. Their prospect of being paid
depends on whether the company has its intact. For the benefit of the people who
transacts with the company, the law protects the capital of the company form none
business risks. Because there is not personal liability in company. The law tries to make
sure that a company has any pointing time resources equivalent to its capital. For
example the share holders should be not allowed to take money from this resources
under 458/1. Suppose a company has been engaging in business for the last 3 years and
if incurred loss after loss. The capital is 5 million birr. By first year its loss is 1 million birr.
Now the asset decreased to 4 million birr. Can the law say no company incurs any loss?
The law can only protect a company’s capital from none business risk not from a
business risks.

All the assets of a company can be used for payment of debts due of by the company.
So, all the assets of the company are subject to security by a creditor of the company. If
the law says all the assets of the company are protected from none risks for the benefit
of the creditors that would be very good for creditors. But nobody want to establish a
company because every generated by the company would be inaccessible to share
holders. Generally in principle, assets in excess of the capital in company are not
protected form none business risks.

Art. 305. — Company name. When do you think the share company name can adversely
affect the right of third parties? The names should not be confusion with similar so
much so customers will be confusion. Why does the name include the word share
company? It is to put people who deal with the company all notice or to tell them that
they are dealing with Share Company and they will have not access personal resources
of share holders. So, the name should be indicated.

Under Art 306, in order to form a company it is a requirement that members that put at
the disposer of those company resources whose original value is 50 thousand birr. Why
does the law fix the minimum capital? Other factors being equal, the more capital you
have the more likely you have to succeed in your business. So, the law wants every
company to be sufficiently capitalized so that companies don’t come and go every day.
Remember capital doesn’t guarantee successes.

The capital required by business depends type of business. 50 thousand may be

sufficient capital for certain type of business but not others. The point is that we cannot
in the abstract really say this is sufficient capital. It is a kind of arbitrary some of money.
Why does the state care about the success of a company? Because the more profit for
company means more tax to the state and more employment of citizen and this help to
make stable state. There are better ways leaving to founders to determine the minimum
capital instead of fixing in the law.

Art 306/2 the amount of the par value of each share shall not be less than 10 (ten)
Ethiopian dollars.

Suppose A, B and C are the promoters of a company have identified the certain business
and have conducted status showing that for this company to be successful it should be
able to raise 1 million birr from members. So, the capital is determined in advance.
Before the company come to existence the promoters conduct status to determine how
much resources should be raised for this company. And this 1 million birr the
predetermined capitals is divided in to units which we call share. And people will bring
offered to buy these. When shares are sold to people to join the company, these units
will have 10 value par values. Par value means a some of money which a unit in the
capital of the company represents. If one unit worths 1 thousand birr the capital will be
divided for 1 thousand units par value of thousand each if the capital is 1 million. The
par value is not the real market of value market of share. Accompany can sell each
shares for than its par value. The worth of 1 thousand of each share, the company can
sell shares by 5 thousand birr art 326 because of market forces. A 4 thousand birr form
and called issue premium. It forms part of the asset not the capital. But law says that the
share may not be sold for less than its par value. If it is sold less than par value, the
capital will be less form predetermined. The share holder may sell his share in different
reasons by any price. . So, byre is buying the right to participate in the distribution of
the company resources in excess of the capital.

Formation of company

A share company doesn’t come in to being spotaniously. There are certain things that
need to be done come in to existence. We may classify those things that need to be
complied with or accomplished for the coming of the company to be company in to 3
broad categories. 1. Discovery. 2. Investigation 3. Assembly.

Discovery means before you established a company you come out with a business idea
to be exploited. Once the business idea is discovered, you proceed to the second stage
investigation. The business idea that somebody came up with will be investigated as to
visibility, profitability, structure of the capital, structure of debt. the then we go to the
third stage assembly is bringing taking practical steps to bring in to existence a company
which will be engaging in the business idea that was discovered and was studied how to
be woukable, closable fisible business. For instance, acquired land and other things.

Beyond the assembly process, entails complying with certain legal requirement that is
needed to be complied with for establishing a company. There are 5 formal and
practical steps necessarily for establishing a company under commercial code before a
company in to existence.

1. Drafting memorandum of association and articles of association under at 313

and 314. These are partnership of agreement in the context of a share company.
That means in the assembly process the people who are taking care of this
process; have to hire a lawyer to draft the memorandum of association and
articles of association.

2. Full subscription of capital: the capital of a company must be fully subscribed

under art 312/1/a. what does full subscription mean? Remember we said that
before the company in to existence, there are broadly 3 general steps discovery,
 investigation and assembly. In the investigation process the capital necessary for
that company will be determined by study conducted as investigation stage.
When art 304 defining a share company says that a share companies a company
whose capital is fixed in advance. It is fixed in advance at the stage of
investigation. That means a legally binding undertaking must be made by people
who wants to invest in the company to raise the predetermined capital in full to
the extent of one quarter of the par value each share.

3. One quarter of the par value of each share must be paid and deposit in bank
under art 312/1/b: contribution should be in cash or in kind so long as
contribution are found to be capable of furthering the objectives for which the
conmpnies established, people could contributed in kind or in cash. So, a binding
promise or full subscription is not enough. A contribution in cash must be
effectively paid before the company come in to existence to the extent of one
quarter of par value of each share. Regarding contribution in kind should
effectively and fully be made before The Company come in to existence to art
338/1 and 339. Contribution in cash the remaining 75% may be paid in the years
following the formation of the e company in a maximum of 5 years. But
contribution in kind must be paid at the very latest on the day of the registration
of the company.

4. Valuation of contribution in kind: If somebody contributed a car, the worth of

this car must be valued by experts under art 315. Because, probably some share
holders wants to exaggerated to have a more right regarding dividend. The share
holders may be motivated to exaggerate their contribution by agreement. So, to
prevent these temptations, the law under art 315 provides valuation by
independent experts form the traders and industry to protect the creditors and
people who transacts with the company in future and some share holders. But,
this mechanism didn’t be proved workable to be evaluated by experts because
of insufficient number and unqualified experts. So, art 315 doesn’t apply
regarding valuation. In the end the new proclamation issued which reflects the
reality of today instead of art 315. Today the proclamation requires valuation to
be made by members themselves like the mechanism of limited company. They
will agree as to the value of contribution in kind by themselves. Therefore, the
risk of exaggeration of the e capital still exists so as to exaggerate the capital. But
this new proclamation doesn’t have a way to make the share holders liable
personally if they exaggerate.

5. Publicity requirements art 223: this means the memorandum of association must
be signed by the members of the company by the people who subscribed and
deposited in the I the commercial register. From that point the company comes
in to existence. No business organization shall have legal personality until all
provisions of this code relating to publicity have been complied with. Publicity
has under the code 2 elements as you can see under art 87. The first one is the
entry of memorandum of association which has been signed by the subscribers
 in to commercial register art 85 and the following. The second one is art 87 says
the code envisages not only publication by entry the memorandum of
association into commercial register but publication this fact in national
commercial gazette. There is not official commercial gazette though the law
expects this. Before practice was to publish the notice in Ethiopia herald and
addis zemen ware used though they are not commercial gazette. Now that has
been also abandoned by law of the registration of businesses licensing
proclamation. Now the only requirement for publicity is the entry of
memorandum of association that has been signed by members or subscribers of
the company in to commercial register. From that point onwards the company
has to come existence and is subject of right and obligation acts for itself by
instrumentality of agents and managers.

Founders or promoters of the company

The law tries to define founders under art 307. Why? Because as you may have inferred
from we said up to now, founders by engaging in all activities to midwives the company
to bring in to existence the company are assumed several obligation. So, we have to
know who is bound by those obligations and we have to know what the rights of the
people are; what the benefit that are duty of these people are. All these are to be
determined. And the first step is to determine exactly who the founders are. For the
purpose of attaching responsibility to these and to give some rights and benefits.

The law defines the founders under art 307 not good ways. Art. 307. — Founders.

(1) A company may not be established by less than five members.

(2) Persons who sign the memorandum of association and subscribe the whole of
the capital shall have the legal status of founders.

(3) Where a company is to be formed by the issue of shares to the public, persons
who sign the prospectus, bring in contributions in kind or are to be allocated a special
share in the profits shall have the status of founders.

(4) Any person, even though outside the company, who has initiated plans or
facilitated the formation of the company, shall have the status of a founder.
A share company can be formed in one of 3 ways. 1. Formation as between founder’s
art 316. 2. Formation by public subscription art 317. 3. by conversion.

1. Formation as between founders art 316: art 316 is not giving very good
definition of formation as between as founders means. But it is telling at list
formation as between founders are not offer to public subscription. Members of
the public are not inviting to join the company. Shares are not sold to the
members of the public. The shares of the company are actually subscribed by the
founders.

2. Formation by public subscription art 317 and the following: there are founders
who came up with the business idea; who conduct the visibilities; that also may
be acquired land others things before the company come in to existence. And
this people invite members of the public through a prospectus a document of
which is seen under art 318 to join the company. In the end there are 2 types of
people. 1. People who participated in discovery, investigation and assembly and
founders who invites through prospectus members of the public to join the
company to subscribe in the company. 2. Members of the public who just
responded to invitation made by media and they are not founders because they
didn’t participate in discovery, investigation and assembly. They haven’t
obligation and they have not the rights of benefit. So, all are not founders of the
company.

3. By conversion: one business organization changes its form. For instance, a

limited company can change its form to share company.

Art 307/2: Persons that sign the memorandum of association and subscribe the
whole of the capital shall have the legal status of founders. This provision is
talking and applied about formation as between founders. Every body who signs
the memorandum of association is a founders of the company.

Art 307/3: Where a company is to be formed by the issue of shares to the public,
persons who sign the prospectus, bring in contributions in kind or are to be allocated a
special share in the profits, shall have the status of founders. This is talking about
Formation by public subscription. This provision has problem regarding contribution in
kind. If the contribution is made by the people who sign the prospectus, it is okay. But
what are members of public who respond by bringing contribution in kind? Should they
be regarded as founders? Should they have special benefit and liability? The law
somehow confusions things. Probably it means it has in view cases where some
founders have already made contribution in kind before the public is responding to a
call made a prospectus; some body may have already contribution in kind. Otherwise it
doesn’t make sense. If there is a situation where in before the members of public are
invited to join the company, somebody has already made contribution in kind and that
person will be regarded as founder. Because, he is responding to invitation to the public
but somehow he was already inform and participating in the process. This may give
sense.

Art 307/4: Any person, even though outside the company, who has initiated plans or
facilitated the formation of the company, shall have the status of a founder. This is the
very important definition. It tells us in the very a sense of who founder is. So, founder is
actually any person a member of the company or not who has initiated plans or
facilitated the formation of the company. To be a founder a person need not be even a
share holder.

The law says that under Art 308/2 in principle so: long as the commitment entered by
founders so long as incurred expenses by founders where necessary for the formation of
the company.

The founders may be personally and jointly and severally liable for the debt of the
company in 2 circumstances. 1. Despite their effort and commitment and having
concluded several contract by the expenses of lots of money, the formation of the
company may be unsuccessful. 2. Even if they are successful forming the company, the
company will not take over all the commitments entered by the founders. In principle,
the company will take over only those commitments that ware necessary to formation
of the company. But sometime founders may be incurred certain unnecessary expenses
in good faith, the law provides that the company will take over.

Art 308/3 Where the company is not established for whatever reason, the subscribers
shall not be liable for the commitments or expenses made by the founders. That means
the subscribers and founders are different particularly where the company is formed by
the formation of subscription. . It says that the founders are ultimately liable.

Art 309 is talking about extra contractual liability. During the formation of the company,
they ware stealing the money or resources. They will be liable for the company. Art
309/c is talking about that if founders disseminating false information or if they are
misleading the people, they will be liable to the people who joined by the wrong
information.

. The law recognizes that these people deserve some special benefit for bringing in to
existence of the company. But the law is also aware of one thing which is founders at
initial stage of the formation of the company are really people who have lots of
influences. In the end the founders become the managers of the company. So, the law
wants to make sure that the founders don’t abuse their particular influences. The law on
the hand recognizes the founders and deserves reward but the law is also very careful
not allow these people to manipulate the influence they have. To make the subscribers
decide a very big reward. Art 310/1 the law limits the type of rewards in 2 ways. 1. The
founders may not for the period of 3 years exceeding. 2 in the future or they may
convenience the meeting of subscribers to allow them to pick and choose which 3 years.
2. In addition to their right of a share holder, all founders will get 20% of the net profit
to the maximum.
Shares in company

The term share in the commercial code is used in different senses in different places. For
instance, 1. Art 304 the share is used as unit in to which the capital is divided. 2. Art 328
is used as in the sense of the smallest possible units in to which membership right in a
company is divided. 3. Art 330 it is used as sense of document. 4. Art 345 which is not
clearly stipulated and which is most important, share is a bundle of right that a share
holder in company as member. Examples of these bundles rights are A. share is a right
to participate in the distribution of profit when the company makes profit. B. If the
company dissolved and wound up and if there is a residual assets, the right to
participate in the distribution of residual assets to their proportion of contribution. C.
Share is used as the right to vote in making decision. D. preferred right of subscription. If
a company wants to expand its capital, it will sell new shares and those new shares are
sold to members in preference outsiders a number of shares in proportion to he is
holding previous. You can look at art 472, 479, as regard exercising these rights.

Simply a juridical meaning of a share is that it is a bundle of right. Among these bundles
of right the very important right is the right participating in profit.

Forms of shares art 325, 340 and 341

We said share is a document which is a transferable security. Meaning a share embodies

membership right in such a manner that those rights can neither be enforced nor
transferred from person to person. It is a negotiable instrument not an ordinary
document of evidence of membership. Unlike in partnership and in a private limited
company, a share holder has a full liberty to transfer his share to any body he wants to
in Share Company. Depending on the modalities or ways of transfer share are divided in
to 2. So, when we talk of forms of shares, we are talking the modalities in which share
are transferred from person to person. These are bearer shares and registered shares.

Bearer shares: Art 325/1 reads as Shares are either registered in the name of the
shareholder or to bearer, as required by the shareholder. What does that mean?

Art. 340. — Assignment of shares.

Art 340/1: Bearer shares are assigned by! Delivery, without any other requirement.

Assignment of shares means transfers of shares. If you are share holder in company and
you have a bearer share, the modality of transfer of your share or your membership is
simply deliver the document like giving money. So, bearer share are transfer very easily.
Art 340/2: Unless the contrary is proved, such shares shall be deemed to be the
property of the holder for the purpose of payment of dividends, redemption and right of
participation in general meetings.

So long as you can prove that a guy is actually thief, the e share holder has a right take
back. Otherwise there are no other formalities. To know more about the transferability,
refer art 715, 717/3.

Art 340/3 the provisions of Art. 731 of this Code shall apply to bearer shares which are
lost or stolen. Suppose you are snatched your share bearer by thief. If this thief sells to
some body. Will you entitle to recover from this the buyer? Depends on whether or not
the person who bought a bearer share from this thief bought it in good faith or not. If he
buys by knowing that share bearer is stolen, he shall give back to the owner. If he buys
in good faith he can take it.

Register share: art 341/1 Ownership of registered shares shall be established by the
relevant entry in the register kept at’ the head office. If you look at art 333, when a
company issues a register shares, it has to keep a register of share. If a register of share
that you have, in order to transfer your share you have to do 3 things. 1. You have to
endorse the share. Endorse means signing. 2. You give it the person who is transferred
to. 3. You cause registration of this fact in the register of share by the company in its
head office. After these 3 steps are fulfilled, the register share is belonging to the third
parties. Art 341/2 No transfer is complete until recorded in this register.

Register share is not exposed to lost and damage while bearer share is not to in view of
share holders. The company will be able to control where is share is, if it is a register
share. If it is a bearer share, the company will not know unless the share holder comes
with bearer share. So, register share is important to exclude undesirable person from
being a member in variety of reasons.

Class of share

Share may be divided on the basis of the rights confer to the share holder. Some share
give special benefit which other doesn’t give. Share of the company may be divided
possibly in to 2 broad categories. Ordinary shares or common shares and preferred
shares. If the share holder wants, in the memorandum of association the company may
issue special shares which confer special benefit to the share holders concerned. These
shares are known as preferred share.

Art 335/1: the memorandum of association or an amendment thereto by a general

meeting may provide for the setting-up of several classes of shares with different rights.

Meaning, There is no requirement that shares be of different classes. Shares will be in

different classes only when share holders want this kind arrangement.

336/1 A share company may create preference shares either in the memorandum of
association or by resolution of an extraordinary general meeting. Such shares enjoy a
preference over other shares, such as a preferred right of subscription in the event of
future issues, or rights of priority over profits, or assets or both.

Assume there are persons called A, B and C. Who is committed they want to establish a
company. There are other 2 people who doesn’t want to have a business who are called
X and Y. X and Y have money. So, A, B and C may give them a special offer try to entire
them to join the company. X and Y says that they will have special right over A, B and C.
for example, X is the mother so 2 children and she has 500 thousand birr. She demands
that they give to the extent of 10 % her share holding or 50 thousand birr to her every
year whenever there is a profit in preference of others. . They agree, to this, X will be
issued shares which give her preference on the contribution of profit to the tunes of
10% of her investment in the company. She always takes 50 thousand birr, if the
company makes profit 50 thousand and above only. But, for example if the company
makes 4 thousand birr profit, she can take 4 thousand birr. This is one possible
agreement.

They may agree indifferent manners. For example, X can say I will have a preference up
to 50 thousand birr and when the profits in excess of this birr, I will participate like
anybody. This participating preference shares. There is not paid at the time of the profit
is 0. She may also says that not only preference but also when the company makes
profit in the event the company doesn’t make profit, those years which didn’t get
anything should not be forgotten.

The main point is 1. It is possible to share holder to cause the company to issue which
gives different types rights. One share may give rights which another share doesn’t give.
2. The shares which gives special rights is called preferred shares and the shares which
doesn’t give any unique benefit are called ordinary shares. 3. The precise content of the
particular special benefit confers on particular share holder is predetermined by free
negotiation in the membership of the company. The preference holder will get more
and more benefit if his bargaining to position is strong compared to others. A company
should not give by reducing its capital to anybody for example at the time of loss.
Special preferred share is given a particular person or share holders joining the company
is very important and to get resources.

Y may be interested in other type of special right regarding distribution of residual

assets in the event of dissolution of the company. . When we talk about a share is
bundle of right, we said that one of the rights which constitutes this bundle of right is
the right to participate in the distribution of the residual assets in the event of wound
up of the company. The precise term of this special benefit has to been upon their
agreement when Y takes his special preference right. Preference can be paid with in
respect of specific rights which constitutes this bundle of right which we call share.

Only specified rights are not subject to creation of preference right for example voting
art 336. Art 336/2 the issue of shares with a preference as to voting rights is prohibited.
The vote of X and Y will be accorded to the more you contribute the more right you
have regarding vote of right. Share with one class will have equal par value and same
right art 335/2. But shares in different classes may have different par value. Generally,
the number of classes of share that a share company can have is determined by the
arrangement of design they distinct. There are some rights with respect which classes
of preference may not be paid like voting.

Call on shares and transaction on shares

Call on shares

When we talk about Call on shares, we are talking about payment of the amount of
money.

So, Call on shares is a demand by A company that the outstanding of some on each cash
share is is paid. Because if you pay for your share in cash, you are not required by law to
pay the in tiresome immediately. Art 342/1 Holders, previous assignees and subscribers
shall be jointly and severally liable for calls on shares.

The law makes sure that Call on shares is met. whenever share holders who fate for
their shares in cash are demand by the company to made the out siding as the program
devised by the company if share holders respond positively and paid. What the result of
if call on shares are met? If they don’t pay, the real amount of the capital, the company
will not have the real amount of capital of the company. If the company doesn’t manage
to collect the promise of money from share holders, it affects 3 categories of people in
adverse matter. 1 it affects its creditors negatively. 2. Even share holders will be affected
negatively. Because, they cannot get profit. 3. The company itself will be affected
negatively. The creditworthiness will be diminished. Profitability and financial capability
will be at risk.

Art 342/2 Any subscriber or shareholder who has assigned his share shall cease to be
liable for calls after two years from the date of the assignment. We said share is a
negotiable instrument. It is transferred from person to person. Suppose A bought a
share a par value of 100 birr and paid 25%. This share is transferred from A to B. then
from B to C and from C to D. the company will get the remaining 75% of share from the
subscriber A and from any of the 4 or any combination of the 4. So, this one way in
which the law makes sure that the capita of the company is paid. But this jointly and
severally liable is applied from 2 to 5 years.

Another way in which the law makes sure that the remaining capital is paid that for the
register share the subscriber, the previous assignee and holders are liable. But a bearer
shares a share which has fully contributed or paid to the company. So that art 342/1
can be easily too applied by the company.

Transaction in share
Some transfer of share has a potential of undermining the capital of the company. The
law wants to provide for specific rules so that transactions in share don’t undermine the
capital of the company. Particularly when a company itself buys shares from share
holders, there is a possibility of the capital of the company being undermined or
compromised because of none business risk that is why art 332 and 337 is provide for.
Art 332 is talking about a situation where a company buys shares from share holders. In
that case, certain precondition must be taken to ensure that this transaction sell of
share by share holders to a company doesn’t result in undermining of the capital of the
company. In Ethiopia where there is not a stock market, many investors worry about
how to sell their shares when they need their money for a number of reasons. Because
of this he may refrain from joining the company. So, especially in country like Ethiopia
where there is not share market, a company may function like a market for its own
shares. But when a company buys back the shares, the share must be fully paid. This is
good to protect thirds also. Art 337 is talking about a situation where the share holder
doesn’t completely sell his share but he gets back the par value of share.

Management of Share Company

A share company has 3 types of management system. You have on the top share holders
acting in various meetings. At the ground there is board of directors. And then there is
the general management. A management of Share Company is a wall structure system
which is quite rigid and inflexible.

Let us start to see from top. In theory the highest authority is acting by share holders in
various capacities by their various meetings. There are 3 types of meetings which are
ordinary meetings, extraordinary meetings and special meetings. These various
meetings have ultimate authority. But in reality these share holders have a difficulty to
exercise this power that theory have in theory because of various reasons. For instance,
the number of the share holders, feelings of share holders because of minimal
investment at the time of voting in company, share holders may be widely dispersed of
a single company, lucking expertise to decide on matters that put before them, the
disinterest of share holders participating, minimal influence,. The law itself recognizes
this fact; share holders actually give through the law certain the most important power
to the board of directors. Board of directors consists of a certain group of share holders.
Normally board’s members exercise the most important affair and policy decision of the
company. Board members are not people who manage the company on day to day
activities. So, they delegate some their power to the general management. The General
Managers are employees of the company under the supervision of board members.

Meetings of share holders

Share holders meetings are divided in to 2. These are general meetings and special
meetings. General meetings in turn divided in to 2. These are extraordinary general
meetings and ordinary general meetings. Look at art 390 to know more.
General meetings is a meeting of every share holders to which every share holders is
welcomed depending on a size and number of the share they have. The division of
general meeting is based on the matter on which they decide. Art 423 reads, unless
otherwise provided by law, only extraordinary meetings may amend the memorandum
or articles of association. An extraordinary meeting is a meeting that every share
holders are welcomed and a meeting which can even amend the constitution of the
company or the partnership agreement.

What are quorums required for this meeting to decided upon the matters that are put
before it? And what are the majorities require for this?

The majorities quite high and it is qualified majority and 2 third majorities is required. If
at third quorum for a meeting, the quorum is not attended and no decision will be taken
on the matter.

What is the implication of art 425/3?

Suppose 70% of the capital is contributed. there is contributed by A, B, C, D and E. in

the context of share company, so, when is not present there is no quorum. So, when
rreding this quorum related provision in the context of share holders meeting, we have
to keep in mind that the quorum is calculated on the basis of capital represented not
the number of share holders and number of shares. Suppose 70% of shares are
represented. Is there a quorum require? The answer may be yes. We said when we are
discussing art 335, shares may not necessarily mean of the same par value. We may
have different classes of share. That means the par value of shares may not be equal.
The par value of shares in same class is equal. But par value of shares indifferent classes
is not equal. Capital is the sum total of par value of all shares. So, even 70% of the share
is represented in meeting, it doesn’t necessarily imply that the quorum is there.
Because, if the 30% of the share is not represented happen to have bigger par value
than those present, yet the required capital is not represented.

When we are talking about quorum requirement, we should always keep In our mind
that what matter is how much those represent in the capital of the company.

Art 425/1 Not less than a two-thirds majority are required for a resolution to be adopted
in an extraordinary meeting, abstentions and balance ballots being disregarded.

Ordinary general meetings

An ordinary general meeting is a meeting which is every body welcomed. It is business

conduct of this is in under art 419.

Art 419/1 the balance sheet, the profit and loss account and the directors' and auditors'
reports shall be read out at the ordinary general meeting. After discussion it shall
approve or reject the accounts for the past financial year. It shall decide, where
necessary, on the allocation and distribution of profits and on all questions arising out of
the accounts for the past financial year.
Art 419/2 the meeting may appoint or remove directors and auditors, decide the
amount of their remuneration, amend where necessary the account* after considering
the report required under Art. 375 approve the issue of debentures as well as the
guarantees attached thereto and decide all matters other than those reserved to
extraordinary general meetings.

Among 3 meetings the most important one is the meeting of ordinary general meeting
regarding the implementation of the company. Because this meeting decides all
decision other than decision of extraordinary general meeting. Art 419 is an illustration
purpose not exhaustive. Art 421/1 When first called, general meetings shall be
composed of that number of shareholders which represents either in person or by proxy
at least one-quarter of the voting shares. When we read art 421/1 one has to keep in
mind is that this will not be not the case if the company has different classes of shares
with different par value. There are cases in theory at list though in practice they don’t
exist in Ethiopia today that a company may ha different classes of shares and shares in
different classes may have different par value. So, we should not base the majority or
the quorum requirement on the head count shares.

Can extraordinary give decision meeting on the matters of 419 of ordinary meeting? No
if it is not expressed in the agenda. If the caller of meeting mentioned in the in the
agenda, it can decide.

Art 397/1 Save as is provided in Art. 391 (2), the agenda shall be prepared by the person
calling the meeting.

Art 397/2 unless otherwise provided; only items on the agenda may be discussed.
However, the meeting may at any time revoke the appointment of directors and appoint
new directors in their place.

Art 397/3 Only items on the agenda of the first meeting may be discussed at subsequent
meetings made necessary by lack of quorum (Art. 393 and 394).

Special meeting

We said in last class that a company doesn’t necessarily issue shares with identical right.
A company may issue shares which confer benefit which are unique to them. A
company may issue shares which confers benefit which other shares don’t confer in
which you have different classes of shares. So, when we are talking about special
meeting, we are actually talking about cases where the company has issued preference
shares. Depending on the type of preference created, we could have a number of class
shares and therefore and a special meetings. Because special meeting is a meeting of
share holders in a particular type of class.

Art 426 says that A resolution of a general meeting to modify the rights of a class of
shareholders becomes effective only when confirmed by a special meeting of the
shareholders in the class concerned. So, special meeting is a meeting aimed at
protecting or safeguarding the special interest of members of a certain class.

How do they decide? Art 428/1 says that Special meetings shall be composed:

(a) At a first meeting, of shareholders holding not less than one half of all voting
shares;

(b) At a second meeting, of shareholders holding not less than one third of all voting
shares;

(c) At a third meeting, of shareholders holding not less than one quarter of all voting
shares.

This provision has not problem because they are in same class and the par value of all
shares are the same in the particular class concerned. The decision of extraordinary
regarding the special classes is not valid if the special meeting modified it.

Board of directors

Art. 349. — Qualification shares.

(1) The directors shall deposit as security with the company such number of their
registered shares in the company as is fixed in the- memorandum of association.

(2) These shares shall not be handed back until the owners have ceased to be
directors and have fully discharged their liabilities, if any, to the company.

This restriction may limit not come good managers who have not enough shares. It has
to be taken in to account when fixing directors fidelity shares.

Duties of directors

There are 3 sources of duties and powers of directors. These are: 1. the law itself. 2. The
articles of association and memorandum of association. 3. and delegation of power by
the meeting of share holders. Generally the powers and duties of directors are the
nucleus of the company.

Debentures

There are 2 ways of financing the business of any company or any business organization.
1. Equity financing. 2. debt financing.

Equity financing means financing the business of certain of business organization

through the contribution of raised from members. So, when somebody or share holder
or members of the business organization finance the firm through equity, they are
putting a certain some of money or resources at risk in the hope that this money or this
resource will be utilized by the company and profit will be realized in which they will
participated in the distribution. .

Debt financing

Debt financing is financing the business of certain firm to money raise by borrowing. In
the context of the share company, a company may finance its business through debt.
There are various types borrowing money. A company may borrow money from: 1.
Members or Banks. 2. A company may issue certain short term documents for raising
money by way of loans like bill of exchange particularly promissory not. 3. the most
pertinent way of borrowing money is by issuing debentures.

Why does the company issue debentures?

Normally, loans that are obtain by a company from members or banks tend to be short
term or medium long term. But a company may be embarking on a certain business
which it believes has a very long gestation period. It may believe that profit may not be
realized in short period of time. In this kind circumstance, taking loan from members or
banks may not respond to the needs of the company. So, the company may be forced to
take debentures.

What are debentures?

Debentures are documents issued by company confirming that the company is indebted
to the document holder by some indicated on the document itself and entitling the
person to whom the document issued to the pricinpal debts that is extended to the
company plus a specified rate of return or specified interest on let say annual basis. A
debenture is simply a document that evidences that company which issued this
document to the holder of the document by the amount of the principal indicated on
the document and entitlsince in this document to the return of the principal and until
this principal is returned to a certain fixed rate of interest.

Debentures are normally issued by the company when the company seeks long term
loans ad the people who lend money in this are the people who have some of money
but who don’t want to invest the money the money as such because investment entails
risk. As a creditor you are not exposing yourself as much risk as an investor in a certain
company does. So, a debenture holder will be a person who has a certain some of
money which doesn’t want to keep in bank because interest rate of a bank may be low.
So, he lends his money to the company higher than the interest of rate of bank. It is an
easy way of raising a huge some of money from the public. The company has: 1. a
chance to borrow a large amount of money from any body. 2. The lone is long term.
Loan from the perspective of the company. The advantage of debenture holders is: 1.
Assured rate of interest. 2. Debentures are negotiable instrument s particularly
transferable security like shares and this affords a unique advantage to the creditors.
The debenture holder can get his money by selling it. Compare 1966 of civil code and
717/3 of commercial code.

Abebe assigned his right to collect 100 birr fro Almaz on June 5 to Aster who now gave
70 birr to Abebe in the expectation that getting 100 birr from Almaz on June 5. This is an
ordinary assignment of 1966 of civil code.

Art. 1966. — Valid defenses.

(1) The debtor may set up against the assignee, as he could have
done against the assignor, any defenses which were available to him
upon his becoming aware of the assignment.
(2) Where he had a claim against the assignor which was net yet
demandable at the time, he may invoke a set-off, provided his claim
does not fall due later than the, assigned claim does.

Debenture is not like ordinary assignment. Because there is no

defense against the debenture holder. Because debenture are
negotiable instruments. Art 717/3 reads that the debtor may not set up
against the holder of the instrument defenses based on his personal relations with
preceding holders, unless the holder, in acquiring the instrument, has knowingly acted
to the detriment of the debtor.

The assignee has a better than the assignor debentures are or lending
money to the company by accepting in return debenture is more
attractive that lending money being an ordinary way because of the
differences that can be raised in the context of debenture as oppose to
in the context of ordinary loan. There are also other reasons by it is
attractive to lend money by accepting in return a debenture. Because
debentures holders are given specific protection by law which other
lends doesn’t have. The company doesn’t raise a defense on the buyer
of the debenture if the buyer doesn’t buy in good faith. There are also
other reasons by it is attractive to lend money by accepting in return a
debenture.

The law protects the debenture holders by strictly regulating the

amount of money a company can borrow by accepting debentures. Art
431/1 reads that Debentures issued by a company may not exceed the amount of
paid up capital shown in the last adopted balance sheet. This amount may be exceeded:

If a company wants to borrow money by issuing debentures in excess

of its paid up capital, it must give to the debentures holders’ insecurity
its immovable properties. The value of the immovable property should
be in excess of the money borrowed by the company. So, the money
borrowed by the company should not be exceeding 3 quarter of the
value of the property given in mortgage. The unique advantage is that
the law gives to the debenture holder but not to others creditors.
Compare art 431 and art 493. For example, the reduction of capital
where there are debentures. We have said before that a company is
not required to take money unless it has assets in excess of its capital.
The capital of the company is protected from none business risk for
the benefit of creditors. Capital may be reduced by 2 reasons that
reduction not motivated by loss and reduction motivated by loss. I
both cases the creditors of the company are affected negatively.
Because creditors are exposed to unexpected risk. Whenever, the
capital reduced because either reason, the law attempts to give
protection to people who have been worried. Art 431 is for the
protection of debenture holders and art 493 is for ordinary creditors.
Art 431 reads as follow a company which has issued debentures may only reduce
its capital in proportion to the debentures redeemed. Where a reduction of capital is
necessary owing to losses, the amount of the legal reserve shall continue to be
calculated on the basis of the capital existing at the time of issue for so long as the
capital and the legal reserve are less than the value of the unredeemed debentures. Art
454 must be read with art 431 as follow art 454/1 not less than one twentieth of the net
profits shall be transferred each year to the legal reserve fund until it amounts to one-
fifth of the capital.

Art 454/2: Transfers shall be made to the legal reserve fund where it has fallen below
the amount fixed in sub-art. (1).

Art 493 talks about protection given to creditors of a company when the capital is
reduced. Art 493: Any creditor holding rights prior to the publication in the official
commercial gazette under Art. 485 may, where the reduction of capital is in an amount
exceeding 10%, object to the resolution within three months from such publication.

Art 493/2: The court may disallow such objection or order the company to pay the
claimant or to provide adequate guarantees for payment.

Art 493/3: No reduction of capital may be effected until the period specified in sub-art.
(1) Has expired.
The creditors cannot object the reduction of capital even the reduction not motivated
by loss as debenture holders. They can only object when the reduction is more than 10%
of the capital of the company.

The point is ordinary creditors are afforded less protection that than debenture holders
when a company reduces its capital. The guarantee and protection that the law gives to
ordinary creditors also applies to debenture holders.

The other advantage of debenture holders is that debenture holders of a certain issue
are by law conferred legal personality so that they protect their right in being together
under art 435. Debenture holders may agents under art 442. Art 442/1 Debenture
holders may be represented by one or more agents who shall be nominated or removed
by a general meeting of debenture holders having the quorum specified in Art. 439 (1)
and (3) and a majority as specified in Art. 440 (1).

Art 443: Unless otherwise provided by the general meeting of debenture holders, agents
of the debenture holders may do all things necessary in the interest of the debenture
holders, and in particular accept and preserve securities guaranteeing the loan. They
shall represent the debenture holders in all legal proceedings. They may take part in
shareholders' general meetings. They shall be present at the drawing of debentures for
redemption.

So, debt financing become possible. As result of the confidence that the people would
develop oin to this system which gives extra protection to debenture holders.