The aim of this study is to critically analyze the roles and responsibilities of BoDs of SCs as contained in RCC and Banks’ Corporate Governance vis-à-vis the Principles that are included as in OECD’s Principles, which are accepted as an international best practice to be emulated. The study has utilized a qualitative research approach and exploratory research design. The theoretical and empirical reviews of the pertinent literature, as well as the interview conducted, have revealed that RCC has gone leaps and bounds in embodying what is expected by the sixth principle of OECD.
Yet, there are still observable lacunae like failing to require ethical standards from BoDs, failing to mandate BoDs to decide on remuneration issues, and failing to put a requirement in place that ensures disclosure and communication mechanism. All of these and other deficiencies of RCC relating to corporate governance call for the promulgation of a Code of Corporate Governance by the Ethiopian Council of Ministers that obliges all financial and non-financial SCs and a Directive by MoTRI that ensures the effective implementation of the Regulation to be passed by the Council of Ministers.
*This article is written by Million Alemu Seboka, who is currently a Legal Consultant and Attorney-at-Law. He holds an LLB, from the Law School of Addis Ababa University (1997) and BSc in Economics from the Department of Business and Economics of Addis Ababa University (2006). This extract is taken from the thesis submitted by him to the Addis Ababa University for the partial fulfillment of his Master of Arts in Business Leadership (in June 2022). The full content of this extract can be accessed from the below attachment. The thesis was done under the capable tutelage of Dr. Mengistu Bogale. You can contact the writer via his email: million.alemu@millionlegalservices.com.
The Value Added Tax Proclamation No. 285/2002 (as amended by Proclamation No. 609/2008) is further amended by Proclamation No. 1157/2019, which came in to effect as of August 13th 2019. The changes introduced by this amendment, which is enclosed hereunder, are as follows. Article 2 (1) of the amendment has repealed and replaced the definition that was used by Article 2(1) of Proclamation for “accounting period”. Accordingly, “accounting period” is defined into two categories: “in the case of taxpayers whose turnover in any 12 (twelve) months is Birr 70,000,000 (seventy thousand) and over, the accounting period will be every month; while in case of taxpayers whose turnover in any 12 (twelve) months is less than Birr 70,000,000 (seventy thousand), the accounting period will be every 3 (three) months”; in both instances the month of Nehasse and Pagumen are aggregated and treated as one calendar month.
As per Article 2 (4) of this amendment the Ethiopian Revenues and Customs Authority is renamed as the Ministry of Revenue, with the view of reflecting the recent re-structuring of the Executive Organs of Ethiopia.
Article 2 (27) of the amendment has added new definition by defining “capital good” as “an asset with a life time of more than one year, used directly or indirectly in the manufacture of goods and in the rendition of services and includes building, vehicle, machinery, equipment and other similar tangible assets”.
Article 7 (5) of Proclamation No. 285/2002 (as amended by Proclamation No. 609/2008) is repealed and replaced by the following new provision: “in the case of transactions to which sub-article 1 (a) of this article is applicable; (a) the tax shall be withheld and paid to the Authority [Ministry of Revenue] by the buyer in accordance with the directive to be issued by the Ministry of Finance; (b) the tax withheld in accordance with this article shall be 50 percent of the tax payable by the buyer and the balance shall be paid to the seller.”
It should be made clear that sub-article 1 (a) of Article 7, which is referred to by this amendment provides that “subject to the provisions of this Proclamation and subject sub-article 2, there shall be levied and paid a tax, to be known as value added tax, at the rate of 15% of the value of (a) every taxable transaction by a registered person.” Hence, as per this new amendment the amount to be withheld and paid by the buyer is 50% of the tax payable and the remaining will be maintained by the seller.
Article 21 (6) of Proclamation No. 285/2002 (as amended by Proclamation No. 609/2008) is repealed and replaced by the following new provision: “(a) a person who registers or has to register for VAT shall be entitled to credit under this Article in the first accounting period in which the person is registered or has to register for VAT, on the amount paid on goods at hand on the date of registration and that are used or to be used for the taxable transaction, but only to the extent that the purchase or import of the goods occurred not more than six months before the date of registration. (b) a person whose 12 (twelve) months taxable transaction exceeds Birr 100,000,000 (one hundred million) shall be entitled to credit under this Article in the accounting period after the date of registration on the amount of the value added tax paid on capital goods at hand or purchased after the date of registration that is used or to be used for taxable transaction”.
As per the amendment of Article 21 (6) (a), only the amount of goods that are used or to be used for the taxable transaction can be deducted by the taxpayer; while as per Article 21 (6) (b) a tax payer is entitled for the tax credit only where the annual taxable transaction exceeds Birr 100,000,000 (one hundred million) and on the amount of VAT paid on capital goods at hand or purchased after the date of the registration that is used or to be used for taxable transaction.
However, as stated under Article 27 (7), which is added as new sub-article by this amendment, the taxpayer who benefited from the provision of Article 21 (6) (b) as stated herein is obliged to “refund the remaining amount of VAT paid on capital goods in excess of the amount credited in the accounting period within the coming one month.” Finally, the amendment has added provision of Article 27 (8) which entitles the Ministry of Revenue to “implement risk-based refund system for refund to be paid in accordance with this Article [which deals with VAT Refund].”
As per the power vested unto it by the provision of Article 55 (1) of the Investment Proclamation No. 1180/2020, the Council of Ministers of the Federal Democratic Republic of Ethiopia has issued Investment Regulation No. 474/2020 (hereinafter cited as the Investment Regulation), which came into effect as of September 2nd, 2020. The major changes that are introduced by the Investment Regulation are highlighted hereunder.
Enforcing the Negative Listing Approach of the Investment Proclamation: -The provision of Article 6 of the Investment Proclamation had mandated the Council of Ministers to specify areas of investment to be reserved for joint investment with the Government, for domestic investors, and joint investment with domestic investors. Accordingly, Article 3 of the Investment Regulation has listed out the Investment Areas Reserved for Joint Investment with the Government, while Article 4 enumerates the Investment Areas Reserved for Domestic Investors, and finally, Article 5 shows the Investment Areas Reserved for Joint Investment with Domestic Investors.
Article 6 of the Investment Regulation by stating that “investment areas that are not listed under Articles 3, 4 and 5 are open to foreign investors” has enforced the negative listing approach that was introduced by the Investment Proclamation.
Areas Allowed for Joint Investment with Government: - Article 3 of the Investment Regulation has listed five investment areas in which an investor (which includes both domestic and foreign) can jointly invest only with the Government of Ethiopia. These are manufacturing of weapons, ammunition, and explosives used as weapons or to make weapons; import and export of electrical energy, international air transport services; bus rapid transit, and postal services excluding courier services.
Areas Allowed Only for Domestic Investors: - Article 4 of the Investment Regulation has listed thirty-two investment areas that are exclusively reserved for domestic investors. Most of these exclusions were introduced by the partially repealed Investment Regulation No. 270/2012 (as amended) and by other specific laws. Some of the major investment areas that are open only for domestic investors are banking, insurance, wholesale trade of petroleum and petroleum products (excluding wholesale of electronic commerce), retail trade (excluding the retail of own products), import trade (excluding liquefied petroleum and bitumen) and export trade of raw coffee, khat, oilseeds, pulses, minerals, hide and skin, etc. Construction and drilling services below grade 1 and non-star designated national cuisine restaurant services are also reserved only for domestic investors. Similarly, maintenance and repair services, including aircraft maintenance and overhaul services as well as aircraft ground handling and related services are reserved only for domestic investors. Finally, lottery and sports betting as well as private employment agency services (excluding employment services for seafarers and other similar professionals that require high expertise and international experience and network) are reserved only for domestic investors.
Investment Areas Reserved for Joint Investment between Foreign and Domestic Investors: - Article 5 (1) of the Investment Regulation has listed seven investment areas that are open only for joint investment by foreign and domestic investors. Accordingly, freight forwarding and shipping agency services; domestic air transport services; cross-country public transport services using buses with a seating capacity of more than 45 passengers; urban mass transport service with large carrying capacity; advertisement and promotion services; audiovisual services, motion picture, and video recording, production, and distribution and accounting and auditing services are allowed for joint investment.
However, Article 5 (2) of the Investment Regulation has limited, a foreign investor who invests in the listed seven areas with a domestic investor not to hold more than 49% of the share capital of the enterprise, they are going to establish for such joint investment.
Application and Rejection Procedures: - the Investment Regulation gives the option of applying for the services of the Investment Commission by filling out a paper-based form as well as an online application form. The Investment Regulation also obliges applicants to present “a copy of bio-pages of valid passport”. The Investment Commission is obliged to accept or reject the applications submitted to it within 3 (three) working days from the date of application and in case of rejection the Commission is obliged to give in writing the reason for rejection. Besides, any transfer of investment permit or change to its content is required to be approved by the Investment Commission as per Article 10 (5) of the Investment Regulation.
Acquisition of Existing Enterprise or its Shares by Foreign Investor: - Article 11 has put in place a detailed legal requirement that needs to be observed where a foreign investor seeks to buy an existing enterprise or its shares. Accordingly, it is required to submit its application to the Investment Commission and the Commission will check whether the investment area of the existing enterprise is open for foreign investment or not, whether the minimum capital requirement is met by a foreign investor or not, and whether other legal requirements are fulfilled or not. The foreign investor wishing to buy the existing enterprise or its shares is also required adduce the necessary clearance from the Ministry of Trade and Industry and the Ministry of Revenues. Finally, the Commission is required to give its approval or rejection decision within (three) working days from the date of application and in case of approval, the Commission is required to replace the business license or register the share transfer right away.
Suspension and Revocation of Investment Permit: - Article 13 of the Investment Regulation requires the Investment Commission to give written notice for the holder of investment permit and the suspension will take effect only where the holder fails to remedy the defects that are outlined in the warning letter within 60 (sixty) working days from the date of the letter by the Investment Commission. Similarly, Article 14 of the Investment Regulation obliges the Investment Commission to give written notice stating the reasons for the impending revocation measure and it is only where the holder of the investment permit fails to respond to such written notice within 15 (fifteen) working days or where the response is found to be unsatisfactory, that the Investment Commission can revoke the investment permit.
Condition for Owning of Dwelling House by Foreign Investor: - as per Article 17 of the Investment Regulation a foreign investor or a foreign national wishing to be treated as a domestic investor may own a dwelling house in Ethiopia where it invests a minimum of USD 10,000,000 (ten million).
One-Stop-Services: - Article 18 (1) of the Investment Regulation mandates the Investment Commission to give the following one-stop-services: registration of articles and memorandum of association and their amendments; registration, amendment, replacement, and cancellation of trade names, business names, commercial registration certificate, business license, and work permit for expats; and handling of requests of investment incentives. Also, Article 18 (2) requires the pertinent government agencies to provide the following services by setting up their respective desks at the Investment Commission. These services are the issuance of tax identification number, residence permit, construction permit, and approval and issuance of a certificate for environmental impact assessment studies. Finally, the provision of Article 18 (3) of the Investment Regulation requires the appropriate investment organ to provide support to investors in respect of their request to obtain land, loan, water, electricity, telecom services for their investment and visa and residence permits for the investors and their family.
Training and Transfer of Knowledge and Skill to Ethiopian Employees: - Article 19 (1) of the Investment Regulation requires an investor employing foreigners on permanent positions to replace them by Ethiopians within stipulated time by providing the needed on-the-job training and by facilitating the transfer of knowledge. Article 19 (2) of the Investment Regulation states that within 3 (three) months from the date of issuance of business license, the investor is required to submit to the Investment Commission a statement that details the type and schedule of the training and thereafter a quarterly implementation report of the training program, that should show the details that are stated under Article 19 (3) of the Investment Regulation.
Partial Applicability of the Existing Investment Regulation: - Article 21 of the Investment Regulation has kept the partial applicability of the provisions of the Investment Areas Reserved for Domestic Investors Council of Ministers Regulation No. 270/2012 (as amended by Regulation No. 312/2014) relating to “investment incentives”. These provisions are Articles 5 to 15 of Regulation No. 270/2012 (as amended) that are provided under Part Two: Investment Incentives.
Please see the attached Investment Regulation for further details.
You can also get the details of the major changes that are introduced by the Investment Proclamation from the legal resources that are published unto this website by following the following links:
Proclamation No. 1150/2019 that has amended some of the provisions of the Commercial Registration and Business Licensing Proclamation No. 980/2016 ''the amended Proclamation'' has entered into force as of August 9th 2019.
Accordingly, the amendment has re-defined "business person" as "any person who professionally and for gain carries on any of the activities specified in the Commercial Code [of Ethiopia of 1960] and the Ethiopian Business Licensing Categories". The amendment has also mandated the Ministry of Trade and Industry [which is renamed by the amendment] to issue the Ethiopian Business Licensing Categories Directive, which will provide the list and types of the commercial activities for which business licenses will be issued in Ethiopia. These new clauses of the amendment by far widens the list and types of the 22 business activities of Article 5 of the Commercial Code of Ethiopia of 1960.
The amendment has also mandated the Ministry of Trade and Industry to put in place and follow up the implementation of systems that will make it possible for service recipients to get registration and licensing services without physically appearing at the registering offices by means of information and communication technology. Further the Ministry of Trade and Industry, is allowed to set up "one stop shop centers" that will authenticate memorandum of associations and articles of associations and any amendments and alterations on these documents as well as that issues Tax Identification Numbers.
The amendment has also eliminated the requirement of publication of company name in newspaper circulation and the fifteen days waiting ahead of business registration, which was mandatory as per the amended Proclamation. This requirement is replaced by a new web-based system "where sole proprietorship or business organizations are established or registration certificate are issued to any person under this Proclamation, the relevant authority shall be means of accessible information communication technology make public information relating to their registration and licensing".
The previous legal requirement of getting registered any alterations or amendments on commercial organization's registration within 60 (sixty) days from the date of their notarization is eliminated and replaces by provision that states "the registering office shall before registering ensure any alterations of or amendments to commercial registration are prepared in accordance with the provisions of the Commercial Code [of Ethiopia of 1960]."
One of the failures that used to lead to cancellation of commercial registration by the registering office under the amended Proclamation, i.e. failing by business person to obtain a business license within one year after being entered into the commercial registration is totally removed by this amendment. Similarly, the previous provision that requires business persons who are engaged in manufacturing or engineering or other similar investment commercial activities to produce sufficient and acceptable evidence that justifies the causes of incompletion of investment activities and for not obtaining business license renewed is removed. The mandatory provision of the amended Proclamation that leads into the cancellation of the commercial registration as result of the cancellation of the business license of the business person is also revoked.
In addition, as per this amendment, cancellation of registration of private limited company will be valid after one month from the date of the registering authority makes it public by means of accessible communication and information technology. However, where the cancellation involves sole proprietorships it will be valid from the date of such cancellation.
The previous by provisions of the amended Proclamation relating to renewal of business license, which requires private limited companies who have lost three fourth of their capital to raise their capital by half to get their business license is lowered so as they will raise their capital only by quarter to get their license renewed. As per this amendment, business persons are given the right of renewing business license within one year of its expiry by only paying Birr 20,000 (twenty thousand) as penalty. Furthermore, business license not renewed by effecting this penalty amount will be deemed as cancelled. However, this same business license can be re-issued to the previous holder in case where an application is submitted to the registering organ a year after the end of the period for the renewal of license.
Finally, grounds that causes the prevention of registration of trade names that are stated under Article 16 of the amended Proclamation are also made to be applicable for registration of "company names". The amendment has replaced the phrase "registration of trade name" as used in part three of the amended Proclamation with "registration of company and trade names". Although, the amendment under its clause 13 has stated that "Article[s] 14 and 15 of the [amended] Proclamation are deleted and replaced by the following new Article 14 and 15" it has only amended the titles of Articles 14 and 15 into "Registration of Company Names" and "Registration of Trade Names", respectively. It seems that the intention of the legislature is just to amend the titles of these provisions and not to totally delete these two provisions as no replacement is provided in the amendment.
23 September 2019 and further edited on 23 April 2020
This Final Part of the series of legal briefs which highlight the legal framework of Ethiopia vis-à-vis capital goods leasing business and its salient features, and it will deal with the remedies for default in repayment of rent and the lessee’s failure to return the goods, termination of lease agreements, investment incentives and other fiscal issues. Finally, it outlines some possible problems and their possible solutions.
II. Remedies for Default in Rent Payment and Repossession
1.In all the three types of the lease agreements, the lessee is obliged to pay the rent amount agreed on the due date and in the manner agreed. The lessee is also obliged to observe other obligations stated in the law and the lease agreement. Where the lessee defaults in the payment of the rent or commits other types of faults, which may breach the agreement, the lessor is expected to grant him a period of 30 (thirty) days for remedying the default so far as the default may be remedied (Articles 7(1) cum 7(3) of the Leasing Proclamation).
2.Where the lessee failed to remedy the default within 30 (thirty) days, the lessor may rescind the agreement, repossess the leased capital goods and claim damages. In case of defaults in payment of the rent, the lessor may recover the accrued unpaid rent together with interest and damages, whether the default is remedied or not (Articles 7(2) cum 7(3) of the Leasing Proclamation).
3.The lessor can request repossession of the leased goods immediately and claim damages, where the lessee rescinded the agreement and fails to deliver the goods as per the due notice given to him by the lessor. The lessor can also request repossession of the leased goods upon the expiry of the agreement, in case of financial and operating leasing agreements, and to claim related damages (Article 9(1) cum 9(3) of the Leasing Proclamation).
4.Where the lessee is not willing to return the leased capital goods to the lessor, MoTI is obliged “to take appropriate measures in order to ensure the return of the leased capital good to the lessor, where the lessee has the obligation to return the leased capital good to the lessor but fails to return it, and may order the police to facilitate the execution” (Article 18(3) of the Leasing Proclamation).
III. Termination of the Lease Agreement
5.The lease agreements concluded between the lessor and the lessee terminate, principally, upon the expiry of the agreed date. In case of operating lease, if the lessee remains in possession of the capital goods leased and the lessor does not claim its return, the agreement is deemed to have extended until one of the parties request for its termination. Unless it is provided in the lease agreement, the death or the incapacity of the lessee cannot be invoked as a reason for termination of the agreement (Article 12 of the Leasing Proclamation).
IV.Investment Incentives and other Fiscal Issues
6.The lessor and the suppliers of capital goods are exempted from customs duties on capital goods they import in accordance with the Investment laws and the Directives issued by the Investment Board, pursuant to the powers granted to it by the Investment laws (Articles 16(1) and 16 (2) of the Leasing Proclamation). Currently investment is regulated by the Investment Proclamation (Proclamation No.1180/2020), (herein after referred to as the Investment Proclamation) and per the Proclamation Investment Incentives and Investment Areas Reserved for Domestic Investors (Regulations No.270/2012), as amended by Regulations No. 312/2014, (herein after referred to as “Investment Regulations”) is enacted and it is operational.
7.As defined in Article 2(7) of the Investment Regulation, "Customs duty" includes indirect taxes levied on imported goods. The Investment Regulation further provides that an investor might be allowed to import free of any customs duty: capital goods, construction materials, vehicles and spare parts that are necessary to establish and operate a business. The Investment Board is to determine the specific manner and detail of such duty-free importation of capital goods and vehicles (Articles 13 cum 14 of the Investment Regulations).
8.In case of a financial lease or an operating lease, a depreciation allowance for capital goods shall be deductible from the rental income received by the lessor, as the legal owner of the leased capital goods. However, in the case of a hire purchase lease agreement the lessee should benefit from the depreciation allowance (Article 17(1) of the Leasing Proclamation).
9.The rent received by the lessor is treated as an income and it is treated as per the Ethiopian Income Tax Proclamation (Proclamation No. 979/2016) and the Income Tax Regulations (Regulations No. 410/2017). As stated in these laws, the amount of the income tax varies depending on the amount of rent earned by the lessor. Conversely, the rent paid by the lessee it to be treated as an operating expense of the lessee and is deductible from its income for the purpose of taxation (Article 17(2) cum 17(3) of the Leasing Proclamation).
10. The payments made to a lessor under capital goods finance are also exempted from Value Added Tax (VAT) as stated by Article 16(3) of the Leasing Proclamation.
V. Concluding Remarks and Potential Problems
11. As can be understood from the successive legal expositions of the Leasing Proclamation and the other laws, regulations and directives outlined herein above, the capital goods leasing business is well regulated. Capital goods finance is open for investment by foreigners, either by themselves or in collaboration with domestic investors as long as they fulfill the requirements enunciated in these successive legal briefs.
12. The lessor and the lessee are entitled to determine the details of their lease agreement, freely and mutually, based on their specific need and wish. Such agreement is to be registered and enforced by MoTI.
13. MoTI is even empowered to order the police to assist the lessor to reclaim the capital goods which the lessor has leased to the lessee. Furthermore, MoTI and NBE are empowered to issue directives required for the implementation of the Leasing Proclamation. MUDC is empowered to register the ownership right which persons, including lessors, have over construction machinery and equipment.
14. One of the possible problems that a lessor might face is failure of the lessee not to return the leased capital good as per their agreement. In such a case, MoTI is authorized to take appropriate actions, including ordering the police, to ensure that the good is returned to its lawful owner, i.e. the lessor. Due to the possible awareness problem of MoTI and the Police, the effectiveness of this provision of the law might be questionable.
15. With this problem in mind, it is important to train the concerned personnel of NBE, MoTI, MUDC, the Police and other stakeholders to discharge their respective duties. It is also important to urge these government organs to enact further detailed directive that facilities the implementation of the Leasing Proclamation and the Proclamation No. 177/1999 as per the power vested in them by the respective Proclamations.
This Final Part is follow-up of the second part of the legal brief that deals with the assessment of the Proclamation on Movable Property Security Right. This Part deals with rights and obligations of the parties to the security right and the third-party obligors.
1. Rights and Obligations of the Parties to Security Rights and the Third-party Obligors
A grantor or secured creditor who is in possession of the collateral which is subject to the security right are required to “exercise reasonable care to preserve the asset” [Article 66]. Upon termination of the security right, the secured creditor is required to return the collateral to the grantor, register the cancellation notice and release the collateral from its control [Article 67].
As per Article 68 a secured creditor is entitled for the reimbursement by the grantor of any reasonable expenses the creditor has incurred for the preservation of the collateralized asset, including the cost of insurance, payment of taxes and other charges. The secured creditor by reasonably using the collateral can apply the sum generated from it for the payment of the secured obligation. The secured creditor has also the right to inspect the collateral in the possession of the grantor or another person.
The grantor is entitled to request from the secured creditor for information in relation to the secured obligation or the secured collateral and the secured creditor is required to provide the requested information within 5 (five) working days [Article 69].
2. Security Rights over Corporeal Assets
As defined by Article 2 (10) corporeal assets include "money, negotiable instrument and certificated securities". In case of money, Article 63 provides that a transferee obtains possession of the money that is subject to the security right free from such right, unless the transferee has knowledge that such transfer violates the right of the secured creditor under the security agreement.
As stated under Article 61 (1), “a security right in a negotiable instrument that is made effective against third parties by possession of the instrument, has priority right over a security right in the instrument that is made effective against third parties by registration of a notice in the Collateral Registry”. As per Article 61 (2) “a buyer or other consensual transferee of an encumbered negotiable instrument acquires its right free of a security right that is made effective against third parties by registration of a notice in the Collateral Registry, if the buyer or other consensual transferee qualifies as a holder in due course under the Commercial Code or where the buyer or other consensual transferee takes possession of the negotiable instrument and gives value without knowledge that the sale or other transfer is in violation of the right of the secured creditor under the security Agreement”. It should be noted that negotiable instruments include "a bill of exchange, promissory notes and other instruments issued to bearer, specified name or order and excludes cheques" [Article 2 (29)].
As per Article 64 (1) a security right in corporeal asset made effective against third parties by possession of the negotiable document that covers the asset, has priority over a competing security right made effective against third parties by other method(s). A transferee of an encumbered negotiable document obtains possession of the document and gives value without knowledge that the sale or other transfer is in violation of the right of the secured creditor under the security agreement, acquires its right free of a security right in the document and the corporeal assets covered thereby that is made effective against third parties [Article 64 (2)]. Negotiable documents include "a bill of lading, way bill, voucher or a warehouse receipt for goods warehoused that represents a right to delivery of corporeal assets and may be transferred by negotiation" [Article 2 (28)].
Article 65 (1) provides that a security right in certificated securities made effective against third parties by the secured creditor’s possession of the certificate has priority over a competing security right created by the same grantor in the same securities made effective against third parties by registration of a notice in the Collateral Registry. Certificated securities are "documents evidencing ownership of share or bond registered in the name of the holder or issued to a bearer" [Article 2 (4)].
As per Article 65 (2) a security right in electronic securities made effective against third parties by a notation of the security right or registration of the name of the secured creditor as the holder of the securities in the books maintained for that purpose by or on behalf of the issuer has priority over security right in the same securities made effective against third parties by any other method.
In case where the security right over the electronic securities is made effective against third parties by the conclusion of a control agreement, then such right has priority over a security right in the same securities made effective against third parties by registration of a notice in the Collateral Registry and in case where two or more control agreements are concluded on the same electronic securities the priorities will be determined based on “the time of conclusion of the control agreements” [Article 65(3) and 65 (4)]. Electronic securities are "shares and bonds registered and transferable electronically but not represented by a certificate" [Article 2 (15)].
A transferee of securities who takes possession of the certificated security or acquires right in an electronic security and give value without knowledge that the sale or other transfer is in violation of the right of the secured creditor under the security agreement, acquires its right free of such security right [Article 65 (5)].
3. Security Rights over Receivables
At the outset it is imperative to see the definition of receivables as provided by the Proclamation. Receivable is defined as “a right to payment of a monetary obligation, excluding a right to payment evidenced by a negotiable instrument, a right to payment of funds credited to a deposit account and a right to payment under security” [Article 2 (37)].
In relation to the security rights created in receivables detailed provisions are provided under Articles 70 to 74. As per these provisions, the creation of security rights in receivables does not affect the rights and obligations of the debtor of the receivable, including the payment terms contained in the contract that gave rise to the receivable. The right over the receivable will have legal effect where the same is notified to the debtor of the receivable by the secured creditor. The debtor can request from the secured creditor reasonable period of time and adequate proof of its security right so as the debtor will be able to discharges its obligations to the secured creditor.
Unless he agrees otherwise in writing with the secured creditor, the debtor of receivable can raise all defenses or set off right that arises from the contract that gave rise to such receivable. However, the debtor cannot agree to waive defenses arising from “fraudulent acts on the part of the secured creditor or based on the incapacity of the debtor of the receivable.”
Any modifications to the original contract that gave rise to the receivables will have effect against the secured creditor where such modification is made before the secured creditor serves notice to the debtor of the receivable. However, the debtor of such receivable is not entitled to recover from the secured creditor or the grantor a sum paid by the debtor, even where the grantor or the assignor fails to perform the contract that gave rise to the receivable.
4. Security Rights over Funds Credited to Deposit Accounts
As per Article 62 (1), a security right in a right to payment of funds credited to a deposit account that is made effective against third parties by the secured creditor becoming the accountholder has priority over a competing security right that is made effective against third parties by any other method(s). In case where the secured creditor is a financial institution, it will have priority over a competing security right made effective against third parties by any method other than by the secured creditor becoming the accountholder [Article 62 (2)].
A security right in a right to payment of funds credited to a deposit account that is made effective against third parties by control agreement has priority over a competing security right except where the security right is held by the financial institution or where the security right is made effective against third parties by the secured creditor that has become the accountholder. In case where there are two or more control agreements are concluded on payment of funds credited to a deposit account, the order of the priority among competing security right will be determined based on the time of the conclusion of the control agreement [Article 62 (3) and 63 (4)].
A financial institution’s right to set-off obligations owed to it by the grantor, has priority as against a security right in the right to payment of funds credited to the deposit account. However, where the security right is made effective against third parties by the secured creditor becoming accountholder, then it will have priority over the financial institution’s right to set-off [Article 62 (5)].
A transferee of funds from a deposit account pursuant to a transfer initiated or authorized by the grantor acquires its right free of a security right in the right to payment of funds credited to the deposit account, except where the transferee has knowledge that the transfer violates the right of the secured creditor under the security agreement [Article 62 (6)].
As per Article 75, the security right that is created against a right to payment of funds credited to a deposit account does not affect the right and obligation of the financial institutions authorized to receive deposits from the public with which that deposit account is maintained, without the consent of the financial institutions. Such institution will not be required to provide any information about that deposit account to third parties and the right of the financial institutions for set-off against such account also remains unaffected.
Roles and Responsibilities of BoDs of Share Companies_by Million Alemu_June 2022