Sources and Historical Development of Ethiopian Bankruptcy Law (Mitiku Mada and Alemayehu Tilahun) Bankcy Law teaching Materialrupt
Elders witness that in Ethiopia the ancient society experienced similar practices like that of Romans. In the earlier times failure to perform promises (i.e. failure to pay back loans) which were given in monetary form or in exchange of goods for goods or bartering entails punishment. The punishment imposed on defaulting persons was either imprisonment in the home of the creditor or enslavement. This trend gradually abolished during the reign of His Imperial Majesty Haile Sellasie. Before Hailesellasie's regime, Menilik II officially prohibited slavery but it hiddenly existed until mid of the 19th C.
Like all other legislations, commercial legislations probably began to play important role in Ethiopia under Menilik II and developed particularly during the reign as Regent and Emperor of His Imperial Majesty Haile Sellasie I. Scholars witnessed that there was no complete record and documentation as what was promulgated and what the contents of the legislation convey. Together with other proclamations there appears to have been bankruptcy law, which was promulgated in 1933 inspired by the French law. It was said that the said law was published in French and Amharic languages which holds about 96 Articles. The French text beers the date of "12 July 1933" but the printed Amharic text leaves the space for the date blank.M. Marein noted that there was no unanimity of opinion as to whether the so called Bankruptcy law was draft only or whether it was ever promulgated. One of the drafters of the Commercial Code, J. Escara in his avante project 'de code de commerce' stated that it was only draft law. This is clear indicator of the fact that there was a law dealing with bankruptcy before the coming into existence of the Commercial Code, which is currently in force.
The second half of the 19th C. in Africa as a whole and in Ethiopia particularly had unforgettable history with marked change in the laws. It was during this time that the existing laws including the Commercial Code came to existence. With regard to its source the 1960 Commercial Code is somewhat eclectic. The then drafters noted that:
all traders buy in order to resell, all enter into contract whether of sale, agency, or carriage, and all use forms of banking credits. Bill of exchange, share companies, private limited companies, bankruptcy and other collective procedures of liquidating the goods of a trader are all institutions known almost every where. Thus, to use comparative law as an element of legislative policy is less dangerous in commercial matters than in the domain of pure civil law
However, there are indefinable differences in the continental law approach and common law approach in areas like persons subject to bankruptcy, number and nature of procedure, effect of bankruptcy on debtor, judges’ role in the proceeding, freedom left to creditors, intervention of administrative authority and defining circumstance under which a person could be declared bankrupt.
J. Escara also noted in his avante project and in the discussions before the sub-commission, that some of the differences are negligible. To exemplify, whether the circumstance under which a person can be declared bankrupt are defined in generic terms or enumerative list which does not create difference. This is because the general definition itself incorporates the limitative enumerative list. He conducted delicate selection of principles from different sources. Hence, in practice the Latin and Germanic institutions are the sources of the continental principles of the Ethiopian Commercial Code. But the existence of Anglo-American commercial practice and on the other hand, the excellent solutions furnished on more than one point by the written commercial law of England and the United States has also contributed to the Ethiopian law. Hence, the source and development of Ethiopian bankruptcy law has similar history with many other countries and it cannot be traced to a single country as a source or limited legal family as the only source.
There are two modes for the transfer of a negotiable instrument. The first one is through Assignment and the second one is through negotiation.
Transfer by Assignment
Normally, a bilateral contract between two parties produces effect only as between the two parties. However, one of the parties may freely transfer the rights arising out of the contract to another 3rd party, who is an outsider to the contract. Such mode of transferring rights is known as Assignment. Shortly stated assignment is the transfer of rights to a third person. The party making the assignment is the assignor, where as the party receiving the assignment is the assignee.
Art 1962 of the civil code expressly allows the creditor to assign his right to a third party even without the consent of the debtor. Transfer by Assignment gives the assignee only those rights the assignor possesses. In other words the assignee takes only those rights that the assignor originally had. The fact that no better title is transferred through assignment is what basically distinguishes assignment from negotiation. No transfer of better title also implies that the assignee’s rights are subject to defenses that the debtor had against the assignor (Art 1966 civil code)
Transfer by negotiation
The commercial code apart from providing the rules of negotiation does not define the term negotiation. According to the uniform commercial code negotiation is the transfer of an instrument in such form that the transferee (the person to whom the instrument is transferred) becomes a holder. Similarly according to Indian law, when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder there of, the instrument is said to be negotiated.
A person is said to be a holder if he is in possession of an instrument (1) that is payable to bearer or (2) that is made payable to an identified person and he is that identified person. For example when Haramaya Unievsrity issues and delivers a cheque to his employee, payable to “Almaz Tilahun or order”, Almaz is the holder of the cheque because she is in possession of an instrument payable to an identified person (Almaz Tilahun) and she is that person. Almaz may then purchase a TV set from a seller, and use the cheque as a mode of payment by endorsing (write on the back of the cheque as “pay to seller X” and sign) and deliver it to the seller X. This means she has negotiated the cheque to seller X. Seller X is now a holder of the cheque, because he is in possession of a cheque payable to an identified person(seller X) and he is that identified person. On the other hand, Almaz while endorsing may simply write her name on the back of the cheque (without indicating the transferee) and deliver it to seller X. still Almaz has negotiated the cheque, and seller X is the holder because he is in possession of a cheque payable to bearer. (A simple signature by the payee converts the instrument from order to Bearer.)
If the cheque was initially issued as Bearer or is converted from order to bearer by endorsement, it could simply be transferred by delivery. Assume Almaz delivers a bearer cheque to Hana, Hana now becomes a holder because she is in possession of an instrument payable to Bearer.
As a principle a transfer by negotiation creates a holder who, at the very least, receives the rights of the previous possessor. Unlike an assignment, a transfer by negotiation can make it possible for a holder to receive more rights in the instrument than the prior possessor had. A holder who receives greater rights is known as a holder in due course.
Generally, there are two known methods of negotiating an instrument so that the receiver becomes a holder. The method used depends on whether the instrument is order instrument or bearer instrument. The special part of the code dealing with commercial instruments provides only these two methods of negotiation. Contrary to this, the general part classifies negotiable instruments as Bearer, order and in a specified name (Art 719). As a result a third method of negotiation is provided for instrument in a specified name. (Art 722 & 723.) For two reasons, it can be concluded that, the method of transfer of “in a specified name instrument” is not applicable to commercial instruments.
Firstly, the law expressly considers Bills of exchange, promissory note and cheque issued in a specified name without the words “or to order” as order instruments. Then it clearly stipulates that such instruments will be negotiated though the same rules of negotiation applicable to any other order instruments (Art 746(2), 825(1)(a),833(1) secondly, The requirement of “registration of instrument” referred to in Art, 723, can not in any way be applicable to commercial instruments, which by their very nature do not need any registration for their transfer. . Art 723 has not been mentioned in the special part dealing with commercial instrument making the general provisions inapplicable to the special provisions. For this reasons the applicability of article 722 & 723 should be limited to only one form of negotiable instruments i.e. transferable securities ( see also article 341 which governs transfer of shares, which is a typical form of transferable securities.)
The cheque system has now become one of the wheels in the machinery of business. But, at times an open cheque payable across a bank's counter lends itself to fraud and forgery by unscrupulous persons causing loss either to the bank or to the customer. With a view to avoiding such risk and protecting the owner of the cheque, the system of crossing of cheques has been introduced where by the holder of an open cheque directs the paying bank to carryout his mandate in particular way.
Thus, a crossed cheque is one on the face of which two transverse parallel lines have been drawn with or without certain words in them (Look at Art, 863 sub article 2).
Classification of crossings: Crossings are of two types: General crossing and Special crossing.
General crossing: It is a crossing which consists of two transverse parallel lines across the face of the cheque. In between the line certain additional words like "banker" or some equivalent term may be written or it may be left without any additional word. (Look at sub article 3 of art 863 of the commercial code. )
Special crossing: when inside the two transverse parallel lines across the face of a cheque, the name of a particular bank is written, it is known as special crossing.
Effects of Crossing: The effect of crossing of cheque is that the payment of this cheque can be made by the drawee banker to some other banker as agent of the holder or to the customer of the drawee bank, and the payee or the holder there of cannot obtain case from the drawee bank. When a cheque is crossed, no one can case it at the counter of the drawee bank, except a customer of the drawee bank or another bank. The amount can be either deposited with the drawee bank for the credit of his customer's account, or have the drawee bank pay its proceeds to another bank for the credit of his account which the holder has with such other bank through the local clearing house.
Article 864 deals with the effects of generally and specially crossed cheques. The effect of general crossing is that payment of such a cheque can be obtained through a bank only or the customer of a drawee bank, and the payee or the holder cannot get payment in cash at the counter of the drawee bank. (Look at sub-article 1, 864). If the payee or holder of a generally crossed cheque is not a customer of the drawee bank or does not have a bank account in any bank, he must hand it over to a friend or relation who has a bank account will be credited with the amount of the cheque.
The effect of a special crossing, on the other hand, is that the cheque can be paid by the drawee bank only to the named banker or, where the latter (the named bank) is the drawee, to a customer of the drawee. The holder cannot get payment through any and every bank, but only through the bank whose name is mentioned in the crossing or where the named banker is the drawee, through the customer of the drawee bank. Thus, for purpose of receiving payment in such a cheque, the holder either must have an account with the named bank, or must negotiate it to some one who already has such an account. (Look at sub-article 2, Art 864)
A cheque can be crossed by the drawer or by any subsequent (sub-article 1 of art. 863).No restriction is imposed here. Again, a general crossing can be turned into a special crossing, but a special crossing may not be converted into a general crossing (sub-art-4, Art. 863).
Purpose of crossing of cheques: Crossing is mainly used to safeguard the cheque against theft, fraud and other tampering. Naturally, a crossed cheque becomes much safer than an open or uncrossed cheque. It can be easily traced into whose hands the money has been paid. Even if it is lost by the payee, he dose not stand to lose anything because the finger can not collect the amount at the counter unless he has an account in the drawee bank that was named in the special crossing.
Article 865 introduces an additional purpose of crossing. The drawer or holder of a cheque may prohibit negotiability of the cheque by inserting in between the line words "not negotiable". The effect of inserting such word is that the holder may not negotiate the cheque. Where a person takes a crossed cheque which bears on it words "not negotiable" he shall not have and shall not be capable of giving a better title to another person than that which the whom he took it had (Sub art 2,Art. 865)
Liability of the banker (Art. 866):- A banker who pays a cheque crossed generally otherwise than to a banker or the drawee bank, or a cheque crossed specially otherwise than to the banker whose name is mentioned, or to the customer of the drawee bank, (where the drawee bank is the named bank) shall be liable for the resulting damage up to the amount of the cheque .
In order to fully understand the basic difference between cheque and bills of exchange, it is good to start with a formal definition of each instrument including some of the basic characteristics.
Bill of exchange
A bill exchange (called ‘draft’ in some jurisdictions) can be defined as “any instrument drawn on drawee that orders the drawee to pay a certain sum of money usually to a third party (the payee) on demand or at a definite future time “
Section 5 of the Indian Negotiable instrument act of 1881 also defines it similarly in the following way:
“A Bill of exchange is an instrument in writing containing an unconditional order, signed by maker, directing a certain person to pay sum of money only to, or to the order of a certain person or to the bearer of the instrument” Black’s law dictionary also defines a Bill of exchange as “An unconditional written order signed by one person (the Drawer) directing another person (the drawee or payer) to pay a certain sum of money on demand or at a definite time to third person (the payee) or order.”
A chaque (in America written as ‘check’) is a bill of exchange drawn by a drawer ordering the drawee bank or financial institution to pay a certain amount of money to the holder on demand. A similar definition is given in section 6 of the Indian negotiable instruments act of 1881 which reads;
“A cheque is a bill if exchange drawn upon a specified banker and payable on demand.”
Lastly black’s law dictionary defines it as “A bill of exchange signed by the maker or drawer drawn on a bank, payable on demand, and unlimited in negotiability”
Even though the commercial code does not give a formal definition of a cheque it could be defined as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise on demand.
From the above definitions we could list the following points as the basic characteristics of cheque.
A) A cheque is a bill of exchange
B) It is always drawn up on a bank, (Art 829 of the commercial code)
C) It is always payable on demand (Art 854 of the commercial code)
A cheque is a bill of exchange because in both cases the drawer gives a signed, unconditional order to the drawee to pay a certain sum of money to a certain person or to the order of that person or to the bearer of the instrument.
Difference between cheque and bills of exchange
The points of difference between a cheque and a bill of exchange are summarized hereunder:-
(1) A cheque is always drawn on a bank whereas a bill of exchange can be drawn on any other person.
A drawee (i.e. the one who who receives order from the drawer and makes payment to the lawful beneficiary or holder) of a bank is always a bank or a financial institution. The term financial institution may for instance refer to micro finance institutions. Hence, any transactions using cheque as a medium of payment could not be conceived of without the involvement of a banker as a drawee. On the other hand, business could have its own version of a cheque without the need for banks as a drawee. Any company and even an individual could act as a drwaee in case of bills of exchange. This has its own advantage given its effect in making business transaction very simple.
(2) A cheque is always payable on demand, where as a bill of exchange may be payable on demand or at a definition period of time in the future. Any commercial instrument with specifying the time of payment is void. Bills of exchange and cheques are used mainly as a mode of payement for an underlying business transaction. Hence, any one who receives any of these instruments has to be sure as to when he will be able to present and demand payment from the drawee. In case of cheque, the time of payement is always on demand. This is to mean that the holder a cheque is entitled to demand payment as soon as he the instrument fro the drawer or another holder. He need not wait any time to get paid. That is one of the prime advantages of a cheque.
Bills of exchange could be paid on demand or it could be paid at a definite future time depending on how the drawer has written the time clause. So just like cheque it could be paid on demand. So what is the difference then? The difference is that cheque has only one time of payment i.e. on demand. Unlike bills of exchange, it could not have a different time of payment other than on demand.
(3) A cheque can be crossed, but a bill of exchange can not be crossed.
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