The Protection Of A Subsidiary Company’s Creditors Within Corporate Groups Under Ethiopian Laws

Abstract

Traditionally, there were no legislations that provide remedy to creditors whose money is involved in a company that fails. However, the general understanding in most jurisdictions today is that a well-designed company law should, among other things, realize the objective of striking a balance between the competing interest of shareholders and creditors. The matter of creditor protection in corporate groupings is more serious than the protection of creditors in single companies. The application of separate entity and limited liability principles limit the liability of the parent company for the debts of its subsidiary to the amount of its shareholding in the subsidiary, even though in the commercial reality corporate groups are designed for the interests of the group as a whole. The Ethiopian Commercial Code as a principal law governing companies lays down some rules on the protection of corporate creditors in single companies stating, inter alia, the rules on mandatory disclosure, capital maintenance, and more importantly on the insolvency of the companies. This study with the objective of critically analyzing the legal frameworks on the protection of a subsidiary company’s creditors in corporate groups under the Ethiopian laws has addressed the questions whether, an a creditor of subsidiary company pursue the assets of a corporate parent to satisfy its claim when a subsidiary company is unable to satisfy a creditor's claim out of its own assets, how should the parent company that has provided loans to its subsidiary be treated when the subsidiary happens to lack enough assets to satisfy its creditors, what are the mechanisms adopted under the RCC for the protection of creditors of a subsidiary company in corporate groups and are those mechanisms adequate when seen in line with practices in notable jurisdictions by utilizing a doctrinal research that mainly focused on analyzing legal instruments, concepts, theories, and principles governing the topic embodied under the RCC and other relevant proclamations and regulations The main findings of the research were: the existing Ethiopian laws provide protections to the creditors of a controlled company in a corporate group by prescribing the rules that a parent company should refrain from abusing its control rights on a subsidiary company, prohibition of cross holdings, the duty to have a consolidated account and providing the duties of a parent company while acting as a majority shareholder and director of a subsidiary company. Hence, the violation of these rules by a parent company in the course of exercising control and supervision on a subsidiary company potentially results in the liability of a parent company to the creditors of a subsidiary company who fail to satisfy their claims by the assets of a subsidiary company.