Capital Maintenance Rules Vis- A- Vis Creditors Protection In Non- Financial Share Companies Under The Revised Commercial Code Of Ethiopia:- A Critical Analysis

Abstract

Capital maintenance rules is the guidelines governing how a company maintains its capital base. It is rules that restrict the freedom of the company controller to move assets out of the company for the benefit of shareholder and to the detriment of creditors. The main objectives of capital maintenance rules are aim to protect creditors and other company stakeholders by preventing directors from paying dividends or returning capital to members other than in limited circumstances. Revised Commercial Code of Ethiopia imposes restrictions on the shareholders ability to withdraw capital from the company to maintain capital and provide other rules governing company’s capital maintenance. Those rules are; divided distribution, the redemption of shares rule, cross-holding as between companies, valuation of in-kind contribution, capital increment and company capital reduction. Restricting such return of capital help companies to be protected from asset-strapping take-over, which prohibits companies from acts that bring leveraged buy-outs risk against creditors. This study aims to critically explore how the capital maintenance rules contained under the revised Commercial Code helps in effectively protecting company creditors’ in non-financial share companies. This paper assessed significance of capital maintenance rules for creditors’ protection in non-financial share companies under Ethiopian revised commercial code. The study employed qualitative research method. As a result, relevant law analyzed with proper literatures. All rules of capital maintenance recognized under the revised commercial code subject to the study have legal gaps. The revised commercial code of Ethiopia generally governed capital maintenance rules. The absence of clear-cut legal provision have affected the creditors’ protection for in non-financial share companies. Therefore, the provision of revised commercial code of Ethiopia governing capital maintenance rules for creditors’ protection in non-financial share companies should be addressed the gaps and analyzed. To solve such legal gaps and problems the remedy identified by the research was it needs to have strong legislation which to govern capital maintenance rules in relation to creditors protection in non-financial share companies