Sunday, August 30, 2020

Founders of share companies under the Ethiopian share company law: legal analysis

Serkalem Eshetie Adinew

Haramaya Law Review Vol. 5 No. 1 (2016)


Abstract

This article explores the Commercial Code and other laws of Ethiopia regarding founders – who they are, liabilities and benefits - who are also called ‘promoters’ by many other company laws. To some extent, it also looks into the business practice based on documents like memorandum of associations, articles of association and prospectuses

ON FORMATION OF A SHARE COMPANY IN ETHIOPIA

Seyoum Yohannes Tesfay

 Journal of Ethiopian LawVolume 22, Issue 1, Jul 2008, p. 102 - 127

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Introduction 

A share company does not spring into being spontaneously. It rather results from planning and other preliminary arrangements by founders. These promotional activities of founders may be classified into three categories. The first is discovery, which consists of finding the business idea to be exploited. Investigation, the second category, involves research or analysis to determine whether or not the proposed business idea is economically feasible. The third category is assembly, which includes the dual process of bringing together the necessary personnel, property and money to set the business in motion and involves the secondary details of completing the formalities requisite to set up the company.

Thursday, August 27, 2020

አክስዮን በመያዣነት ስለሚሰጥበት ሁኔታ-ሰ/መ/ቁ. 39191

 

የሰ/መ/ቁ. 39191

ሐምሌ 2 ቀን 2001 ዓ.ም

 ዳኞች፡- ተገኔ ጌታነህ

       መንበረፀሐይ ታደሰ

       ዓብዱልቃድር መሐመድ

       ፀጋዬ አስማማው

       ዓሊ መሐመድ

አመልካች፡- አቶ አበባው ደስታ ጠበቃ አቶ አምሣለ ፀሐይ ቀረቡ

ተጠሪ፡- የኢትዮጵያ ንግድ ባንክ ነገረፈጅ አቶ ደረጀ ባዩ ቀረቡ

      መዝገቡን መርምረን የሚከተለውን ፍርድ ሰጥተናል፡፡

Types of Endorsement of commercial instruments under Ethiopian law

Types of Endorsement of commercial instruments under Ethiopian law

Generally, there are four categories of Endorsement blank, special, Qualified and restrictive.

Blank endorsement

This type of endorsement is an endorsement that names no specific payee, thus making the instrument payable to the bearer and negotiable by delivery only. It consists of a mere signature

Meaning, form and effects of Endorsement of commercial instruments under Ethiopian law

 Meaning, form and effects of  Endorsement of commercial instruments under Ethiopian law

If an instrument is an order instrument the payee or the holder is required to endorse it for a valid negotiation. Endorsement is the placing of a signature, sometimes with additional notation, on the back of a negotiable instrument to transfer or guarantee the instrument or to acknowledge payment.

Negotiating order, bearer and instruments in a specified name under Ethiopian law of negotiable instruments

 Negotiating order, bearer and instruments in a specified name under Ethiopian law of negotiable instruments

Negotiating order instruments

Only the special provisions of the code dealing with commercial instruments indicate what constitutes an order instrument. Accordingly a commercial instrument becomes an order instrument if it is;

Transfer of Negotiable Instruments through Negotiation

 Transfer of Negotiable Instruments through 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.

Transfer of Negotiable Instruments by Assignment

 Transfer of Negotiable Instruments 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.

Wednesday, August 26, 2020

የባንክ ብድር- የአንድነትና ነጠላ ዋስትና -ሰ.መ.ቁ 44088

 

      የሰ.መ.ቁ 44088

ሐምሌ 27 ቀን 2002 ዓ.ም

 

 

ዳኞች፣ ሐጐስ ወልዱ

                                  ሂሩት መለሰ

                                  ብርሃኑ አመነው 

    አልማው ወሌ

    ዓሊ መሐመድ 

 

 

አመልካች፣  አጋር ማይክሮ ፋይናንስ አ/ማ እርገጤ መድበው ቀረበ

ተጠሪዎች፣  1. ፍቅሬ ሽብሩ

2.    አንተነህ ታደለ

3.    አስፋው ገ/ስላሴ

4.    ፍቃዱ ነጋ

5.    እሸቱ ገ/ስላሴ  

 

መዝገቡን መርምረን የሚከተለውን  ፍርድ ሰጥተናል፡፡

የመያዣ ውል-ባንክ- ሰበር መ/ቁ 51001

 የሰበር መ/ቁ 51001

ጥር 26 ቀን 2002 ዓ.ም

 

ዳኞች፡- 1. ተገኔ ጌታነህ

       2. መንበረፀሐይ ታደሰ

       3. ሐጐስ ወልዱ

       4. ሂሩት መለሠ

       5. አልማው ወሌ

 

አመልካች፡- አቢሲኒያ ባንክ - መርአዊ ታደሰ ቀረቡ

ተጠሪ፡- ዘውዱ ነጋ - ከጠበቃው ደሳለኝ አለሙ ክብረት ጋር ቀረቡ

 

     መዝገቡን መርምረን የሚከተለውን ፍርድ ሰጥተናል፡፡

ፍ ር ድ

     በዚህ መዝገብ አከራካሪ ሆኖ የቀረበው ነጥብ ተጠሪ ንብረቴ ነው በማለት ክስ የመሠረቱበት ሰሊጥ አመልካች ከሌላ ሰው ጋር ባደረገው ስምምነት በመያዣ የያዘው የመያዣ ሠጪው ንብረት ነው ወይንስ የተጠሪው ንብረት የሚለው ነው፡፡ ክርክሩ ከፌዴራል ከፍተኛ ፍ/ቤት ሲጀመር ከሣሽ የነበረው ተጠሪ ሲሆን፣ ተከሳሽ ደግሞ ፐርፍ ኢንተርናሽናል ትሬዲንግ የሚባል ኩባንያ ነው፡፡ ተጠሪ ክስ ሊመሰርት የቻለው በአደራ ያስቀመጥኩትን 2257.064 ኩንታል ነጭ የሁመራ ሰልጥ ያልመለሰልኝ በመሆኑ በፍርድ ኃይል ተገዶ ይመልስልኝ በማለት ነው፡፡ ክሱን በመከተልም ሰሊጡ እንዲታገድ ጥያቄ በመቅረቡ ፍ/ቤቱ ሰሊጡ በሚገኝበት በናይል ቡና ላኪ ኃ/የተወሰነ የግል ማህበር መጋዘን እንዳለ ተከብሮ እንዲቆይ ትዕዛዝ ሰጥቷል፡፡ በሌላ በኩል ደግሞ ክርክሩ ከመወሰኑ በፊት ከሣሽና ተከሣሽ ጉዳዩን በእርቅ ጨርሰው ስለመጡ ይህንኑ ለፍ/ቤቱ አቅርበው በስምምነቱ መሠረት እንዲፈፀም ትዕዛዝ አሰጥተዋል፡፡ ቀደም ሲል ተሰጥቶ የነበረው የእግድ ትዕዛዝም ፍ/ቤቱ አንስቶአል፡፡ አመልካች ክርክሩ ውስጥ የገባው ከዚህ በኋላ ነው፡፡

COMMERCIAL CODE - BOOK IV NEGOTIABLE INSTRUMENTS AND BANKING TRANSACTIONS-TITLE III. BANKING TRANSACTIONS

 TITLE III. BANKING TRANSACTIONS


Chapter 1. Bank Deposits

Section 1. Deposit of funds

Art. 896. - Nature of the contract.
    The contract of deposit of funds renders the bank owner of the funds  deposited, irrespective of the mode of deposit. The bank may dispose of these funds respect of its professional activity, subject to their repayment  under the conditions provided in the contract:
    Provided that the bank shall not acquire the title to nor the right to dispose of coins or other individual monetary tokens in respect of which there is a provision that they shall be refunded in kind.

COMMERCIAL CODE - BOOK IV NEGOTIABLE INSTRUMENTS AND BANKING TRANSACTIONS-TITLE II. COMMERCIAL INSTRUMENTS-Chapter 4. Cheques

 Chapter 4. Cheques

Section 1. Drawing and form of a cheque

Art. 827. – Requirements.
A cheque shall contain:
a.    an unconditional order to pay a sum certain in money;
b.    the name of the person who is to pay (drawee);
c.    the place of payment;
d.    the date when and the place where the cheque is drawn;
e.    the signature of the person who draws the cheque (drawer).

COMMERCIAL CODE - BOOK IV NEGOTIABLE INSTRUMENTS AND BANKING TRANSACTIONS-TITLE II. COMMERCIAL INSTRUMENTS-Chapter 3. Promissory Notes

 Chapter 3. Promissory Notes

Art. 823. – Requirements.
A promissory note shall contain:
a.    the term “promissory note” inserted in the body of the instrument  and expressed in the language employed in drawing up the instrument ;
b.    an un conditional promise to pay a sum certain in money;
c.    the, time of payment;
d.    the place of payment;
e.    the name of the person, to whom or to !Whose order payment is to be  made or a statement that the note is payable to bearer;
f.    the date ,when and place where the note is issued;
g.    the signature of the person who issues the instrument (maker).

COMMERCIAL CODE - BOOK IV NEGOTIABLE INSTRUMENTS AND BANKING TRANSACTIONS-TITLE II. COMMERCIAL INSTRUMENTS-Chapter 2. Bills of Exchange

Chapter 2. Bills of Exchange


Section 1. Establishment and form of bills of exchange

Art. 735. - Requirements.
    A bill of exchange shall contain:
a.    the term "bill of exchange" inserted in the body of the instrument and expressed m the language employed in drawing up the instrument;
b.    an unconditional order to pay a sum certain in money;
c.    the name of the person who is to pay (drawee);
d.    the time of payment;
e.    the place of payment;
f.    the name of the person to whom or to whose order payment is to be made or an indication that it shall be payable to bearer;
g.    the date when and place where the bill is issued;
h.    the signature of the person who issues the bill (drewer).

COMMERCIAL CODE - BOOK IV NEGOTIABLE INSTRUMENTS AND BANKING TRANSACTIONS-TITLE II. COMMERCIAL INSTRUMENTS-Chapter 1. General Provisions

 TITLE II. COMMERCIAL INSTRUMENTS


Chapter 1. General Provisions

 

Art. 732. - Definitions.

1.    Commercial instruments are negotiable instruments setting out an entitlement consisting in the payment of a sum of money.
2.    Bills of exchange, promissory notes, cheques, travellers cheques and warehouse goods deposit certificates shall be deemed to be commercial instruments under this Code.
3.    'I1he provisions of Art. 2813-2824 of the Civil Code shall apply to warehouse goods deposit certificates.

Commercial Code- BOOK IV NEGOTIABLE INSTRUMENTS AND BANKING TRANSACTIONS- TITLE I. GENERAL PROVISIONS

 BOOK IV NEGOTIABLE INSTRUMENTS AND BANKING TRANSACTIONS


TITLE I. GENERAL PROVISIONS

 

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 recognises in particular as negotiable instrument commercial instruments, transferable securities, documents of title to goods.

Tuesday, August 25, 2020

Rules of Construction (Factors not affecting Negotiability): Date

Rules of Construction (Factors not affecting Negotiability): Date

The date when the instrument was made is one of the negotiability requirement in Articles 735(9), 823(f) and 826(d).The code does not make any exception to undated Instrument. The date of an instrument is necessary to determine a definite time for payment and to calculate interest, if there is any specification of interest rate. If the instrument is a demand instrument date may not be necessary to determine the time of payment of the instrument.

Rules of Construction (Factors not affecting Negotiability): Joint notes and bills

Rules of Construction (Factors not affecting Negotiability): Joint notes and bills

The essential validity requirements of a negotiable instrument must be fulfilled cumulatively to make it negotiable. Absence of any one of the factor makes the whole instrument non negotiable or invalid. However there are certain ambiguities or omissions which do not affect the negotiability of the instruments. The commercial code provides rules for clearing up ambiguous terms. However, in some instances there are no specific provisions; hence any gap should be filled through interpretation.

Debentures

Debentures

It is possible that a company’s financial need may not be met by the fund raised from investors only; the money collected through sale of shares may still be insufficient to run the business of the company. In this case, the company may opt for borrowing money from the public by issuing debt securities (debentures). Accordingly, Money may be borrowed from individuals, banks and other lending financial sources who will be creditors of the company holding the debentures as securities

Assignment of Shares of Companies

Assignment of Shares

A share, being a movable property, may be freely assigned or transferred from one person to the other. This, however, does not necessarily mean that no restriction may be made on the free transfer of shares where provided in the company’s constitution. Exceptionally, the law or agreement of the company may hinder free assignment of shares. To this end, Art.333(1)&(2) of comm. code states that restrictive provisions may be made in the articles of association or by general resolution of an extraordinary meeting on the free transfer of shares or making assignment of shares subject to the consent of the board of directors.

COMMERCIAL CODE- BOOK V. BANKRUPTCY AND SCHEMES OF ARRANGEMENT-TITLE V. SUMMARY PROCEDURE

TITLE V. SUMMARY PROCEDURE

Art. 1166. - Terms of application when applied.
1.    Where the balance sheet submitted by the debtor or subsequent information shows that the assets in the bankruptcy do not exceed one thousand Ethiopian dollars, or where the dividend to the distributed cannot exceed ten per cent, the court may, either of its own motion or on the application of the creditors, order that the bankruptcy proceedings shall be by way of summary procedure.
2.    Where in the course of such proceedings it is shown that the assets in the bankruptcy exceed one thousand Ethiopian dollars or the dividend exceeds ten per cent, the court shall order that the proceedings in bankruptcy shall continue under the normal procedure, but such order shall not affect the validity of any act already done.
3.    The normal bankruptcy rules shall be applied where they are applicable to summary procedure.

COMMERCIAL CODE- BOOK V. BANKRUPTCY AND SCHEMES OF ARRANGEMENT-TITLE IV. SPECIAL RULES CONCERNING BANKRUPTCY AND SCHEMES OF ARRANGEMENT WITH RESPECT TO BUSINESS ORGANISATIONS

TITLE IV. SPECIAL RULES CONCERNING BANKRUPTCY AND SCHEMES OF ARRANGEMENT WITH RESPECT TO BUSINESS ORGANISATIONS

 

Art. 1154. - Application of general provisions.

Save as is otherwise provided in the preceding Titles, the provisions of  this Title shall apply to business organisations.

COMMERCIAL CODE- BOOK V. BANKRUPTCY AND SCHEMES OF ARRANGEMENT-TITLE III. SCHEMES OF ARRANGEMENT

 TITLE III. SCHEMES OF ARRANGEMENT


Art. 1119. - Application for scheme of arrangement.

    Any trader who has or is about to suspend payments and has not been declared bankrupt may apply to the court for the opening of a scheme of arrangement, in accordance with the provisions of this Title.

COMMERCIAL CODE- BOOK V. BANKRUPTCY AND SCHEMES OF ARRANGEMENT-TITLE II. BANKRUPTCY

TITLE II. BANKRUPTCY


Chapter 1. Judgment in bankruptcy

Art. 974. - Court having jurisdiction.

1.    The Ethiopian court having jurisdiction in bankruptcy proceedings shall be the court of the place where the business of a trader who is a person is situate or, where there is more than one business, the place where the principal business is situate.
2.    Subject to the provisions of international conventions, the Ethiopian court shall have jurisdiction notwithstanding that the principal place of business is abroad and a foreign court has exercised bankruptcy jurisdiction.

COMMERCIAL CODE-BOOK V. BANKRUPTCY AND SCHEMES OF ARRANGEMENT- TITLE I. GENERAL PROVISIONS

TITLE I. GENERAL PROVISIONS

 


Art. 968. - Scope of application.

1.    The provisions of this Book shall apply to any trader within the meaning of Art. 5 of this Code and to any commercial business organisation within the meaning of Art. 10 of this Code with the exception of joint ventures.
2.    Without prejudice to such provisions as are applicable to physical persons only or to the provisions of Title IV applicable to business organisations only, the provisions of Titles I, II, III and V of this Book shall apply to traders and commercial business organisations.

Forms and classes of shares

 Forms and classes of shares

                Forms of shares

Art. 325- Forms of shares

(1). Shares are either registered in the name of the shareholder or to bearer, as required by the shareholder.

Therefore, there are two forms of shares in Ethiopia: registered and bearer. The distinction between the two lies in the rights that may be enjoyed and obligations that may be discharged by holder of the share. In the case of registered shares, the name of the person is required to appear in the company’s register while the owner of a bearer shares, for most purposes, is the possessor.

Par value and Price of Shares

Par value and Price of Shares

Par value of a share is the nominal value of the share as shown on its face. It is the momentary amount of a share once fixed and contained in the memorandum of association. As is provided under Art 306(2) of the Comm. Code, the amount of the par value of each share  shall not be less than 10 (ten) Ethiopian birr. Where as the price of share, as could be inferred from Art.318(1)(e) of the Comm.Code, is the actual price at which shares are to be issued and that must be mentioned in the prospectus. It is the price that the company is willing to accept and the subscriber is willing to pay on the open market during public subscription.

Shares may not be issued at a price lower than their par value. But as per Art. 326(2) of the Comm.Code, they may be issued at a greater price than their par value where such issue is provided by the memorandum or articles of association or decided by an extraordinary general meeting. The difference in amount between the par value and the price at which shares are issued shall be known as a premium.

Shares of Share Companies

Shares of Share Companies

Concept of a Share

Actually, there is no fixed concept of a share and its nature is not yet determined for the notion of “share” may be understood in different senses.

Firstly, a share may be grasped as a chose- in- action. Chose -in -action is a property that one does not actually perceive, as it has no physical existence but a right that can be enforced by legal action. However, defining the term," share" as a chose-in-action does not always help us draw a clear picture of the concept for the expression “chose-in-action” itself is a vague concept consisting of bundles of rights evidenced by documents.

General Requirements for the Formation of Share Companies

 General Requirements for the Formation of Share Companies

In principle, there are certain general requirements for the formation of share companies in the absence of which a valid share company having legal personality is inconceivable.

Partnership agreement

To begin with, a valid partnership agreement, inter alia, is one of the essential requirements for the formation of a share company. That is, in order to establish a valid share company, there should be a valid partnership agreement out of which the business organization arises. This is evident from the following provision of the Ethiopian commercial code.

      Art. 210(1)- “ A business organization is any association arising out of a partnership agreement.”

Thus, the existence of a valid partnership agreement to be made in writing is one of the essential requirements for the formation of share companies.

Requirements for Negotiability: Payable to order or Bearer

 Requirements for Negotiability: Payable to order or Bearer

The very essence of a negotiable instrument lies in its transferability. Its payment is not limited to the one whose name is specified but extends to any other person designated by the first specified person. So as To assure proper transfer, the instrument must be “payable to order or to bearer “at the time it is issued or first comes into the possession of the holder. If an instrument is neither order nor bearer paper, then it is non negotiable and there fore only assignable and governed by contract law.

Requirements for Negotiability: Payable on Demand or at a definite time

 Requirements for Negotiability: Payable on Demand or at a definite time

Arts 735(d) 758,759,769,825)

The commercial code after generally stating the requirement of specification or indication of the time of payment of Bills of exchange and promissory note (Art 735(d) cum 823 ( c), lists down  four types of time of payment in Art 769 cum Art 825(b). The time of payment for cheque is always on demand or at sight (Art 854).

Requirements for Negotiability: Fixed Amount of money

 Requirements for Negotiability: Fixed Amount of money   

The amount of money to be paid by a negotiable instrument should be fixed and stated with certainty. If the instruments’ value were stated in terms of goods or services, it would be too difficult to ascertain   the market value of those goods and services at the time the instrument was to be paid. Art 735(b), 823(b) and 827(a) all require that commercial instruments be paid wholly in money.  

Requirements for Negotiability: Unconditionality of promise or order

Requirements for Negotiability: Unconditionality of promise or order 

A negotiable instrument’s vitality as a substitute for money or as a credit device would be dramatically reduced if it had conditional promises attached to it. It would be expensive and time consuming to investigate conditional promises or orders and therefore the transferability of the negotiable instrument would be greatly restricted. Substantial administrative costs also would be required to process conditional promises. Furthermore, the payee or the holder of the instrument would risk the possibility that the condition will not occur. 

Requirements for Negotiability: Unconditional promise or order to pay

 Requirements for Negotiability: Unconditional promise or order to pay

(Art 735(b), 823(b),827(a)

For an instrument to be negotiable, it must contain an express order or promise to pay. A promise is simply a pledge to transfer money. For the purpose of negotiable instruments a promise must be express and unconditional. A mere acknowledgement of debt, which might logically imply a promise, is not sufficient to constitute valid promise. The promise must be an affirmative, not acknowledgment.

Requirements for Negotiability: Signature

 Requirements for Negotiability: Signature

(Arts 735(h),823(g),827(e))

The issue of signature is very important in the law of negotiable instrument, because it has varying implication for each party starting from issuance of the instrument to each successive stages of the negotiation.

First of all signature by the maker or drawer makes the instrument valid and binding creating duties on the person who initiates it and immediately creating rights upon delivery to the holder.

Requirements for Negotiability: Written Form

 Requirements for Negotiability: Written Form

Negotiable instruments must be in written form. Clearly, an oral order or promise can create the danger of fraud or make it difficult to determine liability. Negotiable instruments must possess the quality of certainty only formal, written expression can give. The mode of writing can be handwritten, typed or printed.

We don’t find any explicit requirement of writing in the commercial code provisions. However articles 735, 823 and 827 impliedly require the instrument be in writing. All these articles begin by the phrase “…..shall contain” and then enumerates the specific requirements. these specific requirements statements to be written by the drawer or maker. Hence the code makes it apparent that an oral order or promise could not be considered as a commercial instrument. Additionally article 715 defines a negotiable instrument as “any document”, making it clear that only a written instrument may qualify as negotiable.

Requirements for Negotiability: General

 Requirements for Negotiability: General

Every negotiable instrument to qualify as such must meet special requirements relating to form and content. These are mandatory requirements for the validity of the instrument. The absence of any one of such requirements renders the instrument non negotiable. On the other hand if it fulfills, it becomes negotiable i.e. transferable from one person to another person by delivery. The term ‘negotiability’ here refers to the capacity of the instrument being transferred by delivery or endorsement and simultaneously entitling the transferee rights and entitlements emanating from the instrument. When there is a valid negotiation the right and the document together, pass on to the transferee. As you can see from article 715(1), this very essence i.e. inseparability of the document Vs the right, is used as a key element in defining negotiable instruments by the commercial code.

Promissory note

 Promissory note 

A promissory note is a written promise made by one person (the maker) to pay a fixed amount of money to another person (the payee or a subsequent holder) on demand or a specified date.

Section 4 of the Indian negotiable instruments act of 1881 defines promissory note as “an instrument in writing (not being a bank note  or currency note) containing an unconditional undertaking signed by the maker, to pay a certain sum of money only to, or to order of a certain person, or to the bearer of the instrument.” Lastly the definition given by black’s law dictionary reads:

“a promissory note is a written promise by one party (the maker) to pay money to another party (the payee) or to bearer,

Compare the definitions given to promissory note with that of bill of exchange. Then list down all the differences between the two.

A promissory note (sometimes shortly referred to as note) is a two party instrument unlike a bill of exchange and a cheque which are three party instruments. The person who makes the promise to pay is called the maker (or the promissory).He is the one who promises to pay a fixed amount of money to the holder. He is the debtor and must sign the instrument. The person who will get The money (the creditor) is called the payee (or promisee). Apart from  the fact  that in promissory notes, there is only promise from one party to another, unlike order given to 3rd party in case of bill of a bill of exchange and cheque, the other requirements as to statement of fixed amount money & time of payment, and designation of payee   are equally applicable to promissory notes.

Cheque

 Cheque

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 provided on section 6 of the Indian negotiable instruments act of 1881 reads,

A cheque is a bill if exchange drawn upon a specified  banker and payable on demand.

Bill of exchange (draft)

 Bill of exchange (draft)

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 op 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.”

All the above definitions, although slightly employ different words, could be regarded as the correct definitions, of Bills of exchange.

Compare the three definitions and clearly indicate the common elements and what is missing from any one of the definitions?

As you can see from the above definitions there are three parties in Bills of exchange. These are the Drawer, Drawee and payee. The maker of a bill of exchange is known as the Drawer. He is the party that initiates a bill of exchange, thereby ordering the drawee to pay. The person who is ordered or directed to pay is called the Drawee. He is the party who receives order from the drawer to make payment to the payee. A payee is the person who will receive the money. In other words, he is the party to whom the instrument is made payable.

The nature of the order given by the drawer or the nature of the right to be received by the payee is only a right expressed in terms of money. The money to be paid should be fixed or certain. Regarding the time of payment, the payee will collect the money at the time clearly specified by the drawer. The time may be on demand i.e. immediately after the issuance of the Bill or it may be at a future time which is exact or definite.

Types of Negotiable Instruments under the Commercial Code

 Types of Negotiable Instruments under the Commercial Code

Ethiopian law has adopted a very broad definition and types of negotiable instruments. Art 715, after defining negotiable instruments, states that the law in particular recognizes three types of instruments as negotiable; these are;

  • Commercial instruments
  • Transferable securities
  • Document of title to goods

Types of Negotiable instruments

Types of Negotiable instruments 

The types of Negotiable instruments are largely determined based upon the scope of definition given to negotiable instruments and specification of the instruments legally recognized as negotiable in that country’s law. In most countries, the scope of negotiable instruments is limited to commercial papers. i.e. to instrument other than cash, entitling the holder or the person whose name is specified on the paper, the payment of money. In this sense, negotiable instruments may be classified as order to pay [ Bills of exchange and cheque] and promises to pay (promissory notes). 

Function of Negotiable Instruments

 Function of Negotiable Instruments

Negotiable instruments play a pivotal role in making business transactions simple. The vast number of commercial transactions that take place daily in the modern business world would be inconceivable without negotiable instruments.

For instance, assume a trader in Addis Ababa wants to purchase 10,000 quintals of potato from another trader residing in Gambella. In the absence of negotiable instruments, the trader in Addis had to carry perhaps half quintal of money and take it to Gambella to make payment. Transporting large amount of money usually exposes oneself to risk such as looting and destruction due to natural calamities. Additionally it causes inconvenience, delay and waste of time and energy. Using a negotiable instrument as a mode of payment relieves any trader and business of the above worries and difficulties.

Nature and Definition of Negotiable Instruments

 Nature and Definition of Negotiable Instruments

Documents of a certain type, used in commercial transactions and monetary dealings, are called, negotiable instruments. 'Negotiable' means transferable by delivery and 'instrument' means a written document by which a right is created in favor of some person. The fact that it creates a right implicitly follows that it also creates a corresponding obligation on the person who signs on it and becomes a party thereof.

The term 'negotiable instrument' literally means “a document transferable by delivery”. However, this definition does not clearly tell us the true nature, characteristics and valid requirements of a negotiable instrument because not all documents transferring a right could be categorized as negotiable instruments.

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