One-Person Company, Late but Critical Addition to Commercial Code

Jan 31 , 2021
By Yehualashet Tamiru Tegegn

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One of the many things the new draft Commercial Code introduces is a one-person company (OMC). It will add a flexibility that is critical as Ethiopia adapts from a mixed economy to one with a free-market bent, writes Yehualashet Tamiru Tegegn (yehuala5779@gmail.com), adjunct Lecturer at Addis Abeba University and an associate at MTA.

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The current Commercial Code, enacted in 1960, was ahead of its time considering Ethiopia's stage of development. Six decades later, many things have changed, making an amendment necessary. In particular, this is true following the adoption of a mixed economy by Ethiopia since the 1990s and the free market bent of Prime Minister Abiy Ahmed’s (PhD) administration.

The existing Code contains many provisions that are difficult to implement and subject to different interpretations and applications. Moreover, to improve the commercial activities and the living standard of citizens, revising the existing law that strikes the right balance between investors, traders and consumers is imperative. The amendment of the Code was long overdue.

One of the many things the new draft Commercial Code introduces is a one-person company. A person can currently do business only in the form of a sole proprietorship if he wants to go at it alone.

Various factors necessitate the recognition of a one-person company. First and foremost, the existing gap becomes increasingly evident between the prohibition of one-person companies and the permission of companies that have nominally two members. In this circumstance, the majority of the shares can be held by a single shareholder, up to 99pc in fact.

The legal prohibition of the one-person company can also be easily evaded so that the actual founding member relies on the services of one or more persons, formally undertaking some role in the company without the need for them to engage in substance. Members involved in the company but having no concrete function with symbolic shares can become a source of problems and quarrels for a real shareholder.

As a result, the existence of de facto one-person companies has raised a series of problems that the legislature could not avoid addressing by the prohibition of the one-person company.

By allowing natural persons to set up one-person companies in the form of limited liability, a distinct legal personality from the member, a part of the population would find a means of integration into the economy. This will positively impact small enterprises, where entrepreneurs will not have as much a reason to fear that they will lose all their property as a consequence of an eventual abortive business transaction.

Unlike the current Code, which defines a business organisation as an association between two or more persons, the draft indicates that a business organisation is an association established through a memorandum by persons – plural. Notwithstanding this, the Code goes on to define a one-person company as an association.

Recognised as a business organisation, it is also indicated that a one-person company shall also acquire legal personality upon registration in a commercial register. As a corollary to this, it has a legal personality separate and distinct from that of the member.

There are, however, serious concerns as to the appropriateness of such business organisations as it leads to manipulation. Thus, to avert this risk, the draft follows a hybrid form of liability. In principle, the owner of the company is not liable for any claim triggered by the company. Despite this, in cases where the owner committed certain acts, it will be jointly and severely liable with the company.

Some of these crimes include the commission of an unlawful act that intentionally jeopardises the company's interests or its creditors; merger of the assets of the company with his or her property; and failure to separate once owned legal personality from that of the company.

The owner of such a company is also not allowed to establish another one-person company. If the member violates this, any interested party may apply to the court with jurisdiction at the place of incorporation for its dissolution. In such a case, the single shareholder and the company shall be jointly and severely liable for any damage incurred by creditors or any other person owing to this provision's infringement.

The draft, however, has its flaws. It for one does not recognise the transmission of shares. The lawmaker wants business organisations to be successful and the transactions to be secured and predictable. That is the main purpose of a business organisation to have a separate and distinct legal personality from the shareholders. However, the greatest threat in the case of one-person companies is that it may be dissolved if the shareholder becomes incapable or dies. Thus, to avert the risk of dissolution, the law should insert an obligatory provision to insert a successor if the shareholder dies or is incapable.

On top of this, the draft is silent on the critical issue of de facto conversion of private limited companies (PLC) into the one-person company.

What if a member of a PLC or share company or other forms of partnership is reduced to one?

As it stands now, only the company or the partnership will be dissolved. However, in other jurisdictions, if the number of members of a limited company falls to one, or if an unlimited company with only one member becomes a limited company, on re-registration, the company becomes a company having only one member.

This flexibility will add all the more to the ease of doing business.

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PUBLISHED ON Jan 31,2021 [ VOL 21 , NO 1083]

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