Critical Analysis of the Law and Practice of Insolvency in Ethiopia in Protecting Creditors' Interests

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Credit drives the business world. Access to financing is crucial for businesses to operate effectively. Businesses with insufficient capital struggle to maintain daily operations, let alone become profitable. When working capital is insufficient to carry out business activities, businesses must obtain additional capital through credit financing. Creditors are therefore crucial stakeholders with significant interests in the efficient operation of their debtor's business and in protecting its assets. To encourage lending, it is essential to protect creditors' interests. Creditors' interests can be protected through laws, policies, and procedures that safeguard their debtors' assets and facilitate debt recovery. These measures serve as a collective safeguard for creditors, encouraging them to provide loans. Failure to adequately protect creditors' interests increases their risks and discourages lending, which in turn cripples business activities. As a result, nations have implemented various preventive and corrective mechanisms to safeguard creditors' interests holistically. Insolvency law is a typical mechanism used by nations to protect creditors from the ex post risk of non-payment of their debts arising from the debtor's financial difficulties. During insolvency, as the residual risk bearers of the debtors' financial decisions (assets), creditors' risks skyrocket, making creditors major stakeholders and justifying the protection of their interests. With the substantial increase in creditors' risks during insolvency, stronger protection should be accorded to them. The complete protection of creditors' interests during insolvency requires safeguarding their rights under insolvency law and ensuring their proper interpretation and application (execution) on the ground, resolving the debtor's affairs, and guaranteeing the recovery of debts. This study critically examines the law and practice of insolvency in Ethiopia, with a focus on the protection of creditors' interests. Firstly, the study evaluates the law through qualitative analysis of interview data, doctrinal analysis, and examination of international best practices in creditor protection. Secondly, the study evaluates the practice by critically analysing qualitative interview data and a 25-year dataset of insolvency court decisions. The study found that the new Ethiopian insolvency regime is creditor-friendly. It is well-equipped with the tools needed to protect creditors' interests during insolvency and aligns with international best practice. However, safeguarding creditors' interests is broader than just having good law. The comprehensive protection of creditors' interests during insolvency requires a robust legal framework and an effective institutional framework for its practical implementation. The study concludes that the practice of insolvency in Ethiopia is inadequate in protecting creditors' interests due to the entrenched deficiencies in institutional and procedural mechanisms, which severely hinder the correct interpretation and implementation (execution) of the law (creditors' rights) on the ground. Additionally, the practice of insolvency in Ethiopia is also misaligned with international best practices for protecting creditors' interests. Accordingly, the study proposes reforms (policy, legal, and institutional) to mitigate the noted deficiencies in the law and practice of insolvency in Ethiopia, thereby enhancing the protection of creditors' interests.