Liquidation is the process of winding up a company’s affairs, selling its assets, and distributing the proceeds to creditors and shareholders before its legal existence is terminated. Under Ethiopian commercial law, company liquidation is governed by the Commercial Code of Ethiopia (amended in 2020). The law recognizes two types of liquidation, a voluntary liquidation which is initiated by the company’s shareholders or members, often when the company is solvent and a compulsory liquidation ordered by a court, usually when the company is insolvent or has violated legal provisions.

A company may be liquidated when the company’s term as specified in its memorandum of association, by the decision of shareholders, in case of bankruptcy, court order or fulfillment of the purpose for which the company was established.

Procedures for dissolving a Company

          A. Decision to dissolve

A general meeting of shareholders shall be called to pass a resolution to dissolve the company. The resolution must comply with the quorum and voting requirements outlined in the company’s memorandum and articles of association. In case of compulsory dissolution an application is filed to the court by either creditor, shareholders, or the company itself. The court evaluates the grounds for liquidation and issues a liquidation order if valid.

          B. Appointment of a Liquidator

The liquidator can be appointed by the shareholders in voluntary liquidation and by the court in compulsory liquidation. The liquidator plays a critical role in managing the company’s assets, settling liabilities, and distributing remaining assets to shareholders.

In case of a one-person private limited company that has settled all its debts and obligations results a universal assignment of all the assets to the member with out liquidation.

          C. Notification, Audit and Duty-free imported assets

The company must notify the Ethiopian Revenue and Customs Authority (ERCA) and Ministry of Trade of the liquidation. ERCA will do an extensive audit before issuing a clearance after receiving an application letter of dissolution accompanied by the un authenticated resolution of the shareholders decision to dissolve. If the company owner any assets imported through a duty-free privilege, it must sell it before the dissolution to another company with the same privilege or pay the remaining un paid tax. With the issued clearance from ERCA the resolution will be authenticated at Documents Authentication and Registration Agency (DARA). The dissolution must be published in a widely circulated newspaper to inform creditors and stakeholders.

          D. Inventory of Assets and Liabilities

The liquidator prepares a detailed inventory of the company’s assets and liabilities. Creditors are invited to submit their claims within a specified period, typically stated in the public notice.

          E. Settlement of Debts and Obligations

The liquidator uses the company’s assets to pay off debts in the following order of priority:

1. Liquidation expenses and fees.
2. Employee wages and benefits.
3. Secured creditors
4. Unsecured creditors.

If the company is insolvent, the liquidator ensures that debts are paid proportionally among creditors based on available resources.

          F. Distribution of Remaining Assets

After settling all liabilities, any remaining assets are distributed among shareholders in proportion to their shareholding or as stipulated in the company’s memorandum of association.

          G. Final Report and Deregistration

The liquidator prepares a final report summarizing the liquidation process and submits it to the shareholders (in voluntary liquidation) or the court (in compulsory liquidation). The company will be deregistered from the Trade register which can and other relevant authorities. And a final public notice of the company’s dissolution is issued, marking the end of its legal existence.