Proclamation No.103/1998
Capital Goods Leasing Business Proclamation
WHEREAS, for those investors who have the
desire, knowledge and profession to participate in various investment
activities but could not act due to lack of capital it is necessary to create
an enabling environment for the establishment of alternative sources of financing;
WHEREAS, it is believed that lessors of
capital goods can fill the existing gap which is not addressed by the existing
financial institutions;
WHEREAS, the existing laws concerning
capital goods leasing business are found incomplete;
NOW, THEREFORE, in accordance with Article 55 (1) of the Constitution of the Federal Democratic Republic of Ethiopia, it is hereby proclaimed as follows:-
PART ONE
General
1. Short
Title
This
Proclamation may be cited as the "Capital Goods Leasing Business
Proclamation No.103/1998."
2.
Definitions
In this Proclamation, unless the
context requires otherwise:
- "Leasing" means a
financing in kind for production and service purpose by which a lessor
provides a lessee with the use of specified capital goods on financial or
operating lease or hire-purchase agreement basis, without requirement of
collateral, for a specified period of time and collects in turn a certain
amount of installment in periodical payments over the specified period;
- "Lease agreement" or
"agreement" means financial lease, operating lease or
hire-purchase agreement as defined in this Proclamation;
- "Financial lease"
means a type of leasing by which a lessor provides a lessee against
payment of mutually agreed installments over a specified period with the
use of specified capital goods which is:
a.
either
already acquired by the lessor; or
b.
purchased
by the lessor from a third party, known as the supplier, chosen and specified
by the lessee;
and
under which the lessor shall retain full ownership right on the capital goods
during the period of the lease agreement, and, subject to agreement between the
two parties, the lessee may have an option to purchase the capital good
outright after the termination of the lease period at an agreed price.
- "Hire-purchase" means
a type of leasing by which a lessor provides a lessee with the use of a
specified capital goods, against payment of mutually agreed installments
over a specified period under which, with each lease payment, an equal
percentage of the ownership is transferred to the lessee and, upon
effecting of the last payment, the ownership of the capital goods shall
automatically be transferred to the lessee;
- "Operating lease"
means a type of leasing for a period of time not exceeding two years, by
which a lessor provides a lessee against payment of mutually agreed rent
with the use of specified capital goods that the lessor has at hand;
- "Lessee" means a
person who, under a lease agreement, obtains capital goods from a lessor
and has the right to use the capital goods, against payment of rent for
an agreed period of time;
- "Lessor" means a
person who, under a lease agreement, provides to a lessee the right to
use the capital goods in return for rent for an agreed period of time;
- "Capital goods"
means goods designated as such under the Investment law and directives
issued by the Investment Board pursuant to the powers vested in it by the
Investment Law;
- "Supplier" means a
person, other than the lessor or the lessee, who is in the business of
selling goods;
- "Investment Law"
means either the Investment Proclamation No.37/1996, or the Investment
Incentives Council of Ministers Regulations No.7/1996, or both;
- "Non-cancelable
Agreement" means a lease agreement that is cancelable only by the
operation of the law or by mutual agreement;
- "Person" means any
natural or juridical person;
- "Ministry" means
Ministry of Trade and Industry.
PART TWO
Licensing, Features of Lease Agreements and Rights and
Obligations of the Contracting Parties
3. Issuance
of License
- capital goods leasing business
shall be operated only by a lessor licensed by the Ministry.
- The Ministry shall issue
directives concerning the criteria to be fulfilled to obtain leasing
license.
4. General
Features of Lease Agreements
Any lease agreement shall, among other
things, contain:-
- a statement of the type of
leasing;
- a description of the capital
goods, sufficient to identify it, a statement of the full price of the
capital good and the total lease rent payable under the lease agreement;
- the amount of each rent, the
period within which the total rent is to be paid, the date or the mode of
determining the date on which each installment is payable and a statement
that the lessee shall pay the rent on the agreed date;
- a provision showing the
responsibility of the lessee for repairing damages caused to the capital
goods by third parties during the time the agreement is in force;
- a provision showing the right
of the lessee to terminate the agreement and return the leased capital
goods to the lessor, where, at the time of its transfer to him, the
capital goods is found to have a defect which diminishes its usefulness
to the lessee;
- a statement that the lessor
undertakes to transfer to the lessee the rights and benefits deriving
from the sales contract between the lessor and the supplier of the
capital goods;
- a statement that the lessee
shall have the right to enjoy quiet possession of the leased capital
goods during the entire period of the lease as provided in the agreement;
- a statement that the lessor
may not, in his capacity as a lessor, be liable for death, personal
injury or damage to the property of third parties caused during the use
of the capital goods by the lessee.
5. Specific
Features of Lease Agreements
- In the case of a financial
lease agreement:
a.
the
lessee shall hold the capital goods as a mere bailee of the lessor and he shall
not have any ownership right on the capital goods during the entire period of
the lease;
a.
the
agreement shall be a full pay-out and non-cancelable agreement;
a.
the
lessee may, by mutual agreement, have an option to buy or return the capital
goods to the lessor on the termination of the lease agreement;
a.
a
statement that the lessee undertakes to insure and maintain the capital goods.
- In the case of an operating
lease agreement:
a.
the
capital goods leased shall remain the property of the lessor to whom the lessee
shall return on the termination of the agreement, unless otherwise the parties
agree that the lease be further renewed or the leased capital good be purchased
by the lessee;
a.
the
lessee or the lessor shall have the right to cancel the agreement provided that
the party causing damage to the other by early termination of the agreement
shall pay compensation;
a.
a
statement that the lessor undertakes to insure and maintain the capital goods.
- In the case of a hire-purchase
agreement:
a.
an
equal percentage of the ownership, with each installment payment, shall be
transferred to the lessee and, upon effecting of the last payment, the
ownership of the capital goods shall automatically be transferred to the
lessee;
a.
the
parties shall provide, in the agreement, for the manner by which ownership
rights and claims arising form the agreement shall be settled between the
lessor and the lessee in case of early termination of the lease agreement by
either party;
a.
a
statement that the lessee undertakes to insure and maintain the capital goods.
6. Defaults
in Payment of Rent and Others
- Where the lessee defaults in
the payment of the rent, or commits another fault which may breach the
agreement, the lessor shall grant him a period of 30 days for remedying
the default so far as the default may be remedied.
- Where the lessee does not
remedy the default within the period specified in sub-Article (1) of this
Article, the lessor may rescind the agreement, repossess the leased
capital goods and claim related damages.
- Where the lessee defaults in
the payment of the rent, the lessor may recover accrued unpaid rent
together with interest and damages, whether the default is remedied or
not.
7. Defects
on the Leased Capital Good
- The lessor may not warrant
against a defect which was made known to the lessee on the making of the
agreement.
- The lessor shall make good any
damage which the lessee has suffered owing to the defect of the capital
goods where the lessor knew or should have known of the defect on
delivering the capital goods to the lessee and failed to inform the
latter accordingly.
- Unless otherwise provided in
the lease agreement, the lessor shall not be liable for defects in and
for unfitness for intended use of the capital goods he purchases in
conformity with the specifications given by the lessee.
- The lessor has the right to
rescind the agreement, with prior notice, and to repossess the leased
capital goods, where the lessee does not make use of the capital goods in
accordance with the lease agreement or accepted norm or usage and such
use entails risk of irreparable damage to the capital goods leased.
8.
Bankruptcy
- The obligations and conditions
of the agreement shall continue with an organ legally subrogated to the
judicially bankrupt lessor as long as the lessee performs his obligations
in accordance with the terms of the lease agreement.
- The lessor shall not lose his
ownership right on the capital goods leased eventhough the lessee is
judicially bankrupt.
- Damages
- Where the agreement is
rescinded by the lessee, and the lessee does not deliver the capital
goods after having been given due notice to surrender the capital goods
to the lessor, the lessor has the right to repossess the leased capital
goods immediately and claim damages.
- Where the lessor suffers any
damage owing to default on the part of the lessee prior to the transfer
of the leased capital goods from the lessor to the lessee, the latter
shall make goods such damage to the former so long as the lessor acted in
goods faith and costs were incurred by him for purchase of the capital
goods at the request of the lessee.
- Where, in the case of
financial lease or operating lease agreement, the lessee fails to return
the capital goods on the expiry of the agreement, the lessor has the
right to repossess the leased capital goods and claim related damages
unless otherwise provided in the agreement.
- Transfer of Right
The
lessor has the unilateral right to assign his rights under the lease agreement
to third parties, but without infringement of the lessee’s right to the quiet
enjoyment of the capital goods leased.
- Claim by Third Parties
- Any action by a third party
claiming a right on the capital goods shall be brought against the
lessor.
- The ownership right of the
lessor on the capital goods leased under the lease agreement shall
prevail at all times over claims by third parties including creditors of
the lessee.
- The lessee shall inform the
lessor of any impediments or disturbances by third parties to his quiet
enjoyment of the capital goods.
- Where the lessee fails or
delays to inform the lessor as provided under sub-Article (3) of this
Article, he shall be responsible for any expenses or damages incurred by
the lessor.
- Where the value of the capital
goods has decreased as a result of legal proceedings instituted by a
third party against the lessor, the lessee shall have the right to demand
the reduction of the rent according to the new value or the cancellation
of the agreement.
- Termination of Lease Agreement
- Any lease agreement shall
terminate on the date agreed upon by the parties.
- Unless otherwise provided in
the lease agreement, the agreement shall not be terminated by the death
or incapacity of the lessee.
- Where, on the expiration of an
operating lease, the lessee remains in possession of the capital goods
leased and the lessor does not claim its return, the agreement shall be
deemed to have extended until such time as one of the parties demand the
termination of the agreement.
- Lessee not to Create Charges On
Capital Goods
- The lessee shall not create
any charge or encumbrance on the capital goods leased.
- Any charge or encumbrance
created on the capital goods by the lessee shall be void.
- Encumbrances created by the
lessor and taxes claimed on the leased capital goods shall be borne by
the lessor.
- Custody and Preservation of the
Capital Goods
- The lessee shall take care of
and preserve the capital goods as long as it is in his custody.
- The lessee may not change the
manner of utilization of the capital goods without the consent of the
lessor.
PART THREE
Miscellaneous Provisions
- Incentives
The
lessor shall be exempted from customs duties on capital goods he imports in
accordance with the Investment Law and the directives issued by the Investment
Board pursuant to the powers vested in it by the Investment Law.
- Depreciation Allowance and
Income Tax
- In case of financial lease or
operating lease, depreciation allowance for capital goods shall be
deductible from the rental income received by the lessor, as legal owner
of the leased capital goods. However, depreciation allowance shall be for
the benefit of the lessee in case of a hire-purchase agreement.
- The rent received by the
lessor through the lease agreement shall be treated as income.
- Rent paid by the lessee shall
be treated as an operating expense of the lessee and is deductible from
his income for the purpose of taxation.
- Powers and Duties of the
Ministry
The Ministry shall:
- register lease agreements.
- take appropriate measures in
order to ensure the return of the leased capital goods to the lessor,
where the lessee has the obligation to return the leased capital goods to
the lessor but fails to return it and may order the police to facilitate
the execution.
- issue other directives
required for the implementation of this Proclamation.
- Application of Other Laws
Unless
otherwise expressly provided by this Proclamation, the relevant provisions of
the Civil Code and the Commercial Code shall apply to lease agreement.
- Effective Date
This Proclamation shall come into force
as of the 5th day of March, 1998.
Done
at Addis Ababa, this 5th day of March, 1998.
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