Advancing credit and having means to enforce against a borrower on default are fundamental to the operations of any financial institution. Recently, the High Court of Kenya has issued some puzzling decisions, creating uncertainty regarding the ability of foreign companies incorporated outside Kenya to enforce loan agreements with Kenyan counterparties in Kenyan courts. In summary, the courts have held that foreign lenders who have not registered in Kenya lack the legal capacity to enforce their rights against borrowers who default on loan repayments.
Key Decisions
In Stichting Rabo Bank Foundation v Ava Chem Limited and Another [2024] KEHC 9931 (KLR) (Rabo), the Kenyan High Court held that an unregistered foreign lender did not possess the legal capacity to initiate legal proceedings against defaulting borrowers. The plaintiff, incorporated in the Netherlands, advanced money to a Kenyan borrower, secured by a personal guarantee. Upon default, the lender sought to enforce its rights through court proceedings in the Kenyan High Court. Despite the borrowers’ acknowledgment of debt, the court dismissed the suit on grounds that the lender was not registered as a foreign company under Kenya’s Companies Act and could therefore not sustain an action before the court.
Previously, the court reached a similar conclusion in Root Capital Incorporated v Tekangu Farmers Co-operative Society Ltd and Another [2016] KEHC 3735 (KLR) (Root). Root, incorporated in Massachusetts, USA, extended credit secured by charges over Kenyan assets. Upon default by the borrower, Root sued to enforce its security, but the suit was dismissed due to Root’s lack of registration as a foreign company in Kenya.
Implications
These decisions are based on the court’s interpretation of section 974(1) of Kenya’s Companies Act, which states that:
“A foreign company shall not carry on business in Kenya unless (a) it is registered under this part; or (b) it has applied to be so registered, and the application has not been dealt with within the prescribed period.”
The term “foreign company” is broadly defined under section 2 of the Companies Act as any company incorporated outside Kenya.
The decisions seem to turn on the meaning of “carrying on business” in Kenya. Section 974(2) illustrates examples such as offering debentures or guaranteeing debentures in Kenya as amounting to “carrying on business” in Kenya. Unfortunately, in both the Rabo case and the Root case, the High Court seems to have applied it in the ordinary sense of engaging in activity of a commercial nature rather than being guided by the examples contained in statute. The taking of a debenture is certainly very different from offering debentures and the decisions have failed to make this distinction.
The High Court’s ruling in Rabo is currently under appeal, and the Court of Appeal’s forthcoming decision may finally provide a more sensible outcome for foreign lenders.
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Read the original publication at Cliffe Dekker Hofmeyr
