The price of non-compliance just got higher. In a landmark decision following a growing trend in Kenyan jurisprudence, the High Court has upheld the legal principle that only duly registered foreign companies can enforce their rights in Kenyan courts. This judgment builds on the precedent we highlighted in our article “Court Dismisses 139 Cases Lodged by Digital Lenders” where unregistered digital lenders saw their suits thrown out en masse. Now, the court has extended that same hardline stance to foreign institutional financiers, ushering in a new era of heightened compliance scrutiny in Kenya’s lending landscape.
The case in focus, Rabo Bank Foundation v Ava Chem Limited & Christopher Irungu Mwangi, has stirred debate as the court grappled with the interpretation of Section 974 of the Companies Act, 2015—a provision that underscores the critical requirement for foreign companies to register locally before engaging in business in Kenya. In this article, we dive deep into the details of the case and explore what this Judgement means for foreign lenders navigating Kenya’s legal landscape.
The Legal Crux: Capacity to Sue Hinged on Registration
Section 974(1) of the Companies Act provides that a foreign company shall not carry on business in Kenya unless it is registered or has applied for registration. A “foreign company” is broadly defined as any entity incorporated outside Kenya, and subsection (2) outlines what may constitute “carrying on business,” including establishing a place of business or offering securities to the public.
Against this backdrop, the High Court faced a legal conundrum: Could the simple act of a foreign company lending money to a Kenyan borrower—under a contract executed entirely abroad—be deemed as “carrying on business” in Kenya?
Brief Summary of Rabo Bank Foundation v Ava Chem Limited
- The Plaintiff, Rabo Bank Foundation, a Dutch-incorporated limited liability company, entered into a Financial Support Agreement dated 3rd October 2016 with Ava Chem Limited, advancing a sum of USD 180,116.00.
- Christopher Irungu Mwangi, the 2nd Defendant, issued a personal guarantee in 2017 and a deed of surety in 2018.
- Following default in repayment, Rabo Bank filed suit for USD 230,868.51 (including accrued interest and costs).
- The Defendants admitted the debt but filed a Preliminary Objection, asserting that the Plaintiff, being an unregistered foreign company, lacked locus standi to institute the suit in Kenya.
- The Plaintiff in response made an application seeking summary judgement.
Judicial Determination: Procedure Trumps Substantive Justice
The Court considered both the Plaintiff’s summary judgment application and the Preliminary Objection together. In a decisive ruling:
- The Court held that Rabo Bank, as an unregistered foreign company, had no legal standing to bring the suit in Kenya.
- The Court ruled that a non-existent legal person cannot sue, regardless of the merits of the claim.
- The suit, including the application for summary judgment, was struck out in its entirety.
What Does This Mean for Foreign Lenders?
- Strict Application of Section 974 – A Clear Compliance Threshold
The Court applied Section 974 of the Companies Act in a straightforward manner, reinforcing the requirement that any foreign company engaging in business in Kenya must first be registered. While Rabo Bank argued that the loan agreement was executed in the Netherlands and that it had no physical presence in Kenya, the Court found that the act of lending funds to a Kenyan borrower qualified as "carrying on business" under the Act. - Debt Admission Not Enough – Emphasis on Procedural Compliance
Even though the Defendants had admitted the debt, the Court held that legal standing could not be granted to an unregistered foreign entity. The decision highlights the importance of procedural compliance and suggests that courts may prioritize statutory requirements over equitable considerations. It also signals the need for foreign lenders to ensure all regulatory boxes are checked before pursuing legal action in Kenya. - A Wake-Up Call for International Creditors
The judgment serves as an important reminder for international financiers, particularly those involved in impact lending, agriculture, SME support, and climate finance. While their contributions to Kenya’s economy are valued, the legal message is clear: without registration under Kenyan law, even well-documented claims may not be enforceable in court
Comparative Context: A Trend Solidifying
This decision joins others, such as Root Capital Inc. v Tekangu Farmers Co-operative Society Ltd & Another [2016] KEHC 3735, where another U.S.-based lender was similarly struck out for lack of registration despite having secured its loans through local assets. 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
These rulings, once isolated, now appear to form a coherent judicial posture—where procedural non-compliance trumps the merits of the case.
A Legal and Policy Inflection Point
The decision in Rabo Bank Foundation is currently under appeal. The Court of Appeal now faces a pivotal opportunity to clarify the law and provide a balanced interpretation of what constitutes “carrying on business” under Kenyan law.
Until then, foreign lenders must take urgent steps to secure their legal position:
- Register as foreign companies in Kenya.
- Apply for licensing or approval from the Central Bank of Kenya.
- Conduct robust legal due diligence prior to disbursement to assess potential jurisdictional pitfalls.
How does this affect Foreign Lenders?
The ruling has ignited a firestorm of debate. This decision has left more questions than answers. Does executing a loan agreement in the Netherlands—with no physical or operational presence in Kenya—truly amount to “carrying on business” in Kenya? Is this the kind of conduct that Parliament intended to regulate under Section 974 of the Companies Act? Should failure to register under company law automatically strip a foreign party of its right to seek redress in Kenyan courts? The ruling appears to prioritize procedural form over substantive justice, raising concerns about the precedent it sets. More importantly, what message does this send to global financiers?
These are not theoretical concerns—they strike at the heart of Kenya’s reputation as a welcoming destination for cross-border investment. In a world where capital moves fluidly across borders, must every foreign financier register locally and obtain Central Bank approval before lending, even without any operational footprint in Kenya? And if so, at what cost to our economic growth and access to development finance, especially in critical sectors like agriculture, clean energy, and SMEs?
Conclusion: The Courtroom Is Not Always Open
Kenya’s judicial system is making one thing abundantly clear—legal standing begins with compliance. Whether a loan agreement is executed locally or abroad, foreign companies must be registered in Kenya to have the legal capacity (locus standi) to enforce repayment through Kenyan courts.
What’s more, if you’re operating as a lender, registration alone is not enough—you must also be licensed and approved by the Central Bank of Kenya (CBK). In today’s regulatory environment, compliance is not optional—it’s Mandatory. Lenders must align with both corporate and financial sector regulations to protect their investments and enforce their rights.
HOW WE CAN HELP
At CM Advocates LLP, we know that the heartbeat of every lending business is its ability to recover what it lends. We also understand the frustration that comes with being legally barred from demanding repayment, simply because of a compliance oversight.
That’s where we come in.
Our dedicated Commercial & Corporate team is here to guide you through Kenya’s legal landscape, ensuring your lending operations—local or cross-border—are fully compliant with the Companies Act and other regulatory requirements.
Whether you're a foreign financier, development fund, or venture lender, we’ll walk with you every step of the way—from registration and structuring, to enforcement and recovery.
✅ Need help registering as a lender?
✅ Not sure if your current lending operations comply with Kenyan law?
✅ Looking to enforce a debt or restructure your investment model?
We’ve got you covered. Book a compliance review or strategic advisory session tailored to your portfolio today. Visit www.cmadvocates.com, or contact us at commercial@cmadvocates.com. For direct queries, reach out to our contributors via the contact details below—we’re always happy to help.
Contributors:
Victorine Rotich
Brian Thuranira