Section 974 Companies Act Kenya: Impact on Foreign Lenders, Fintech, and Cross-Border Finance

How the Stichting Rabo Bank Foundation v Ava Chem Ruling Affects Loan Enforcement, FDI, and the Future of Banking and Investment Law in Kenya

The 2024 High Court decision in Stichting Rabo Bank Foundation v Ava Chem Ltd & Another [2024] KEHC 9931 sent ripples through Kenya’s banking, finance, and fintech sectors. The ruling, which struck out a foreign lender’s claim for lack of local registration under Section 974 of the Companies Act, raises critical questions for international lenders, investors, and Kenyan borrowers alike.

In this article, our leading legal experts in Kenya with deep expertise in banking and finance, fintech, and cross-border investment break down the implications and what foreign lenders and local businesses need to know.

Background: The Ruling at a Glance

In this case, a Dutch lender advanced funds to a Kenyan borrower, secured by a personal guarantee. When the borrower defaulted, the lender sought to enforce its rights in the Kenyan High Court. Despite the borrower’s admission of debt, the court dismissed the suit, holding that the lender lacked “locus standi” because it was not registered as a foreign company under Section 974 of the Companies Act.

The court’s reasoning: Section 974 bars foreign companies from “carrying on business” in Kenya without registration, and the lender’s act of taking security was deemed to fall within this scope, even though the transaction was executed abroad and did not involve a debenture or public offering.

Our Perspective: What issues the court considered and why the appeal matters

At Cavendrys, we believe the High Court’s approach conflates two fundamentally distinct issues: regulatory compliance and contractual legal capacity.

Section 974 of the Companies Act is a regulatory provision designed to ensure that foreign companies with an ongoing business presence in Kenya are subject to local oversight. It is not, in our view, intended to bar foreign entities from enforcing bona fide contractual rights arising from isolated or cross-border transactions, especially where the contract was executed abroad and the debt is admitted.

By treating the absence of registration as a bar to contractual enforcement, the court effectively denied a foreign lender access to justice for a legitimate, admitted debt. This is a significant departure from global standards. In most major financial centres, including London, New York, Johannesburg, and Singapore, foreign lenders are permitted to enforce contracts in local courts unless expressly prohibited by statute, and registration requirements are not triggered by one-off lending or taking security.

Why This Matters for Kenya’s Financial Markets and FDI

If this interpretation stands, it risks:

Raising the risk premium for all cross-border lending into Kenya, as lenders will price in the uncertainty of enforcement.
Reducing the availability of international credit and investment for Kenyan businesses, particularly in the fintech and digital lending sectors.
Sending a negative signal to foreign direct investors, who expect legal certainty and alignment with international best practice.

A Call for Clarity and Alignment with Global Standards

We hope that, on appeal, the Court of Appeal will draw a clear distinction between regulatory requirements for “carrying on business” and the legal right to enforce contracts. The two are not the same, and conflating them undermines both commercial certainty and Kenya’s attractiveness as an investment destination.

Kenya has long positioned itself as a regional financial hub. To maintain this status, it is critical that our courts and regulators provide clarity and predictability, ensuring that foreign lenders and investors are not locked out of the justice system for technical regulatory reasons unrelated to the substance of their transactions.

Key Legal Issues and Market Impact

What is “Carrying on Business” in Kenya?
Section 974 provides a non-exhaustive list of activities that may constitute “carrying on business,” such as offering debentures. However, the statute does not expressly include one-off lending or taking security. The High Court’s broad interpretation creates uncertainty for foreign lenders and investors.
Enforcement Risk for Foreign Lenders
The ruling means that, without local registration, foreign lenders may be unable to enforce even undisputed debts in Kenyan courts. This increases the risk premium for cross-border lending and could restrict access to international capital for Kenyan businesses.
Legal Capacity vs. Regulatory Compliance
The court conflated the lender’s legal existence (as a company incorporated abroad) with its compliance status under Kenyan law. In most jurisdictions, foreign entities can enforce contracts unless specifically barred by statute, a principle now in question in Kenya.
Appeal Pending
The lender has appealed the decision, and the Court of Appeal’s ruling is eagerly awaited by the market. In the meantime, uncertainty prevails.

What Should Foreign Lenders and Investors Do?

Review Transaction Structures
International lenders should carefully assess whether their activities could be construed as “carrying on business” in Kenya. This includes reviewing the nature of security, the location of contract execution, and any ongoing presence or solicitation in Kenya.
Consider Local Registration
Where repeat lending or a sustained market presence is contemplated, registration under Section 974 may be prudent to avoid enforceability issues.
Obtain Robust Legal Opinions
Legal opinions should address not only the validity of lending and security arrangements but also the evolving risks around registration and enforcement.
Monitor Legal Developments
The pending appeal in the Rabo Bank case may clarify the law. Until then, lenders and investors should proceed with caution and seek up-to-date legal advice.

Our Expertise: Banking, Finance, Fintech, and Investment Law in Kenya

At Cavendrys, we have a proven track record advising international and domestic clients on:

Cross-border lending and security arrangements
Regulatory compliance for foreign and local financial institutions
Fintech licensing, digital lending, and payments regulation
Structuring investments and joint ventures in Kenya and the wider East African region
Dispute resolution and enforcement of foreign judgments and arbitral awards

Our team combines deep knowledge of Kenyan law with commercial insight into the realities of cross-border finance and fintech innovation. We regularly advise on the intersection of regulatory compliance, contract enforceability, and market entry strategy for banks, fintechs, DFIs, and private equity investors.

We are actively engaged in dialogue with regulators, industry bodies, and market participants to promote legal certainty and a pro-investment environment in Kenya. Our lawyers contribute to policy discussions, publish thought leadership on emerging legal issues, and provide training to clients and stakeholders.

For tailored advice on banking, finance, fintech, or investment law in Kenya, contact our team today.