How Ava Chem Limited Used A Legal Loophole in Kenya To Evade Paying Debt To Dutch Bank

In a landmark case that has sent tremors through Kenya’s international investment community, Ava Chem Limited has successfully evaded repayment of a substantial loan from Stichting Rabo Bank Foundation by exploiting an obscure provision in Kenya’s Companies Act—a ruling that experts warn could severely damage the country’s appeal as a destination for foreign capital.

The High Court of Kenya dismissed the Dutch lender’s case against Ava Chem Limited in early 2024, ruling that Rabo Bank—a 100-year-old Netherlands-based cooperative with operations across several African countries—lacked legal standing to sue in Kenya simply because it wasn’t registered as a foreign company under Kenyan law.

“Neither the existence nor the quantum of the debt was disputed during proceedings,” notes veteran economic analyst Jaindi Kisero in Business Daily. “Yet the court threw out the case on what amounts to a technicality—that the lender ‘is not a juristic person in Kenya capable of instituting a suit.’”

The Legal Loophole

The dismissal hinged on Section 974(1) of Kenya’s Companies Act, which requires foreign companies to register before “carrying on business” in Kenya. The High Court interpreted providing loans to Kenyan entities as “carrying on business”—even though the Act itself primarily cites activities like offering debentures rather than taking security for loans.

This interpretation creates what Kisero calls a “manifestly paradoxical” situation: Kenya’s tax authorities recognize foreign lenders as entities permanently established in Kenya for taxation purposes under the Income Tax Act, while simultaneously denying them legal recourse when borrowers default.

“Where is legal certainty and justice in an investment climate regime where on the one hand, one piece of legislation recognizes you as an entity carrying on business in Kenya and deems you as permanently established entity that must pay full taxes—and on the other, a judge insists that you are not allowed to enforce your contractual rights?” questions Kisero.

A Troubling Pattern

The Ava Chem case follows a similar 2016 ruling against Root Capital Incorporated, a Massachusetts-based lender who was also denied the ability to enforce its security against a defaulting Kenyan borrower.

In both cases, the courts applied Section 974(1) to block foreign entities from seeking legal remedies.

These decisions come at a particularly sensitive time, as Kenya recently expanded regulatory oversight through the Business Amendment Laws Act 2024, which broadens Central Bank of Kenya jurisdiction over foreign lenders, including development finance institutions, private equity funds, and international commercial banks.

International Fallout

The implications of this legal interpretation extend far beyond the immediate case. During a recent diplomatic gathering hosted by Dutch nationals, heated debates erupted over Kenya’s investment climate.

“If foreign lenders perceive Kenya’s legal and regulatory environment as unpredictable or hostile, they may redirect their capital to more stable jurisdictions,” warns Kisero. “The ripple effects of such a prospect would be felt across the economy. Indeed, reduced access to foreign debt capital could constrain credit availability for businesses and the government itself, which is a regular borrower in the international marketplace.”

Foreign entities, including private equity and venture capital-backed lenders, have been instrumental in financing projects in Kenya. Under the current framework, these foreign lenders are allowed to operate without local licensing as long as they are not soliciting deposits or conducting regulated banking activities in Kenya.

Damage to Investment Climate

The ruling has sparked concerns about Kenya’s competitiveness as an investment destination and reinforces negative stereotypes about African judicial systems.

“This dispute has huge implications on Kenya’s competitiveness and standing as a foreign investment destination. It is the kind of episode that entrenches the belief and prejudice among Westerners that African courts are unsuitable for settling investment disputes,” Kisero observes.

Legal experts point out a significant flaw in international investment climate assessments, which give more weight to quantitative parameters like tax rates, access to finance, corruption, security, business licensing, and utility costs, while statistics on judicial decisions receive comparatively little consideration.

Hope for Appeal

The Rabo Bank ruling is currently under appeal, with the Court of Appeal’s forthcoming decision eagerly anticipated by both local businesses and international investors. Legal experts hope for an outcome that will restore confidence in Kenya’s judicial system and its openness to foreign investment.

“We engage in breach of faith and honor when we whimsically exchange our laws to the detriment of foreign businesses who act on the promises and impressions we have made in official government publications. Our courts permit what honour forbids,” concludes Kisero.

As the appeal progresses, the fundamental question remains: Can foreign investors rely on Kenya’s legal framework remaining stable and fair throughout the lifecycle of their investments? The answer to this question may determine the future of foreign capital flows into East Africa’s largest economy.