Kenyan corporate wars with global lenders threaten access to loans
- Longstanding disputes between local companies in Kenyan and foreign courts could give financial institutions a bad image.
- The contentious nature of the cases and the uncertainties surrounding the debt collection process could force some creditors to review their credit policy.
- The World Bank’s 2018 Ease of Doing Business in Kenya report noted that dispute resolution was a major element in measuring doing business.
Protracted legal disputes between Kenyan companies and multilateral financial institutions could put local businesses under scrutiny, affecting their ability to access much-needed long-term capital.
Longstanding litigation between local companies in Kenyan and foreign courts could also paint a negative picture of financial institutions such as the World Bank, International Finance Corporation, East African Development Bank, Development Bank, PTA Bank and Afri-Exim Bank.
The litigious nature of the cases and uncertainties surrounding the loan recovery process could force some of the creditors to review their lending policies, excluding local businesses from cheaper, long-term project financing.
Victor Njenga, an insolvency practitioner, says cases, where there is a contract, should be simple and should not drag unnecessarily through the courts for a long time. The lawyer argues that the courts should simply enforce contractual rights in the event of debt.
However, he adds, this is not the case as litigants tend to file one claim after another, delaying the case in court for many years.
The World Bank’s 2018 Ease of Doing Business in Kenya report noted that dispute resolution was a major element in measuring doing business.
The report measured contract enforcement using the time and cost of resolving a commercial dispute through a local trial court.
It also assessed the quality of judicial processes by assessing whether Kenya has adopted a set of good practices that promote the quality and efficiency of the judicial system.
Mark Kotonya, another lawyer, agrees that as things stand, creditors, both local and international, may be discouraged by trends in the loan recovery process.
“We can do better because the current situation is not working in our favor,” he said.
The lawyer said that creditors work with statistics and they have to do a lot of due diligence before entering into transactions.
Mr Kotonya says the court system is not entirely to blame as some parties have perfected the art of delaying cases through numerous demands. He suggests that judges be firm and apply the rules of civil procedure on the speedy resolution of cases.
A notable case involves a company linked to former Jubilee Secretary General Raphael Tuju and the East African Development Bank (EADB) over a debt of 1.6 billion shillings.
Mr. Tuju’s company – Dari Limited – has been embroiled in numerous court cases beginning in the UK, before traveling to Kenya for enforcement and recently before the Regional Court – East African Court of Justice ‘ is, where he sought immunity from the decision of the High Court in Kenya.
The former Cabinet Secretary is further seeking damages of 3.1 million shillings from EADB, accusing the lender of “killing” his dream of acquiring and developing a multi-billion shilling estate.
EADB is a regional development finance institution serving its three member states of Kenya, Tanzania and Uganda. The main objective of the lender is to provide financial assistance to promote the development of member states.
Mr. Njenga says while loan repayment is a positive indicator and encourages the lender to release more money for businesses, where a borrower is unwilling to settle the amount, gives a negative impression to lenders.
In 2006, the International Finance Corporation (IFC), the commercial lending arm of the World Bank, became involved in a loan dispute with a Kenyan horticultural company Redhill Flowers, and another company, Gimalu Estates Limited, linked to the former powerful agent of President Moi. regime, Mr. Samuel Gichuru.
In addition to court cases involving prominent individuals and companies, at least 20 Kenyan companies have recently been blacklisted by the World Bank and the African Development Bank (AfDB) for alleged financial irregularities and corruption issues. quality related to supply contracts awarded by the two institutions in recent years. the last two years.
In February 2021, the AfDB banned a Kenyan civil engineering firm, Global Interjapan Kenya Limited, from participating in its contracts due to bidding irregularities in a 7 billion shilling irrigation project.
Africa Development Professional Group, a consulting firm, was barred from World Bank projects for alleged fraud. Others include Aerospace Aviation, Beta Trading Company, Techno Brain Kenya Limited and Sony Commercial Agencies.
The lawsuits come with increased legal and reputational risk for multilateral and regional banks that are governed by treaty instruments establishing them and regulating their operations.
At the heart of these legal disputes is the application of treaties and other international legal instruments as well as judgments rendered by foreign courts in the local jurisdiction where the parties operate.
The Constitution stipulates that the treaty or convention ratified by Kenya will become part of the laws of Kenya. This means that the Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters is applicable in Kenya.
There is also the Treaty Making and Ratification Act 2012 which governs treaties that Kenya has entered into with other states and international organizations.
As parties to these treaties, governments are expected to facilitate the expeditious resolution of disputes as part of their obligation to ensure the proper functioning of treaty-based institutions.
In her decision in the Tuju case in January 2020, Judge Wilfrida Okwany noted that the Foreign Judgments (Reciprocal Enforcement) Act requires Kenyan courts to recognize and enforce judgments of UK courts.
The judge ruled that the British judgment could be enforced against the Tuju company.
“I believe that contrary to the position of the debtor on the issue of public order, the failure of this court to recognize, register and enforce the impugned judgment may give rise to the undesirable conclusion, in the eyes of other democratic states that abide by the rule of law, that repayment of loans is against public order in Kenya or that Kenya is a country that does not abide by its own laws, in this case the law,” a- she declared.
She noted that the English court’s judgment cannot be overturned by the court, as Tuju’s lawyers have suggested.
“This court does not know how a valid judgment for the performance of a contract between individuals and entities can be construed as inconsistent with the Constitution or other laws of Kenya; contrary to the national interest of Kenya; or contrary to justice and morals,” the judge said.
The EADB then appointed receivers to manage Dari’s assets in an effort to recover the amount owed, but Tuju went to the Court of Appeal and stopped the takeover.
Mr Tuju argues that the bank’s decision was intended to thwart its debt repayment plan.
“We find that the insolvency proceedings and notices of execution are all anchored on the UK judgment, which arises from the debt instrument, i.e. the facility agreement dated April 10, 2015 executed by the parties. Therefore, unless the order for a stay of execution and proceedings is granted, the appeal will be rendered without effect,” said judges Hannah Okwengu, Patrick Kiage and Agnes Murgor.
The Tujus argued that they risked insolvency proceedings and incarceration in civil prison for the disputed debt.
The court also heard that the bank would suffer no harm because it holds security interest in Karen’s property.
The dispute stems from a loan agreement from his company – Dari Ltd borrowed the bank on April 10, 2015, under which it agreed to give Dari a loan of $9.3 million ($943.9 million). shillings). Part of the agreement to finance the acquisition of a property in Karen known as Tree Lane and for the development and construction of residential units.
Mr Njenga notes that the case in the UK took around four months and was concluded, but that has not been the case here in Kenya as the case has been dragging on for three years.