Foreign lenders can pursue debts through Kenyan courts even when they are not registered to operate in the country, the Court of Appeal has ruled.
In a judgment on July 31, the Court of Appeal overturned a High Court decision that had struck out a foreign lender’s case after finding that its failure to register under Kenya’s Companies Act deprived it of the legal standing to sue.
The dispute involved a claim of USD 230,868.51 (about KSh29.87 million) that a foreign lender said a Kenyan company owed. The company opposed the case, arguing that the lender could not sue in Kenya because it was not registered to operate in the country.
The appellate court rejected the argument that non-registration, on its own, automatically prevents a foreign company from bringing proceedings before a Kenyan court.
Non-Registration Does Not Erase a Foreign Company’s Legal Status
The judges distinguished between registration to carry on business in Kenya and a foreign company’s legal capacity to pursue its rights through the courts.
Under Section 974 of the Companies Act, a foreign company must register if it carries on business in Kenya.
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However, the court noted that the law does not state that an unregistered foreign company ceases to exist as a legal person or automatically loses the ability to sue.
It also does not provide that every contract entered into by an unregistered foreign company becomes invalid or that debts owed to such a company are automatically extinguished.
The court therefore found that the High Court had wrongly treated non-registration as an automatic bar to the lender’s claim.
Loan to Kenyan Company Does Not Automatically Mean Doing Business in Kenya
The court also addressed whether advancing money to a Kenyan company automatically amounts to carrying on business in Kenya.
It found that this cannot be determined simply from the fact that a foreign company entered a financial transaction with a Kenyan entity.
Instead, the nature and extent of the foreign company’s activities must be examined.
Relevant factors may include the number and frequency of transactions, where contracts are negotiated and concluded, where they are performed, whether the company has offices, employees or agents in Kenya, the duration and continuity of its activities and the extent of its commercial presence in the country.
The Court may also consider the source of the funds and the overall circumstances of the transaction.
This means that a single cross-border financial transaction does not automatically establish that a foreign lender is carrying on business in Kenya.
The Court of Appeal further faulted the use of a preliminary objection to determine whether the foreign lender was carrying on business in Kenya.
A preliminary objection can determine a pure point of law where the relevant facts are undisputed.
In this case, while it was undisputed that the lender was foreign and had not registered in Kenya, the parties disagreed on whether its activities amounted to carrying on business in the country.
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The court held that this was a factual question requiring evidence and could not properly be determined through a preliminary objection.
Court of Appeal Says Foreign Lenders Still Must Follow Kenyan Law
The ruling does not give foreign companies a blanket exemption from Kenya’s registration requirements.
The court held that foreign companies carrying on business in Kenya must comply with the Companies Act and other applicable laws.
The court rejected the argument that non-registration automatically means a foreign company cannot sue or recover a debt in Kenya.
The legal consequences of any breach of the registration requirement must instead be determined from the wording and purpose of the relevant law.
The Court of Appeal allowed the appeal, set aside the High Court’s decision, and dismissed the preliminary objection that had led to the case being struck out.
The Court reinstated the debt recovery case before the High Court for determination.
However, the appellate court did not decide whether the USD 230,868.51 debt was ultimately payable.
It also left open the factual question of whether the foreign lender’s activities amounted to carrying on business in Kenya, as well as other issues requiring evidence.
The ruling therefore does not mean foreign lenders can ignore Kenyan registration laws. Instead, it establishes that lack of registration alone cannot automatically bar a foreign company from Kenyan courts or wipe out a debt owed to it.
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