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Kenyan firms’ wars with global lenders risk access to loans

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African Development Bank headquarters. PHOTO | COURTESY

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Summary

  • The long-running litigations pitting local companies in Kenyan and foreign courts might paint a bad picture to financial institutions.
  • The contentious nature of the cases and the uncertainties surrounding the loan recovery process could force some of the creditors to review their lending policies.
  • World Bank’s Ease of Doing Business in Kenya Report 2018 noted that dispute resolution was a major component in the measurement of doing business.

Protracted legal disputes between Kenyan companies and multilateral financial institutions could put local businesses under sharp scrutiny affecting their ability to access much-needed long-term capital.

The long-running litigations pitting local companies in Kenyan and foreign courts might also paint a bad picture to financial institutions such as the World Bank, International Finance Corporation, East African Development Bank, African Development Bank, PTA Bank and Afri-Exim Bank.

The contentious nature of the cases and the uncertainties surrounding the loan recovery process could force some of the creditors to review their lending policies, locking out indigenous enterprises from cheaper, long-term project financing.

Victor Njenga, an insolvency practitioner, says cases, where there is a contract, should be straightforward and need not unnecessarily drag in court for long. The advocate says courts just need to enforce the contractual rights where there is a debt.

However, he adds, that is not the case because litigants tend to file one application after another, delaying the matter in court for many years.

World Bank’s Ease of Doing Business in Kenya Report 2018 noted that dispute resolution was a major component in the measurement of doing business.

The report measured the enforcement of contracts using the time and cost for resolving a commercial dispute through a local first-instance court.

It also assessed the quality of judicial processes by evaluating whether Kenya had adopted a series of good practices that promote quality and efficiency in the court system.

Mark Kotonya, another advocate, agrees saying as things are, creditors- both local and international might be discouraged going by the trends in the loan recovery process.

“We can do better because the situation at the moment doesn’t work in our favour,” he says.

The lawyer said 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 because some parties have perfected the art of delaying matters through numerous applications. He suggests that judges should be firm and enforce the civil procedure rules on expeditious disposal of cases.

Notable case involves a company linked to former Jubilee secretary-general Raphael Tuju and the East African Development Bank (EADB) over a debt of Sh1.6 billion.

Mr Tuju’s company — Dari Limited — has been embroiled in numerous court cases starting in the UK, before moving to Kenya for enforcement and recently before the regional court — East African Court of Justice, where he has sought immunity from the decision of the High Court in Kenya.

The former Cabinet secretary is further seeking damages of Sh3.1 million from the 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 major objective of the lender is to provide financial assistance to promote the development of the member states.

Mr Njenga says whereas the repayment of the loans is a positive indicator and encourages the lender to release more money to businesses, where a borrower doesn’t want to settle the amount, gives a negative impression to the lenders.

In 2006, the International Finance Corporation (IFC), the commercial lending arm of the World Bank, was involved in a loan dispute with a Kenyan horticultural firm Redhill Flowers, and another company, Gimalu Estates Limited, linked to former powerful operative in President Moi’s regime, Mr Samuel Gichuru.

Apart from court cases involving high-profile individuals and companies, at least 20 Kenyan firms have recently been blacklisted by the World Bank and the African Development Bank (AfDB) for alleged financial improprieties and quality concerns linked to procurement contracts awarded by the two institutions over the last two years.

In February 2021, AfDB banned a Kenyan civil engineering firm, Global Interjapan Kenya Limited, from participating in its contracts over tender irregularities in a Sh7 billion irrigation project.

Africa Development Professional Group, a consultancy, was locked out of World Bank projects for alleged fraud. Others include Aerospace Aviation, Beta Trading Company, Techno Brain Kenya Limited and Sony Commercial Agencies.

Legal tussles

Lawsuits come with increased legal and reputational risk for multilateral and regional banks which are governed by treaty instruments establishing them and regulating their operations.

At the heart of such legal tussles is the enforcement of treaties and other international legal instruments as well as judgments by foreign courts in the local jurisdiction where the parties operate.

The Constitution states that treaty or convention ratified by Kenya shall form part of the law of Kenya. This means the Convention on Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters is applicable in Kenya.

There is also the Treaty Making and Ratification Act of 2012 that governs treaties Kenya has entered into with other States and international organisations.

As parties to such treaties, governments are expected to facilitate expeditious resolution of disputes as part of their obligation of ensuring smooth function of treaty-based institutions.

In her ruling in the Tuju case in January 2020, Justice Wilfrida Okwany noted that the Foreign Judgments (Reciprocal Enforcement) Act requires Kenyan courts to recognise and enforce judgments of UK courts.

The judge held that the UK judgment could be enforced against Tuju’s company.

“I find that contrary to the judgment debtor’s position on the issue of public policy, the failure by this court to recognise, register and enforce the impugned judgment may give rise to the undesirable conclusion, in the eyes of other democratic states that observe the rule of law, that the repayment of loans is against public policy in Kenya or that Kenya is a country that does not observe its own laws, in this case, the Act,” she said.

She noted that the English court judgment cannot be impeached by the court as suggested by Tuju’s lawyers.

Valid judgment

“This court is at a loss as to how a valid judgment for the enforcement of a contract between private individuals and entities can be construed to be inconsistent with the Constitution or other laws of Kenya; inimical to the national interest of Kenya; or contrary to justice and morality,” said the judge.

EADB later appointed receivers to manage Dari’s assets in a bid to recover the amount owed, but Tuju moved to the Court of Appeal and stopped the takeover.

Mr Tuju maintains that the bank’s move was meant to frustrate his plan of repaying the debt.

“We find that the insolvency proceedings and the enforcement notices are all anchored on the UK judgment, which arises from the debt instrument, that is, the facility agreement dated 10th April, 2015 executed by the parties. Therefore, unless the order of stay of execution and proceedings is granted, the appeal will be rendered nugatory,” said Justices Hannah Okwengu, Patrick Kiage and Agnes Murgor.

The Tujus argued that they are likely to be subjected to insolvency proceedings and likely to be committed to civil jail over the disputed debt.

The court also heard that the bank would not suffer any prejudice because it holds security over the property in Karen.

The dispute stems from a loan agreement his company — Dari Ltd borrowed the bank on April 10, 2015, under which it agreed to give Dari a $9.3 million (Sh943.9 million) loan. Part of the deal to fund the acquisition of a property in Karen known as Tree Lane and for development and construction of residential units.

Mr Njenga notes that the case in UK took about four months and it was concluded but that has not been the case here in Kenya as the matter has dragged on for three years.

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